SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-14879
CYTOGEN CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2322400
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
650 College Road East, Princeton, New Jersey 08540
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (609) 750-8200
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Securities
registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
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(Title of Class)
Preferred Stock Purchase Rights, $0.01 par value per share
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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.
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
---
The aggregate market value of the registrant's voting shares of Common Stock
held by non-affiliates of the registrant on June 28, 2002, based on $10.70 per
share, the last reported sale price on the NASDAQ National Market on that date,
was $92,517,375.
The number of shares of Common Stock, $.01 par value, of the registrant
outstanding as of March 1, 2003 was 8,813,832 shares.
The following documents are incorporated by reference into the Annual Report on
Form 10-K: Portions of the registrant's definitive Proxy Statement for its 2003
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
TABLE OF CONTENTS
Item Page
---- ----
PART I 1. Business.................................................................... 1
2. Properties.................................................................. 31
3. Legal Proceedings........................................................... 31
4. Submission of Matters to a Vote of Security Holders......................... 32
PART II 5. Market for the Company's Common Equity and Related Stockholder Matters...... 33
6. Selected Financial Data..................................................... 34
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 35
7A. Quantitative and Qualitative Disclosures about Market Risk.................. 44
8. Financial Statements and Supplementary Data................................. 44
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 44
PART III 10. Directors and Executive Officers of the Company............................. 45
11. Executive Compensation...................................................... 45
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters..................................................... 45
13. Certain Relationships and Related Transactions.............................. 45
14. Controls and Procedures..................................................... 45
PART IV 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 46
EXHIBIT INDEX............................................................................................ 46
SIGNATURES............................................................................................... 52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................................................... F-1
-i-
PART I
Item 1. Business
Overview
Cytogen Corporation of Princeton, New Jersey is a product-driven,
oncology-focused biopharmaceutical company. We market proprietary and licensed
oncology products through our in-house sales force: ProstaScint(R) (a monoclonal
antibody-based imaging agent used to image the extent and spread of prostate
cancer) and NMP22(R) BladderChek(TM) (a point-of-care test for bladder cancer
detection). We have also developed Quadramet(R), a skeletal targeting
therapeutic radiopharmaceutical for the relief of bone pain in prostate and
other types of cancer, for which we receive royalties on product sales through
Berlex Laboratories, the United States affiliate of Schering AG Germany, which
markets the product in the United States. Our pipeline comprises product
candidates at various stages of clinical development, including fully human
monoclonal antibodies and cancer vaccines based on PSMA (prostate specific
membrane antigen) technology, which we exclusively licensed from Memorial
Sloan-Kettering Cancer Center. We also conduct research in cell signaling
through our AxCell Biosciences research subsidiary in Newtown, Pennsylvania.
In August 2000, we expanded our product pipeline by entering into marketing,
license and supply agreements with Advanced Magnetics, Inc. for Combidex(R),
which is an investigational magnetic resonance imaging (MRI) contrast agent that
assists in the differentiation of metastatic from non-metastatic lymph nodes. We
hold exclusive United States marketing rights to Combidex. Advanced Magnetics is
continuing its discussions with the FDA relating to outstanding issues regarding
an approvable letter received from the FDA dated June 2000, in an effort to
bring Combidex to market.
We are integrating our expertise in molecular and cellular biology,
biochemistry, bioinformatics, pharmacology and clinical development to create
targeted technologies for cancer therapy and diagnosis. In this regard, we are
developing product candidates based on prostate specific membrane antigen, or
PSMA, which is a cell-surface protein that is abundantly expressed on prostate
cancer cells at all stages of disease, including advanced or metastatic disease.
The PSMA gene was first discovered by scientists at Memorial Sloan-Kettering
Cancer Center. From this technology, we have put one product on the market
(ProstaScint) and are building a robust pipeline of potential products in
research and development. These pipeline products are focused primarily on novel
vaccine and antibody cancer therapy, initially in the area of prostate cancer.
In December 2002, the PSMA Development Company LLC, a joint venture between
Cytogen and Progenics Pharmaceuticals, Inc., announced the initiation of a Phase
I clinical trial for the testing of a novel therapeutic prostate cancer vaccine
directed against PSMA.
PSMA is also present at high levels on the newly formed blood vessels
(neovasculature) needed for the growth and survival of many types of solid
tumors. If PSMA-targeted therapies can destroy or prevent formation of these new
blood vessels, we believe that such therapies may prove valuable in treating a
broad range of cancers.
Further research and development efforts are carried out through AxCell, which
remains engaged in the research and development of novel biopharmaceutical
products using its collection of proprietary signal transduction pathway
information, despite significant reductions in AxCell's workforce, which we
implemented in September 2002.
AxCell uses its proprietary technology as a tool to provide academic,
governmental and commercial collaborators with vital information about signal
transduction pathways that can be used for drug discovery and development.
AxCell provides this information rapidly and efficiently, using the proprietary
methods and systems that AxCell developed to identify signal transduction
pathways. We have successfully leveraged our technology through collaborations
with Mount Sinai School of Medicine, National Cancer Institute, Kimmel Cancer
Center at Thomas Jefferson University, University of Muenster in Germany and
Celgene Corporation. These collaborations increase our research resources,
improve our technological strength and establish valuable development
relationships with potential commercial opportunities.
The Company was incorporated in Delaware on March 3, 1980 under the name
Hybridex, Inc. and changed its name to Cytogen Corporation on April 1, 1980. Our
executive offices are located at 650 College Road East, Suite 3100, Princeton,
New Jersey 08540 and our telephone number is 609-750-8200.
1
On October 25, 2002, we received approval from our stockholders at a duly called
and held special meeting of stockholders to effect a reverse split of our common
stock. Our Board of Directors thereafter approved a one-for-ten reverse split of
our outstanding, issued and authorized shares of common stock, which became
effective on October 25, 2002. All numbers set forth in this Annual Report on
Form 10-K reflect the effect of such one-for-ten reverse stock split.
ProstaScint(R) and OncoScint(R) are registered United States trademarks of
Cytogen Corporation. All other trade names, trademarks or servicemarks appearing
in this Annual Report on Form 10-K are the property of their respective owners,
and not the property of Cytogen Corporation or any of our subsidiaries.
Quadramet(R) is a trademark of The Dow Chemical Company used under license by
Cytogen.
We also maintain a website at http://www.cytogen.com. We provide an internet
link on our website to the Securities and Exchange Commission's website where
you can find documents that we file with the SEC, including our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to such reports filed pursuant to Section 13(a) or 15(d) of the
Exchange Act. Such documents are posted as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the SEC.
Alternatively, we will provide electronic or paper copies of our filings free of
charge upon request.
PROSTATE CANCER AND ONCOLOGY
Background
Prostate cancer is the most common type of cancer found in American men, other
than skin cancer. The American Cancer Society estimates that there will be about
220,900 new cases of prostate cancer in the United States in the year 2003, and
estimates that 28,900 men will die of the disease this year. Prostate cancer is
the second leading cause of cancer death in men, exceeded only by lung cancer.
Although men of any age may be diagnosed with prostate cancer, it is found most
often in men over 50. It is estimated that more than 70% of all prostate cancers
are diagnosed in men over the age of 65. Prostate cancer is almost twice as
common among African-American men as it is among caucasian American men. It is
also most common in North America and northwestern Europe. It is less common in
Asia, Africa, and South America.
We find encouragement in the overall vitality of the oncology market and believe
future growth lies in identification of new in-licensing opportunities. While
large pharmaceutical companies tend to concentrate on products with market
potential larger than that of typical anticancer drugs; selected niche products
which compliment our oncology focus may fit well within Cytogen's product
portfolio.
2
We currently market the following proprietary and licensed oncology products:
Product Description Status 2002 Sales Future Growth Drivers
------- ----------- ------ or Royalty ---------------------
Revenue ($
millions)
----------
ProstaScint(R) Monoclonal Developed and $7.92 - Fusion imaging -
(Capromab antibody-based marketed by combining ProstaScint(R)
Pendetide) imaging agent used Cytogen in the images with CT (computed
to image the extent United States tomography) or MR
and spread of (magnetic resonance)
prostate cancer scans in a digital overlay
- Utilization of
ProstaScint scans to
guide therapy
("image-guided therapy"),
to enhance therapy
targeting for treatments
such as brachytherapy,
cryotherapy and external
beam radiation, such as
intensity modulated
radiation therapy (IMRT)
Quadramet(R) Skeletal targeting Developed by $1.84 - New clinical data
(Samarium Sm-153 therapeutic Cytogen based supporting the expanded
Lexidronam radiopharmaceutical upon technology and earlier use of
Injection) for the relief of licensed from Quadramet in various
bone pain in Dow Chemical, cancers
prostate and other marketed by - Novel research supporting
types of cancer Berlex combination uses with
Laboratories, other therapies, such as
the United chemotherapy and
States affiliate bisphophonates
of Schering AG - Establishing the use of
Germany, in the Quadramet at higher doses
United States to target and treat
primary bone cancers
- Increased marketing and
sales penetration to
radiation and medical
oncologists
NMP22(R) A point-of-care in Developed by Not - Food and Drug
BladderChek(TM) vitro diagnostic Matritech, Inc., material, Administration approval
(nuclear matrix test for bladder marketed to Cytogen for expanded use as an
protein-22) cancer urologists by began aid in diagnosis
Cytogen in the introducing
United States to
physicians
in November
2002
In January 2003, we provided Draximage Inc., the radiopharmaceutical subsidiary
of Draxis Health Inc., with notice of termination for each of our License and
Distribution Agreement and Product Manufacturing and Supply Agreement with
respect to both of Draximage's BrachySeedTM I-125 and BrachySeedTM Pd-103
products. Effective January 24, 2003, we no longer accept or fill new orders for
the BrachySeed I-125 and BrachySeed Pd-103 products.
3
Technology
PSMA
Prostate specific membrane antigen, or PSMA, is a transmembrane protein that may
be used as an important marker associated with prostate cancer. Memorial
Sloan-Kettering Cancer Center identified PSMA using a monoclonal antibody
supplied by us. A patent entitled "Prostate Specific Membrane Antigen" was
issued to Sloan-Kettering Institute for Cancer Research, an affiliate of
Memorial Sloan-Kettering Cancer Center, and we acquired the exclusive worldwide
license covering this technology. A murine monoclonal antibody directed against
PSMA is the basis of our ProstaScint imaging product. PSMA has also been found
to be present in the new blood vessels formed in association with a variety of
other major solid tumors. We believe that, due to the unique characteristics of
this antigen, technologies utilizing PSMA can yield novel products for the
treatment and diagnosis of cancer.
In 1999, we entered into a joint venture with Progenics Pharmaceuticals, Inc. to
develop in vivo immunotherapeutic products utilizing PSMA. These product
candidates include a therapeutic prostate cancer vaccine utilizing the PSMA gene
and a vector delivery system, a recombinant form of the PSMA protein as a basis
of immune stimulation, and antibody-based immunotherapies for prostate cancer.
We believe that these product candidates, if successfully developed, could play
an important role in the treatment of prostate cancer. We believe there are
significant unmet needs for treatment and monitoring of this disease. In
addition, we intend to evaluate the utility of these therapies, as an
anti-angiogenesis approach, in other cancers where PSMA is expressed in
association with tumor neovasculative such as in breast, colon, lung and other
cancers.
The joint venture is owned equally by Progenics Pharmaceuticals, Inc. and us. We
have exclusively licensed to the joint venture certain immunotherapeutic
applications of our PSMA patent rights and know-how. Progenics has funded the
first $3 million of development costs of the program in addition to $2.0 million
in supplemental capital contributions funded at certain dates. Beginning in
December 2001, we and Progenics began sharing costs of the program. In 2002, we
incurred expenses of $2.9 million relating to programs at the joint venture
compared to $332,000 in 2001. The joint venture is funded by equal capital
contributions from each of Progenics and Cytogen in accordance with an annual
budget approved by the joint venture representatives from each such party. As of
March 28, 2003, the parties are in the process of negotiating the 2003 annual
budget for the joint venture and have agreed that the operating budget for 2003
will be no less than the 2002 operating expenses for the joint venture. Contract
research and development services provided by Progenics to the joint venture
during 2002 were in accordance with a services agreement between the parties. As
of March 28, 2003, the parties are negotiating the terms of a new services
agreement and believe that if mutual agreement is not achieved, the parties can
successfully negotiate with outside third parties for necessary services.
We have North American marketing rights to products developed by the joint
venture and a right of first negotiation with respect to marketing activities in
any territory outside North America. We anticipate initiation of marketing
efforts for any product developed upon approval by the FDA or requisite foreign
regulatory bodies, as applicable. If approved, we anticipate marketing these
products with our own sales force and will be reimbursed by the joint venture
for these costs. We will split the net profit equally with Progenics for any
products developed by the joint venture.
During 2001, the joint venture entered into a worldwide exclusive licensing
agreement with AlphaVax Human Vaccines, Inc. to use the AlphaVax Replicon Vector
(ArV(TM)) system to create a therapeutic prostate cancer vaccine incorporating
the PSMA antigen. Also in 2001, the joint venture entered into a collaboration
with Abgenix, Inc. to use the company's XenoMouse(TM) technology for generating
fully human antibodies to PSMA. As a result of such collaboration, the joint
venture successfully created human monoclonal antibodies that target PSMA.
In December 2002, the PSMA Development Company LLC announced the initiation of a
Phase I clinical trial for the testing of a novel therapeutic prostate cancer
vaccine directed against PSMA.
We licensed PSMA through our subsidiary, Prostagen, Inc., to Northwest
Biotherapeutics, Inc., for development of ex vivo dendritic cell based
immunotherapy of prostate cancer. In 2000, we executed a new sublicense
agreement with Northwest Biotherapeutics Inc. clarifying their rights to make
and use PSMA for ex vivo prostate cancer immunotherapy. In December 2002, we
announced that we had regained our rights to ex vivo prostate cancer
immunotherapy using PSMA, in connection with the termination of our agreement
with Northwest Biotherapeutics, Inc. We are encouraged by efforts to date
demonstrating a favorable safety and clinical response in prostate cancer
patients treated using PSMA-based ex vivo immunotherapy. Based on this
information, we will seek other corporate collaborations or partnerships to help
us realize the clinical and commercial potential of this approach.
4
Independent of our joint venture, we obtained exclusive, world-wide licenses
from Molecular Staging, Inc. for technology to be used in developing in vitro
diagnostic tests using both PSMA and PSA. Molecular Staging's Rolling Circle
Amplification Technology (RCAT(TM)) is a novel, patented process that creates
new diagnostic opportunities. RCAT is a highly sensitive, quantitative and
efficient amplification method that allows the user to detect the presence of
target molecules in a wide array of testing formats. It offers a practical
method that allows solid phase recognition and detection of target molecules
either directly, on a cell or on a biochip. We have established the proof of
concept of using the RCAT technology in a PSA serving assay and are
investigating the optional contribution of reagents (i.e., monoclonal antibody
pairs) using a similar approach for PSMA.
AxCell Biosciences
A majority of the drugs on the market today are agents that interact with cell
surface receptors. Surface receptors, however, are generally associated with
multiple intracellular signaling pathways and, as a result, drugs targeting
these receptors are less specific to the disease, leading to reduced efficacy
and/or unwanted side effects. By targeting intracellular proteins downstream
from the surface receptor, a drug can more precisely initiate the desired
cellular response, leading to treatments with greater efficacy and fewer side
effects. Many proteins along these intracellular pathways communicate with each
other through structurally and functionally defined modules called `domains' and
their respective binding partners called `ligands'. The modular and well-defined
nature of these domain-ligand interactions makes them ideal drug targets for
developing small inhibitory molecules.
One of the historical challenges to design small molecule inhibitors for
domain-ligand interactions is the fact that domains are highly homologous within
each domain `family' making it difficult to develop a highly specific inhibitor
for a particular interaction. Our subsidiary, AxCell, overcomes this problem
through the exact determination of specificity boundaries for each domain-ligand
interaction. This biochemical approach integrates parallel synthesis of
peptides, protein expression and high-throughput screening methodology combined
with tools of bioinformatics.
AxCell has the only high throughput platform for the systematic identification
and characterization of domain-mediated intracellular pathways, which can be
combined with many levels of biological information to understand how they work
together in a systems biology approach. Using its proprietary technologies,
AxCell has made significant technical progress over the past several years and,
despite a significant reduction in its workforce, which we implemented in
September 2002, is currently applying its pathway content and knowledge to
accelerate the development of targeted drugs in certain therapeutic categories
through both internal efforts and external research collaborations with
corporate, government and academic institutions.
Marketed products
We have three actively marketed products: ProstaScint, a monoclonal
antibody-based imaging agent used to image the extent and spread of prostate
cancer; Quadramet, a skeletal targeting therapeutic radiopharmaceutical for
relief of bone pain from cancer that has spread to the bone from the primary
tumor; and NMP22 BladderChek, a point-of-care test which aids in the diagnosis
of bladder cancer.
ProstaScint
Prostate cancer is the most common type of cancer found in American men, other
than skin cancer. The American Cancer Society estimates that there will be about
220,900 new cases of prostate cancer in the United States in the year 2003, and
that about 28,900 men will die of this disease. Prostate cancer is the second
leading cause of cancer death in men, exceeded only by lung cancer. Although men
of any age may be diagnosed with prostate cancer, it is found most often in men
over 50. It is estimated that more than 70% of all prostate cancers are
diagnosed in men over the age of 65.
ProstaScint is a diagnostic, murine-based monoclonal antibody which is linked to
the radioisotope Indium-111 as an imaging agent which localizes in the body
specifically targeting PSMA. ProstaScint utilizes our proprietary targeted
delivery system, employing whole monoclonal antibodies, which directs Indium-111
to malignant prostate tumor sites. A radioisotope is an element which, because
of nuclear instability, undergoes radioactive decay and emits radiation. We
supply ProstaScint to hospitals, diagnostic imaging centers and radiopharmacies.
Due to the selective expression of PSMA, the ProstaScint imaging procedure can
aid in the detection of the extent and spread of prostate cancer in the body.
ProstaScint is approved for marketing in the United States in two clinical
settings: as a diagnostic imaging agent in newly diagnosed patients with
5
biopsy-proven prostate cancer thought to be clinically localized after standard
diagnostic evaluation and who are at high risk for spread of their disease to
pelvic lymph nodes and for use in post-prostatectomy patients in whom there is a
high suspicion that the cancer has recurred.
When deciding on an initial course of therapy for diagnosed prostate cancer,
physicians must first determine the extent of disease in the patient. The
accuracy of this information is vital in deciding upon an appropriate course of
therapy. Prior to the availability of ProstaScint, determining whether newly
diagnosed disease was limited to the prostate or had spread beyond the gland was
based upon statistical inference from the biopsy appearance of the tumor and the
patient's serum level of PSA. Conventional imaging methods such as CT (computed
tomography) or MR (magnetic resonance) are all relatively insensitive because
they rely on identifying significant changes to normal anatomic structure to
indicate the presence of disease. The ProstaScint disease images are based upon
expression of the PSMA molecule and, therefore, may identify disease not readily
detectable with conventional procedures.
During an imaging procedure, ProstaScint is administered intravenously into the
patient. The antibody in ProstaScint travels through the bloodstream and binds
to specific antigens expressed by the tumors being studied. The radioactivity
from the isotope that has been attached to the antibody can be detected from
outside the body by a gamma camera. Gamma cameras are found in nuclear medicine
departments. The image captured by the camera assists in the identification of
the location of the radiolabeled pharmaceutical thus identifying the sites of
tumors. Clinical studies conducted to date by physicians on our behalf indicate
that ProstaScint may provide new and useful information not available from other
conventional diagnostic modalities regarding the existence, location and extent
of a specific disease throughout the body.
In the United States, following initial therapy, prostate cancer patients are
monitored to ascertain changes in the level of serum PSA. In this setting, a
rise in PSA is evidence of recurrence of the patient's prostate cancer.
Knowledge of the extent and location of disease recurrence is important in
choosing the most appropriate form of treatment. The National Comprehensive
Cancer Network (NCCN), a consortium of leading cancer hospitals, included
ProstaScint imaging as a tool in its Practice Guidelines for recurrent prostate
cancer in both its 2001 and 2002 edition. Guidelines such as these are published
to serve as the practice standard for the oncology community.
We believe that future growth and market penetration of ProstaScint is largely
dependent upon, among other things, the implementation and continued research of
new product applications, such as: (i) combining or fusing ProstaScint with CT
or MR scans in a digital overlay ("fusion imaging"); and (ii) using ProstaScint
scans to guide therapy ("image-guided therapy") to enhance therapy targeting,
including brachytherapy, cryotherapy, and external beam radiation, such as
intensity modulated radiation therapy (IMRT), an advanced and more powerful form
of therapy that uses computers to focus radiation more precisely on the target.
NMP22 BladderChek
In October 2002, we entered into a five-year agreement with Matritech Inc. to be
the sole distributor for Matritech's NMP22 BladderChek device to urologists and
oncologists in the United States. Retention of exclusivity rights depends upon
meeting certain minimum annual purchases. NMP22 BladderChek is a point-of-care
antibody-based diagnostic test for bladder cancer that requires only a few drops
of a patient's urine. NMP22 BladderChek returns results in thirty minutes and
provides urologists with an adjunct technology to cystoscopy, a clinical
procedure for the visual identification of tumors in the bladder. NMP22
BladderChek is approved for sale in the United States. During November 2002, we
began promoting NMP22 BladderChek to urologists in the United States using our
in-house sales force.
OncoScint CR/OV
We discontinued marketing, selling and producing OncoScint CR/OV, a monoclonal
antibody diagnostic imaging agent for spread of colorectal and ovarian cancer,
at the end of 2002. The market for OncoScint CR/OV for colorectal cancer
diagnosis has been negatively affected by positron emission tomography, or
"PET", scans. The sensitivity of the PET scan in colon cancer appears to be
similar or higher than the OncoScint CR/OV scan.
Quadramet
Quadramet is a cancer therapeutic agent for the relief of pain in patients with
metastatic bone lesions that image on conventional bone scan, a routinely
performed nuclear medicine procedure. Quadramet consists of a radioactive
isotope, Samarium-153, which emits beta radiation, and a chelating agent, EDTMP,
which targets the drug to sites of new bone formation.
6
Once tumors have metastasized to the skeleton, they continue to grow and cause
destruction of the adjacent bone. This erosion of bone stimulates new bone
formation which encircles the metastatic tumor. By targeting these areas of bone
formation, Quadramet delivers site-specific radiation, which may result in
significant pain reduction. According to American Cancer Society and National
Cancer Institute statistics, about half of all people with cancer (other than
skin cancer) will have bone metastasis at some point in the course of their
disease. Bone metastasis is one of the most frequent causes of cancer related
pain.
Quadramet has many characteristics which we believe are advantageous for the
treatment of cancer bone pain, including early onset of pain relief, lasting up
to four months with a single injection; predictability of recovery from bone
marrow toxicity; ease of administration; and length of pain relief. In addition,
due to its pharmacokinetic properties, the radioactive plasma half-life is
approximately five to six hours. Quadramet is administered as a single
intravenous injection on an outpatient basis and directly targets sites of new
bone formation which include those areas in the skeleton that have been invaded
by metastatic tumors. Quadramet exhibits selective uptake in bone with little or
no detectable accumulation in soft tissue.
We believe that the future growth and market penetration of Quadramet is largely
dependent upon, among other things: (i) new clinical data supporting the
expanded and earlier use of Quadramet in various cancers and in combination with
other therapies, such as chemotherapy and bisphophonates; (ii) establishing the
use of Quadramet at higher doses to target and treat primary bone cancers; and
(iii) increased marketing and sales penetration to radiation and medical
oncologists.
Current competitive treatments for severe bone cancer pain include narcotic
analgesics, external beam radiation therapy, bisphosphonates, Metastron and
Novantrone.
BrachySeed
In December 2000, we entered into a 10-year agreement with Draximage Inc., the
radiopharmaceutical subsidiary of Draxis Health, Inc. to market and distribute
Draximage's BrachySeed implants in the United States. On January 24, 2003, we
provided Draximage with notice of termination for each of our License and
Distribution Agreement and Product Manufacturing and Supply Agreement with
respect to both of Draximage's BrachySeed I-125 and BrachySeed Pd-103 products.
Effective January 24, 2003, we no longer accept or fill new orders for the
BrachySeed I-125 and BrachySeed Pd-103 products.
Oncology Product Sales, Marketing and Distribution
ProstaScint is a technique-dependent product that requires a high degree of
proficiency in nuclear imaging technology in order to correctly image and
interpret the scan. We have established a network of accredited nuclear medicine
imaging centers through our PIE, or Partners In Excellence Program. Each PIE
site receives rigorous training and proficiency evaluations. As of December 31,
2002, there were 396 such sites qualified to perform ProstaScint imaging,
including National Cancer Institute-designated Comprehensive Cancer Centers.
ProstaScint may only be used at qualified PIE sites. We plan to add PIE sites on
a selective basis in order to ensure that new and existing sites are adequately
qualified maintaining a high level of competence. At the present time, we bear
partial expense of the qualification of new sites.
The primary objective of our dedicated sales force is to promote our products to
urologists, radiation oncologists and nuclear medicine physicians. Within this
field force are technical specialists who assist in the training of nuclear
medicine technologists and nuclear medicine physicians including the
qualification process for nuclear imaging centers to perform ProstaScint
imaging. We depend on our own sales force for the sale and marketing of
ProstaScint and NMP22 BladderChek. The distribution of ProstaScint and NMP22
BladderChek is handled by outside contractors. We also rely on Berlex for the
sale, marketing and distribution of Quadramet in the United States.
During 2000, we terminated our co-marketing arrangement with the Bard Urological
Division of CR Bard Company, Inc with respect to the marketing of ProstaScint.
In 1999, we reached an agreement with Bard to phase out the co-marketing
agreement so that we could undertake direct marketing responsibility for the
product. We took this step because of our view that a highly-trained and
dedicated internal sales force would be able to market our high technology
products most effectively, and to build an internal marketing capability for
possible future products. The transition was completed by mid-year 2000.
In October 1998, we entered into an exclusive agreement with Berlex
Laboratories, Inc. for the marketing of Quadramet, after terminating our
previous marketing relationship with the radiopharmaceutical division of DuPont
7
Merck. Berlex re-launched Quadramet in March 1999, and maintains a sales force
that targets its sales efforts on the oncological community. Pursuant to our
agreement with Berlex, we are entitled to royalty payments based on net sales of
the Quadramet product and milestone payments based upon sales levels achieved.
We are also required to pay royalties or guaranteed contractual minimum
payments, whichever is greater, and future payments upon the achievement of
certain milestones, to The Dow Chemical Company, the owner of the technology
upon which we developed Quadramet.
Corporate Partners, Strategic Alliances and License Agreements
Our strategy is to use alliances with other companies to increase our financial
resources, reduce risk and retain an appropriate level of ownership of products
currently in development. In addition, through alliances with other
pharmaceutical and biotechnology companies, we may obtain funding, expand
existing programs, learn of new technologies, and gain additional expertise in
developing and marketing products.
Abgenix, Inc.
During 2001, the PSMA Development Company LLC, a joint venture between Cytogen
and Progenics Pharmaceuticals, Inc., entered into an agreement with Abgenix,
Inc. regarding the development of fully human antibodies to PSMA using Abgenix's
XenoMouse technology.
Advanced Magnetics, Inc.
In August 2000, Cytogen and Advanced Magnetics, Inc. mutually terminated a
previously negotiated agreement pursuant to which Cytogen was to acquire
Advanced Magnetics. Instead, the two companies entered into marketing, licensing
and supply agreements. Under such agreements, we acquired exclusive United
States rights to two product candidates, Combidex (for all applications) and
imaging agent Code 7228 (for oncology applications only). Combidex, a MRI
contrast agent for the detection of lymph node metastases, received an
approvable letter in June 2000 from the FDA, subject to certain conditions,
following a priority review. Advanced Magnetics is continuing its discussions
with the FDA relating to outstanding issues regarding such approvable letter in
an effort to bring Combidex to market. At this time, Advanced Magnetics does not
intend to develop Code 7228 for oncology imaging.
Under the terms of our License and Marketing Agreement with Advanced Magnetics,
we issued 200,000 shares of common stock to Advanced Magnetics. Of such 200,000
shares, 25,000 are being held in escrow pending the achievement of certain
milestones relating to Combidex and 25,000 are being held in escrow pending the
achievement of certain milestones relating to Code 7228. The remaining 150,000
shares were transferred to Advanced Magnetics, subject to certain restrictions,
such restrictions having subsequently expired.
Our License and Marketing Agreement with Advanced Magnetics will continue until
August 25, 2010, and shall thereafter automatically renew for successive five
year periods, unless notice of non-renewal or termination is given by us or
Advanced Magnetics, 90 days prior to the commencement of any renewal period.
There can be no assurance that Advanced Magnetics will receive FDA approval to
market products licensed by Cytogen.
AlphaVax
In 2001, the PSMA Development Company LLC, our joint venture with Progenics
Pharmaceuticals, Inc., entered into a development and license agreement with
AlphaVax to utilize their proprietary viral vector technology to deliver the
PSMA gene systemically. This agreement contains certain up-front, maintenance,
milestone and royalty payments. We believe that this technology, if successfully
deployed, may have important advantages in targeting immune stimulating cells in
vivo which impact on the progression of cancer.
8
Berlex Laboratories, Inc.
In October 1998, we entered into a license agreement with Berlex Laboratories,
Inc. regarding the sales, marketing and distribution of Quadramet, a
radiopharmaceutical product used to provide pain relief from cancer spreading to
the bone. As consideration for the rights granted, Berlex Laboratories agreed to
pay us royalties based on net sales, as defined in the agreement. This agreement
will expire twenty years from the date of execution or on the date of expiration
of the last to expire licensed patent, whichever is later.
Elan Corporation, plc
In January 1996, we entered into a license agreement granting Elan worldwide
rights to a group of peptides and associated technology for orally administered
drugs that are transported across the gastrointestinal epithelium, as well as
rights to other orally delivered drugs derived from related research programs.
Elan is responsible for the further development and commercialization of this
technology. We are entitled to royalties from sales of any product developed and
commercialized based on this technology.
Matritech
In October 2002, we entered into a five-year agreement with Matritech Inc. to be
the sole distributor for Matritech's NMP22 BladderChek test to urologists and
oncologists in the United States. Retention of exclusivity rights depends upon
meeting certain minimum annual purchases. NMP22 BladderChek is a point-of-care
antibody test for bladder cancer detection that requires only a few drops of a
patient's urine. NMP22 BladderChek returns results in thirty minutes and
provides urologists with an adjunct technology to cystoscopy, a clinical
procedure for the visual identification of tumors in the bladder. NMP22
BladderChek is approved for sale in the United States. During November 2002, we
began promoting NMP22 BladderChek to urologists in the United States using our
in-house sales force.
Memorial Sloan-Kettering Cancer Center
In 1993, we began a development program with Memorial Sloan-Kettering Cancer
Center involving PSMA and our proprietary monoclonal antibody. In November 1996,
we exercised an option for, and obtained, an exclusive worldwide license to this
technology.
Northwest Biotherapeutics, Inc.
We licensed PSMA through our subsidiary, Prostagen, Inc., to Northwest
Biotherapeutics, Inc., for development of in vitro dendritic cell based
immunotherapy of prostate cancer. Prostagen also licensed exclusive PSMA
manufacturing rights for immunotherapy to Northwest Clinicals, LLC, a
corporation formed and co-owned by Northwest Biotherapeutics and Prostagen. Such
manufacturing rights license agreement with Northwest Clinicals, LLC was
terminated and the manufacturing rights thereunder returned to Cytogen. In 2000,
we executed a new sublicense agreement with Northwest Biotherapeutics Inc.
clarifying their rights to make and use PSMA for ex vivo prostate cancer
immunotherapy. In December 2002, we announced that we had regained our rights to
ex vivo prostate cancer immunotherapy using PSMA, in connection with the
termination of our agreement with Northwest Biotherapeutics, Inc.
Progenics Pharmaceuticals, Inc.
In 1999, we entered into a joint venture with Progenics Pharmaceuticals, Inc. to
develop products utilizing our PSMA technology. The products currently under
development include, among others, a therapeutic prostate cancer vaccine
utilizing a PSMA protein/adjuvant approach. In December 2002, the joint venture
announced the initiation of a Phase I clinical trial for the testing of a novel
therapeutic prostate cancer vaccine directed against PSMA. We are also
developing through this joint venture, antibody-based immunotherapies for
prostate cancer. We believe that these drugs, if successfully developed, could
play an important role in the treatment of advanced prostate cancer and other
cancers where PSMA is expressed, such as in breast, colon lung and other
cancers.
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The Dow Chemical Company
In March 1993, we obtained an exclusive license from The Dow Chemical Company to
North American rights to use Quadramet as a therapeutic radiopharmaceutical for
metabolic bone disease or tumor regression for cancer caused by metastatic or
primary cancer in bone in humans, and for the treatment of disease characterized
by osteoblastic response in humans. In November 1998, Dow also extended our
exclusive rights for use of Quadramet in treating advanced rheumatoid arthritis
to Europe, Japan and other countries in addition to North America.
Draxis Health, Inc.
In December 2000, we entered into a 10-year agreement with Draximage Inc., the
radiopharmaceutical subsidiary of Draxis Health, Inc. to market and distribute
Draximage's BrachySeed implants in the United States. On January 24, 2003, we
provided Draximage with notice of termination for each of our License and
Distribution Agreement and Product Manufacturing and Supply Agreement with
respect to both of Draximage's BrachySeed I-125 and BrachySeed Pd-103 products.
Effective January 24, 2003, we no longer accept or fill new orders for the
BrachySeed I-125 and BrachySeed Pd-103 products.
PRODUCT CONTRIBUTION TO REVENUES
ProstaScint and Quadramet account for, and prior to its discontinuation in
January 2003, BrachySeed accounted for, a significant percentage of our total
revenues. For the years ended December 31, 2002, 2001 and 2000, revenues related
to ProstaScint accounted for approximately 61%, 65% and 66%, respectively, of
our total revenues; revenues related to Quadramet accounted for approximately
14%, 18% and 19%, respectively, of our total revenues; and revenues related to
BrachySeed accounted for approximately 19% of our total revenues during the year
ended December 31, 2002 and 7% of our total revenues during the year ended
December 31, 2001.
On January 24, 2003, we provided Draximage with notice of termination for each
of our License and Distribution Agreement and Product Manufacturing and Supply
Agreement with respect to both of Draximage's BrachySeed I-125 and BrachySeed
Pd-103 products.
RESEARCH AND DEVELOPMENT
Our research and development expenditures include our share of the costs
incurred to develop PSMA through our joint venture with Progenics
Pharmaceuticals, payments we made to customer sponsored research programs,
payments to DSM Biologics for the development of a new manufacturing process for
ProstaScint and the cost to develop the signal transduction pathway research
program at AxCell. Our expenses for research and development activities were:
- 2002 -- $ 10.5 million
- 2001 -- $ 10.4 million
- 2000 -- $ 7.0 million
We intend to pursue research and development activities having commercial
potential and to review all of our programs to determine whether possible market
opportunities, near and longer term, provide an adequate return to justify the
commitment of human and economic resources to their initiation or continuation.
During 2002, we incurred $551,000 of expenses for the DSM development program,
$3.6 million for the signal transduction pathway program at AxCell and a
stock-based milestone payment of $2.0 million related to the progress of the
dendritic cell prostate cancer clinical trials at Northwest. In addition to the
$7.6 million of research and development expense incurred during 2002, we
recognized $2.9 million of expenses related to our share of the losses from our
joint venture with Progenics. The joint venture is funded by equal capital
contributions from each of Progenics and Cytogen in accordance with an annual
budget approved by the joint venture representatives from each such party. As of
March 28, 2003, the parties are in the process of negotiating the 2003 annual
budget for the joint venture and have agreed that the operating budget for 2003
will be no less than the 2002 operating expenses for the joint venture. Contract
research and development services provided by Progenics to the joint venture
during 2002 were in accordance with a services agreement between the parties. As
of March 28, 2003, the parties are negotiating the terms of a new services
agreement and believe that if mutual agreement is not achieved, the parties can
successfully negotiate with outside third parties for necessary services.
10
COMPETITION
The biotechnology and pharmaceutical industries are subject to intense
competition, including competition from large pharmaceutical companies,
biotechnology companies and other companies, universities and research
institutions. Our existing therapeutic products compete with the products of a
wide variety of other firms, including firms that provide products used in more
traditional treatments or therapies, such as external beam radiation,
chemotherapy agents and narcotic analgesics. In addition, our existing and
potential competitors may be able to develop technologies that are as effective
as, or more effective than those offered by us, which would render our products
noncompetitive or obsolete. Moreover, many of our existing and potential
competitors have substantially greater financial, marketing, sales,
manufacturing, distribution and technological resources than we do. Our existing
and potential competitors may be in the process of seeking FDA or foreign
regulatory approval for their respective products or may also enjoy substantial
advantages over us in terms of research and development expertise, experience in
conducting clinical trials, experience in regulatory matters, manufacturing
efficiency, name recognition, sales and marketing expertise and distribution
channels. We believe that competition for our products is based upon several
factors, including product efficacy, safety, cost-effectiveness, ease of use,
availability, price, patent position and effective product promotion.
We expect competition to intensify in the fields in which we are involved, as
technical advances in such fields are made and become more widely known. We
cannot assure you, however, that we or our collaborative partners will be able
to develop our products successfully or that we will obtain patents to provide
protection against competitors. Moreover, we cannot assure you that our
competitors will not succeed in developing therapeutic products that circumvent
our products or that these competitors will not succeed in developing
technologies or products that are more effective than those developed by us. In
addition, many of these companies may have more experience in establishing
third-party reimbursement for their products. Accordingly, we cannot assure you
that we will be able to compete effectively against existing or potential
competitors or that competition will not have a material adverse effect on our
business, financial condition and results of operations.
The market for therapeutic and diagnostic products that address prostate and
bladder cancer is large. Our most significant competitors are major
pharmaceutical companies, radiopharmaceutical distributors and biotechnology
companies. There is one marketed product that competes with our ProstaScint
product, which is 18-F fluorodeoxyglucose-PET (FDG), a Positron Emission
Tomography (PET) imaging agent which is produced and distributed by various
radiopharmaceutical suppliers, such as PETnet and Syncor International
Corporation (now Cardinal Health Nuclear Pharmacy Services). We also face
competition in the diagnostic bladder cancer market from Polymedco which
produces BTAstat(R), a competitive product to NMP22 BladderChek, which we have
licensed from Matritech. Matritech has retained rights to market and may market
the point-of-care NMP22 BladderChek test directly to physicians other than
urologists and oncologists, such as primary care physicians.
Additionally, we face competition in the development of PSMA-related technology
and products primarily from Millenium Pharmaceuticals, Inc. and Medarex, Inc.
These competitors, many of which have substantially greater resources than ours,
operate large, well-funded cancer research and development programs, and have
significant expertise in manufacturing, testing, regulatory matters and
marketing.
MANUFACTURING
Our products must be manufactured in compliance with regulatory requirements and
at commercially acceptable costs. ProstaScint was manufactured at a current good
manufacturing practices, or cGMP, compliant manufacturing facility in Princeton,
New Jersey which is operated by Laureate Pharma L.P. (formerly Bard BioPharma
L.P.). An Establishment License Application for the facility was approved by the
FDA for the manufacture of ProstaScint in October 1996. Our manufacturing
agreement with Laureate expired in January 2002. In July 2000, we entered into a
Development and Manufacturing Agreement with DSM Biologics Company B.V.,
pursuant to which DSM conducted certain development activities with respect to
ProstaScint for testing and evaluation purposes. Our intention was that DSM
would replace the arrangement with Laureate, with respect to the manufacture of
ProstaScint.
In January 2003, we entered into a new Contract Manufacturing and Supply
Agreement with Laureate Pharma L.P., pursuant to which Laureate will
manufacture, and supply us with, ProstaScint, through December 31, 2003.
Notwithstanding the terms of such contract, we cannot be certain that Laureate
will satisfactorily perform its obligations thereunder or that Laureate will be
able to supply ProstaScint to us on commercially satisfactory terms, if at all.
Our failure to procure a sufficient supply of ProstaScint will have a material
11
adverse effect on our business, financial condition and results of operations.
As of December 31, 2002 we had a sufficient level of ProstaScint, inventory on
hand for ten months.
Our manufacturing arrangement with Laureate is subject to FDA oversight. Any
failure of Laureate to comply with FDA requirements will have a material adverse
effect on our business, financial condition and results of operations.
Quadramet is manufactured by Bristol-Myers Squibb (BMS) (formerly DuPont),
pursuant to an agreement with both Berlex and Cytogen.
Raw materials and suppliers
The active raw materials used for the manufacture of our ProstaScint product
include antibodies. We intend that the raw materials needed for our ProstaScint
product will be supplied by Laureate Pharma L.P., the same contract manufacturer
that we intend will make ProstaScint.
With respect to some components of Quadramet, particularly Samarium153 and
EDTMP, such raw materials are provided to BMS by outside suppliers. BMS obtains
its requirements for Samarium153 from one supplier. Alternative sources for
these components may not be readily available. If BMS cannot obtain sufficient
quantities of these components on commercially reasonable terms, or in a timely
manner, it would be unable to manufacture Quadramet on a timely and
cost-effective basis, which could have a material adverse effect on our
business, financial condition and results of operations.
On January 24, 2003, we provided Draximage with notice of termination for each
of our License and Distribution Agreement and Product Manufacturing and Supply
Agreement with respect to both of Draximage's BrachySeed I-125 and BrachySeed
Pd-103 products.
Pursuant to the terms of our distribution agreement with Matritech, we rely on
Matritech as the sole supplier of NMP22 BladderChek. Matritech uses independent
contractors to manufacture the product. If Matritech fails to, or is unable to
provide the product, we could experience a material adverse effect on our
business, financial condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS
We believe that our success depends in part on our ability to protect our
products and technology through patents and trade secrets. Accordingly, our
policy is to pursue a vigorous program of securing and maintaining patent and
trade secret protection to preserve our right to exploit the results of our
research and development activities and, to the extent it may be necessary or
advisable, to exclude others from appropriating our proprietary technology.
We aggressively protect our proprietary technology by selectively seeking patent
protection in a worldwide program. In addition to the United States, we file
patent applications in Canada, major European countries, Japan and additional
foreign countries on a selective basis to protect inventions important to the
development of our business. We believe that the countries in which we have
obtained and are seeking patent coverage for our proprietary technology
represent the major focus of the pharmaceutical industry in which we and certain
of our licensees will market our respective products. We also rely on trade
secrets, know-how, continuing technological innovation and in-licensing
opportunities to develop and maintain our proprietary position.
As of December 31, 2002, we owned or licensed over 40 United States patents and
additional pending United States patent applications, and over 45 corresponding
issued foreign patents and additional corresponding pending foreign patent
applications.
The issued patents owned or exclusively licensed by us cover various aspects of
our technology and therapeutic products and the methods for their production and
use, including various aspects of ProstaScint, Quadramet, and NMP22 BladderChek.
We have obtained a patent term extension on U.S. 5,162,504, the patent directed
to ProstaScint to October 28, 2010. In addition, there is a patent term
extension on U.S. 4,898,724, the patent directed to Quadramet to March 28, 2011.
We have entered into several license agreements under which we are exclusively
licensed to certain patents and patent applications. In particular, we acquired
an exclusive license from Memorial Sloan-Kettering Institute for certain patents
and patent applications covering PSMA. We are also the exclusive licensee of
certain United States patents and applications owned by DOW covering Quadramet.
12
We both co-own with and are the exclusive licensee of the University of North
Carolina at Chapel Hill of certain patents and pending applications, covering
aspects of proteomics technology, including our phage display.
We also currently own or are licensed under the following trademarks and
servicemarks: ProstaScint(R); Quadramet(R); NMP22(R) BladderChek(TM); and
Combidex(R).
We also rely upon, and intend to continue to rely upon, trade secrets,
unpatented proprietary know-how and continuing technological innovation to
develop and maintain our competitive position. It is our policy to require our
employees, consultants, licensees, outside scientific collaborators, sponsored
researchers and other advisors to execute confidentiality agreements upon the
commencement of employment or consulting relationships with us. These agreements
provide that all confidential information developed or made known to the
individual during the course of the individual's relationship with us is to be
kept confidential and not disclosed to third parties except in specific
circumstances. In the case of employees, the agreements provide that all
inventions conceived by the individual shall be our exclusive property. There
can be no assurance, however, that these agreements will provide meaningful
protection or adequate remedies for the our trade secrets in the event of
unauthorized use or disclosure of such information.
We believe that our valuable proprietary information is protected to the fullest
extent practicable; however, we cannot assure you that:
- additional patents will be issued to us in any or all appropriate
jurisdictions;
- litigation will not be commenced seeking to challenge our patent
protection or that challenges will not be successful;
- our processes or products do not or will not infringe upon the patents
of third parties; or
- the scope of patents issued will successfully prevent third parties
from developing similar and competitive products.
The technology applicable to our products is developing rapidly. A substantial
number of patents have been issued to other biotechnology companies. In
addition, competitors have filed applications for, or have been issued, patents
and may obtain additional patents and proprietary rights relating to products or
processes that are competitive with ours. In addition, others may have filed
patent applications and may have been issued patents to products and to
technologies potentially useful to us or necessary to commercialize our products
or to achieve our business goals. We cannot assure you that we will be able to
obtain licenses of patents on acceptable terms.
We cannot predict how any patent litigation will affect our efforts to develop,
manufacture or market our products.
We are defendants in litigation filed against us in the United States Federal
Court for the District of New Jersey with respect to claims that our ProstaScint
product infringes a third-party patent and we have disclosed certain information
regarding such lawsuit under the caption "Legal Proceedings", herein.
GOVERNMENT REGULATION AND PRODUCT TESTING
The development, manufacture and sale of medical products utilizing our
technology are governed by a variety of federal, state and local statutes and
regulations in the United States and by comparable laws and agency regulations
in most foreign countries. Our three actively marketed products consist of a
biologic (ProstaScint), a drug (Quadramet, a therapeutic radiopharmaceutical)
and a Premarket Approval ("PMA") device (NMP22(R) BladderChek(TM)). Future
applications for these may include expanded indications and could result in
additional drugs, biologics, PMA devices or combination products. Our product
development pipeline contains various other products, the majority of which will
likely be classified as new drugs or biologics.
In the United States, medical products that we currently market or intend to
develop are regulated by the Federal Food, Drug, and Cosmetic Act ("FDC Act")
and the Public Health Service Act, and by the Food and Drug Administration (the
"FDA") rules and regulations promulgated thereunder. These laws and regulations
require, among other things, carefully controlled research and preclinical and
clinical testing of products, government notification, review and/or approval
prior to investigating or marketing the product, inspection and/or licensing of
manufacturing and production facilities, adherence to current Good Manufacturing
13
Practices ("cGMP"), and compliance with products specifications, reporting,
advertising, promotion, export, packaging, labeling and other applicable
regulations.
The FDC Act requires that our products be manufactured in FDA registered
facilities subject to inspection. The manufacturer must be in compliance with
cGMP which imposes certain procedural and documentation requirements upon us and
our manufacturing partners with respect to manufacturing and quality control
activities. To ensure full technical compliance with such regulations, a
manufacturer must spend funds, time and effort in the areas of production and
quality control. Noncompliance with cGMP can result in, among other things,
fines, injunctions, civil penalties, recalls or seizures of products, total or
partial suspension of production, failure of the government to grant approval
for marketing, withdrawal, suspension or revocation of marketing approvals and
criminal prosecution. Any failure by us or our manufacturing partners to comply
with the requirements of cGMP could have a material adverse effect on our
business, financial condition and results of operations.
FDA approval of our proposed products, including a review of the manufacturing
processes and facilities used to produce such products, will be required before
such products may be marketed in the United States. The process required by the
FDA before drug, biological or PMA device products may be approved for marketing
in the United States generally involves (i) preclinical laboratory and animal
tests under the FDA's good laboratory practice regulations, (ii) submission to
the FDA of an Investigational New Drug Application ("IND") (for a drug or
biologic) or Investigational Device Exemption ("IDE") (for a device), which must
become effective before clinical trials may begin, (iii) human clinical trial(s)
to establish the safety and efficacy of the product for its intended indication,
(iv) submission to the FDA of a marketing application (New Drug Application
("NDA") for drug, Biologics License Application ("BLA") for biologic and PMA for
device) and (v) FDA review of the marketing application in order to determine,
among other things, whether, for a new drug or device, the product is safe and
effective for its intended uses, or whether, for a biological product, the
product is safe, pure and potent and the facility in which it is manufactured,
processed, packed or held meets standards designed to assure the product's
continued safety, purity, and potency. Radiopharmaceutical drugs and biologics
are subject to additional requirements pertaining to the description and support
of their indications for use, and the evaluation of product effectiveness and
safety, including radiation safety. There is no assurance that the FDA review of
marketing applications will result in product approval on a timely basis, or at
all.
Clinical trials for drugs and biologics typically are performed in three phases
to evaluate the safety and efficacy of the product. In Phase I, a product is
tested in a small number of patients primarily for safety at one or more
dosages. Phase II evaluates, in addition to safety, the efficacy of the product
against particular diseases in a patient population that is generally somewhat
larger than Phase I. Clinical trials of certain diagnostic and cancer
therapeutic agents may combine Phase I and Phase II into a single Phase I/II
study. In Phase III, the product is evaluated in a larger patient population
sufficient to generate data to support a claim of safety and efficacy within the
meaning of the FDC Act. Permission by the FDA must be obtained before clinical
testing can be initiated within the United States. This permission is obtained
by submission of an IND application which typically includes, among other
things, the results of in vitro and non-clinical testing and any previous human
testing done elsewhere. The FDA has 30 days to review the information submitted
and makes a final decision whether to permit clinical testing with the drug or
biologic. However, this process can take longer if the FDA raises questions or
asks for additional information regarding the Investigational New Drug
application.
There can be no assurance that submission of an IND or IDE will result in the
ability to commence clinical trials. In addition, FDA may place a clinical trial
on hold or terminate it if, among other reasons, it concludes that clinical
subjects are being exposed to an unacceptable health risk. After completion of
in vitro, non-clinical and clinical testing, authorization to market a drug,
biologic or device must be granted by FDA. The FDA grants permission to market
through the review and approval of either an NDA, BLA or PMA.
An NDA is an application to the FDA to market a new drug. A BLA is an
application to the FDA to market a biological product. An NDA or BLA, depending
on the submission, must contain, among other things, information on chemistry,
manufacturing controls and potency and purity; nonclinical pharmacology and
toxicology; human pharmacokinetics and bioavailability and clinical data. The
new drug or biologic may not be marketed in the United States until the FDA has
approved the NDA or BLA. In addition, for both NDAs and BLAs, the application
will not be approved until the FDA conducts a manufacturing inspection and
approves the applicable manufacturing process for the drug or biologic. A PMA is
an application to the FDA to market certain medical devices, which must be
approved in order for the product to be marketed. It must be supported by valid
scientific evidence, which typically includes extensive data, including
pre-clinical data and clinical data from well-controlled or partially controlled
clinical trials, to demonstrate the safety and effectiveness of the device.
Product and manufacturing and controls specification and information must also
be provided.
14
Both the studies and the preparation and prosecution of these applications in
front of the FDA are expensive and time consuming, and each may take several
years to complete. Difficulties or unanticipated costs may be encountered by us
or our licensees in their respective efforts to secure necessary governmental
approval or licenses, which could delay or preclude us or our licensees from
marketing their products. There can be no assurance that approvals of our
proposed products, processes or facilities will be granted on a timely basis, or
at all. Limited indications for use or other conditions could also be placed on
any approvals that could restrict the commercial applications of products. With
respect to patented products or technologies, delays imposed by the government
approval process may materially reduce the period during which we will have the
exclusive right to exploit them, because patent protection lasts only for a
limited time, beginning on the date the patent is first granted in the case of
United States patent applications filed prior to June 6, 1995, and when the
patent application is first filed in the case of patent applications filed in
the United States after June 6, 1995, and applications filed in the European
Economic Community. We intend to seek to maximize the useful life of our patents
under the Patent Term Restoration Act of 1984 in the United States and under
similar laws if available in other countries.
Certain of our future products may be regulated by FDA as combination products.
Combination products are products comprised of a combination of two or more
different types of components, e.g., drug/device, device/biologic,
drug/device/biologic, or are comprised of two or more separate different types
of products packaged together for use, or two or more different types of
products packaged separately but labeled for use in combination with one
another. The regulation of a combination product is determined by the product's
primary mode of action; for example, a combination drug/device that has a
primary mode of action as a drug would be regulated by the Center for Drugs
under a new drug application. In some cases, however, consultative reviews
and/or separate approvals by each agency Center with jurisdiction over a
component may be required. The product designation, approval pathway, and
submission requirements for a combination product may be difficult to predict,
and the approval process may be fraught with unanticipated delays and
difficulties. In addition, post-approval requirements may be more extensive than
for single entity products. Even if products such as ProstaScint or Quadramet
that we intend to develop for use with other separately regulated products are
not regulated as combination products, they may be subject to similar
multi-Center consultative reviews and additional post-market requirements.
Once a product is approved by the FDA, we are required to maintain approval
status of the product by providing certain updated safety and efficacy
information at specified intervals. Product changes as well as any change in a
manufacturing process or equipment that has a substantial potential to adversely
affect the safety or effectiveness of the product for a drug or biologic, or,
for a device, the use of a different facility for manufacturing where such
change affects safety and effectiveness, would necessitate additional FDA review
and approval. Post approval changes in labeling, packaging or promotional
materials may also necessitate further FDA review and approval. Additionally, we
are required to meet other requirements specified by the FDA Act including but
not limited to cGMPs, enforced by periodic inspections, adverse event reporting,
requirements governing labeling and promotional materials, and the maintenance
of records. Failure to comply with these requirements or the occurrence of
unanticipated safety effects from the products during commercial marketing,
could lead to the need for product marketing restriction, product withdrawal or
recall, or other voluntary or FDA-initiated action, which could delay further
marketing until the products are brought into compliance. Similar laws and
regulations apply in most foreign countries where these products may be
marketed.
Violations of the FDC Act, Public Health Service Act, or regulatory requirements
at any time during the product development process, approval process, or after
approval may result in agency enforcement actions, including voluntary or
mandatory recall, license suspension or revocation, premarket approval
withdrawal, seizure of products, fines, injunction and/or civil or criminal
penalties. Any agency enforcement action could have a material adverse effect on
us.
Orphan Drug Act
The Orphan Drug Act is intended to provide incentives to manufacturers to
develop and market drugs and biologics for rare diseases or conditions affecting
fewer than 200,000 persons in the United States at the time of application for
orphan drug designation. A drug that receives orphan drug designation and is the
first product to receive FDA marketing approval for a particular indication is
entitled to orphan drug status, which confers a seven-year exclusive marketing
period in the United States for that indication. Clinical testing requirements
for orphan drugs are the same as those for products that have not received
orphan drug designation but manufacturers may receive grants or tax credits for
research, as well as protocol assistance. Under the Orphan Drug Act, the FDA
cannot approve any application by another party to market an identical product
for treatment of an identical indication unless the holder consents, the party
has a license from the holder of orphan drug status, or the holder of orphan
drug status is unable to assure an adequate supply of the drug. However, a drug
that is considered by FDA to be different from a particular orphan drug is not
15
barred from sale in the United States during the seven-year exclusive marketing
period even if it receives marketing approval for the same product claim. In
addition, holders of orphan drug status must notify FDA of any decision to
discontinue active pursuit of drug approval or biologics license, or, if such
approval or license is in effect, notify FDA at least one year prior to any
discontinuance of product production.
Fraud and Abuse
We are subject to various federal and state laws pertaining to health care fraud
and abuse, including anti-kickback laws and physician self-referral laws.
Violations of these laws are punishable by criminal and/or civil sanctions,
including, in some instances, imprisonment and exclusion from participation in
federal and state health care programs, including Medicare, Medicaid and VA
health programs. Because of the far-reaching nature of these laws, there can be
no assurance that the occurrence of one or more violations of these laws would
not result in a material adverse effect on our financial condition and results
of operations.
Anti-Kickback Laws. Our operations are subject to federal and state
anti-kickback laws. Certain provisions of the Social Security Act, that are
commonly known collectively as the Medicare Fraud and Abuse Statute, prohibit
entities, such as us, from knowingly and willingly offering, paying, soliciting
or receiving any form of remuneration in return for the referral of items or
services reimbursable by any federal health care program, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by federal health care programs. Violation of the Medicare Fraud and
Abuse Statute is a felony, punishable by fines up to $25,000 per violation and
imprisonment for up to five years or both. In addition, the Department of Health
and Human Services may impose civil penalties of up to $50,000 per act and up to
three times the remuneration offered and exclude violators from participation in
Medicare or state health programs. Many states have adopted similar prohibitions
against payments intended to induce referrals to Medicaid and other third party
payor patients.
Physician Self-Referral Laws. We are also subject to federal and state physician
self-referral laws. Federal physician self-referral legislation (known as the
Stark law) prohibits, subject to certain exceptions, a physician from referring
Medicare or Medicaid patients to an entity providing "designated health services
including, among other things, certain radiology and radiation therapy services,
and clinical laboratory services" in which the physician or a member of his
immediate family has an ownership or investment interest, or with which the
physician has entered into a compensation arrangement. The Stark law also
prohibits the entity receiving the referral from billing any good or service
furnished pursuant to an unlawful referral. The penalties for violations include
a prohibition on payment by these government programs and civil penalties of as
much as $15,000 for each violative referral and $100,000 for participation in a
circumvention scheme." Various state laws also contain similar provisions and
penalties.
False Claims Laws. Under separate statutes, submission of claims for payment
that are false or fraudulent may lead to civil money penalties, criminal fines
and imprisonment, and/or exclusion from participation in Medicare, Medicaid and
other federally funded state health programs. These false claims statutes
include the Federal False Claims Act, which allows any person to bring suit
alleging false or fraudulent Medicare or Medicaid claims or other violations of
the statute and to share in any amounts paid by the entity to the government in
fines or settlement. Such suits, known as qui tam actions, have increased
significantly in recent years causing greater numbers of health care companies
to have to defend a false claim action, pay fines or be excluded from the
Medicare, Medicaid or other federal or state health care programs as a result of
any investigation arising out of such action.
Other regulations
In addition to regulations enforced by FDA, and federal and state laws
pertaining to health care fraud and abuse, we are also subject to regulation
under the state and local authorities and other federal statutes and agencies
including the Occupational Safety and Health Act, the Environmental Protection
Act, the Toxic Substances Control Act, the Resource Conservation and Recovery
Act and the Nuclear Regulatory Commission.
Foreign regulatory approval
The regulatory approval process in Europe has changed over the past few years.
There are two regulatory approval processes in Europe for products developed by
us. Beginning in 1995, the centralized procedure became mandatory for all
biotechnology products. Under this regulatory scheme, the application is
reviewed by two scientific project leaders referred to as the rapporteur and
co-rapporteur, respectively. Their roles are to prepare assessment reports of
safety and efficacy and for recommending the approval for full European Union
marketing.
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The second regulatory scheme, referred to as the Mutual Recognition Procedure,
is a process whereby a product's national registration in one member state
within the European Union may be "mutually recognized" by other member states
within the European Union.
Substantial requirements, comparable in many respects to those imposed under the
Food Drug and Cosmetic Act, will have to be met before commercial sale is
permissible in most countries. There can be no assurance, however, as to whether
or when governmental approvals, other than those already obtained, will be
obtained or as to the terms or scope of those approvals.
HEALTH CARE REIMBURSEMENT
Our business, financial condition and results of operations will continue to be
affected by the efforts of governments and third-party payors to contain or
reduce the costs of healthcare through various means. There have been, and we
expect that there will continue to be, federal and state proposals to implement
government control of pricing and profitability of therapeutic and diagnostic
imaging agents. The Centers for Medicare and Medicaid Services (CMS) have
introduced significant changes in product descriptors, codes and reimbursement
values. Although it is not possible to predict or identify all of the risks
relating to such changes, we believe that such risks include, but are not
limited to: (i) increasing price pressures (including those imposed by rules and
practices of managed care groups and institutional and governmental purchasers);
and (ii) judicial decisions and government laws related to Medicare, Medicaid,
healthcare reform, radiopharmaceutical, pharmaceutical and device reimbursement,
and price in general. In addition, an increasing emphasis on managed care has
and will continue to increase the pressure on pricing of these products. While
we cannot predict whether legislative or regulatory proposals will be adopted or
the effects proposals or managed care efforts may have on our business, the
announcement of proposals and the adoption of proposals or efforts could have a
material adverse effect on our business, financial condition and results of
operations. Further, to the extent proposals or efforts have a material adverse
effect on other companies that are our prospective corporate partners, our
ability to establish strategic alliances may be materially and adversely
affected. In certain foreign markets, the pricing and profitability of our
products generally are subject to government controls.
Sales of our products depend in part on the availability of reimbursement to the
consumer from third-party payors, including Medicare, Medicaid, and private
health insurance plans. Third-party payors are increasingly challenging the
reimbursement values of medical products and services. To the extent we succeed
in bringing products to market, we cannot assure you that these products will be
considered cost-effective and that reimbursement to consumers will be available
or sufficient to allow us to sell our products on a competitive basis.
Reimbursement by a third-party payor may depend on a number of factors,
including the payor's determination that our products are clinically useful and
cost-effective, medically necessary and not experimental or investigational.
Since reimbursement approval is required from each payor individually, seeking
approvals can be a time consuming and costly process which could require us to
provide supporting scientific, clinical and cost-effectiveness data for the use
of our products to each payor separately. If we or our collaborators are unable
to secure adequate third party reimbursement for our products, there would be
material adverse effect on its business, financial condition and results of
operations.
CUSTOMERS
During the year ended December 31, 2002, we received 55% of our total revenues
from four customers, as follows: 16% from Berlex Laboratories, 18% from
Mallinckrodt Medical, Inc., 12% from Medi-Physics and 9% from Syncor
International Corporation (now Cardinal Health Nuclear Pharmacy Services).
EMPLOYEES
As of March 1, 2003, we employed 49 persons, 48 of whom are employed full-time
and 1 of whom is employed part-time. Of such 49 persons, 6 were employed in our
subsidiary, AxCell, 2 in regulatory, 5 in clinical activities, 12 in
administration and management, and 24 in marketing and sales. The employees in
marketing and sales included 6 Regional Oncology Specialists and 12 Regional and
Territory Managers. We believe that we have been successful in attracting
skilled and experienced employees. None of our employees is covered by a
collective bargaining agreement. All of our employees have executed
confidentiality agreements. We consider relations with our employees to be
excellent.
17
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following risks and uncertainties described below
together with the other information included or incorporated by reference in
this Annual Report on Form 10-K in your decision as to whether to invest in our
common stock. If any of the following risks or uncertainties actually occur, our
business, financial condition and operating results could be significantly and
adversely affected. If that happens, the price of our common stock could
decline, and you could lose all or part of your investment.
We Have a History of Operating Losses and an Accumulated Deficit and Expect To
Incur Losses in the Future.
We have a history of operating losses since our inception. We had a net loss of
$15.7 million for the year ended December 31, 2002 and had a net loss of $12.1
million for the year ended December 31, 2001. The loss for the year ended
December 31, 2002 included: (i) a $2.9 million charge for our share of
development costs at the PSMA Development Company LLC, a joint venture with
Progenics for the development of in vivo immunotherapies utilizing the prostate
specific membrane antigen, or PSMA; (ii) a non-cash charge of $1.7 million to
write-off the carrying value of the licensing fees associated with BrachySeed
I-125 and BrachySeed Pd-103; (iii) a non-cash milestone payment of $2.0 million
related to the progress of ex vivo dendritic cell prostate cancer clinical
trials at Northwest Biotherapeutics, Inc.; (iv) a non-cash charge of $516,000
resulting from an other than temporary decline in the fair value of an
investment in Northwest Biotherapeutics, Inc. common stock; and (v) a charge of
$869,000 related to the restructuring of our AxCell Biosciences subsidiary in
September 2002. Beginning in December 2001, we began to equally share the costs
of the PSMA Development Company LLC and we expect to incur significant and
increasing costs in the future to fund our share of the joint venture. We had a
net loss of $27.3 million for the year ended December 31, 2000 which included
one-time, non-cash charges of $13.1 million for the acquisition of product
candidate rights and $4.3 million for the cumulative effect of an accounting
change following the adoption of Securities and Exchange Commission Staff
Accounting Bulletin No. 101. We had an accumulated deficit of $356.4 million as
of December 31, 2002.
In order to develop and commercialize our technologies, particularly our
prostate specific membrane antigen, or PSMA, technology, and expand our oncology
products, we expect to incur significant increases in our expenses over the next
several years. As a result, we will need to generate significant additional
revenue to become profitable.
Our ability to generate and sustain significant additional revenues or achieve
profitability will depend upon the factors discussed elsewhere in this
"Additional Factors That May Affect Future Results" Section, as well as numerous
other factors outside of our control, including:
- development of competing products that are more effective or less
costly than ours;
- our ability to develop and commercialize our own products and
technologies; and
- our ability to achieve increased sales for our existing products and
sales for any new products.
As a result, we may never be able to generate or sustain significant additional
revenue or achieve profitability.
We Are Heavily Dependent On Market Acceptance Of ProstaScint and Quadramet For
Near-Term Revenues.
We expect ProstaScint and Quadramet to account for a significant percentage of
our product-related revenues in the near future. For the year ended December 31,
2002, revenues from ProstaScint and Quadramet accounted for approximately 78% of
our product related revenues. In 2002, our product-related revenue included
revenue from BrachySeed, which accounted for 20% of our product related revenue.
In January 2003, we served notice of termination for each of our License and
Distribution Agreement and Product Manufacturing and Supply Agreement with
Draximage with respect to both the BrachySeed I-125 and BrachySeed Pd-103
products. As a result, effective January 24, 2003, we no longer accept or fill
new orders for the BrachySeed products.
Because our marketed products contribute the majority of our product-related
revenues, our business, financial condition and results of operations depend on
their acceptance as safe, effective and cost-efficient alternatives to other
available treatment and diagnostic protocols by the medical community,
including:
- health care providers, such as hospitals and physicians; and
18
- third-party payors, including Medicare, Medicaid, private insurance
carriers and health maintenance organizations.
Our customers, including technologists and physicians, must successfully
complete our Partners in Excellence Program, or PIE Program, a proprietary
training program designed to promote the correct acquisition and interpretation
of ProstaScint images. This product is technique dependent and requires a
learning commitment on the part of users. We cannot assure you that additional
technologists and physicians will make this commitment or otherwise accept this
product as part of their treatment practices.
Berlex Laboratories, Inc. markets Quadramet in the United States through an
agreement with us entered into in October 1998. We cannot assure you that Berlex
will be able to successfully market Quadramet or that this agreement will result
in significant revenues for us in the future.
We cannot assure you that ProstaScint or Quadramet will achieve additional
market acceptance on a timely basis, or at all. If ProstaScint or Quadramet do
not achieve broader market acceptance, we may not be able to generate sufficient
revenue to become profitable.
The Reduced Workforce At AxCell May Not Be Able To Implement AxCell's Business
Plan.
In September 2002, we implemented the restructuring of our subsidiary, AxCell
Biosciences Corporation, in an effort to reduce expenses and position Cytogen
for stronger long-term growth in oncology. As a result, we reduced our staff at
AxCell by seventy-five percent, suspended certain projects at AxCell and
implemented other cost-saving measures.
The technologies under development at AxCell are complex and remain commercially
unproven. Even if we are able to develop and commercialize a product through
AxCell, there are a limited number of pharmaceutical companies and biotechnology
companies that are potential customers for such technology or product.
Although we believe that we have retained the AxCell personnel who are key to
achieving AxCell's goals and implementing its strategies, we cannot be certain
that such reduced workforce will be able to implement AxCell's current business
plan. The further loss of any of AxCell's personnel could have a material
adverse effect on AxCell's ability to achieve its goals.
We May Need To Raise Additional Capital, Which May Not Be Available.
We have incurred negative cash flows from operations since inception. We
expended, and will need to continue to expend, substantial funds to complete our
planned product development efforts, including our PSMA programs. Our future
capital requirements and the adequacy of our available funds depend on many
factors, including:
- successful commercialization of our products;
- acquisition of complementary products and technologies;
- magnitude, scope and results of our product development efforts;
- progress of preclinical studies and clinical trials;
- progress toward regulatory approval for our products;
- costs of filing, prosecuting, defending and enforcing patent claims
and other intellectual property rights;
- competing technological and market developments; and
- expansion of strategic alliances for the sale, marketing and
distribution of our products.
We may raise additional capital through public or private equity offerings, debt
financings or additional collaborations and licensing arrangements. Additional
financing may not be available to us when needed, or, if available, we may not
be able to obtain financing on terms favorable to our stockholders or us. If we
raise additional capital by issuing equity securities, the issuance will result
in ownership dilution to our stockholders. If we raise additional funds through
19
collaborations and licensing arrangements, we may be required to relinquish
rights to certain of our technologies or product candidates or to grant licenses
on unfavorable terms. If we relinquish rights or grant licenses on unfavorable
terms, we may not be able to develop or market products in a manner that is
profitable to us. If adequate funds are not available, we may not be able to
conduct research activities, preclinical studies, clinical trials or other
activities relating to the successful commercialization of our products on a
timely basis, if at all, with the result that our business could be
significantly and adversely affected.
Our Products, Generally, Are In The Early Stages Of Development And
Commercialization And We May Never Achieve The Revenue Goals Set Forth In Our
Business Plan.
We began operations in 1980 and have been engaged primarily in research directed
toward the development, commercialization and marketing of products to improve
diagnosis and treatment of cancer and other diseases. In October 1996, we
introduced for commercial use our ProstaScint imaging agent. In March 1997, we
introduced for commercial use our Quadramet therapeutic product. In 2001, we
launched the iodine version of BrachySeed. In May 2002, we launched the
palladium version of BrachySeed. In November 2002, we began promoting NMP22
BladderChek to urologists in the United States. In January 2003, we discontinued
our marketing and sale of the BrachySeed products.
Our PSMA technologies are still in the early stages of development. We have
significantly reduced operations at our AxCell subsidiary, which is responsible
for the development certain of our technologies. We may be unable to develop or
commercialize these products and technologies.
Our business is therefore subject to the risks inherent in the development of an
early stage biopharmaceutical business enterprise, such as the need:
- to obtain sufficient capital to support the expenses of developing our
technology and commercializing our products;
- to ensure that our products are safe and effective;
- to obtain regulatory approval for the use and sale of our products;
- to manufacture our products in sufficient quantities and at a
reasonable cost;
- to develop a sufficient market for our products; and
- to attract and retain qualified management, sales, technical and
scientific staff.
The problems frequently encountered using new technologies and operating in a
competitive environment also may affect our business. If we fail to properly
address these risks and attain our business objectives, our business could be
significantly and adversely affected.
Our PSMA Product Development Program Is Novel And, Consequently, Inherently
Risky.
We are subject to the risks of failure inherent in the development of product
candidates based on new technologies, including our PSMA technology. These risks
include the possibility that:
- the technologies we use will not be effective;
- our product candidates will be unsafe;
- our product candidates will fail to receive the necessary regulatory
approvals;
- the product candidates will be hard to manufacture on a large scale or
will be uneconomical to market; and
- we will not successfully overcome technological challenges presented
by our potential new products.
Our other research and development programs involve similarly novel approaches
to human therapeutics. Consequently, there is no precedent for the successful
commercialization of therapeutic products based on our PSMA technologies. We
20
cannot assure you that any products will be successfully developed from our PSMA
technology. If we fail to develop such products for the reasons set forth above
or for any other reason, our business could be significantly and adversely
affected.
All of Our Potential Oncology Products Will Be Subject To The Risks Of Failure
Inherent In The Development Of Diagnostic Or Therapeutic Products Based On New
Technologies.
Product development for cancer treatment involves a high degree of risk. We
cannot assure you that the product candidates we develop, pursue or offer will
prove to be safe and effective, will receive the necessary regulatory approvals,
will not be precluded by proprietary rights of third parties or will ultimately
achieve market acceptance. These product candidates will require substantial
additional investment, laboratory development, clinical testing and regulatory
approvals prior to their commercialization. We cannot assure you that we will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products.
Before we obtain regulatory approvals for the commercial sale of any of our
products under development, we must demonstrate through preclinical studies and
clinical trials that the product is safe and efficacious for use in each target
indication. The results from preclinical studies and early clinical trials may
not be predictive of results that will be obtained in large-scale testing. We
cannot assure you that our clinical trials will demonstrate the safety and
efficacy of any products or will result in marketable products. A number of
companies in the biotechnology industry have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials.
Clinical trials or marketing of any potential diagnostic or therapeutic products
may expose us to liability claims for the use of these diagnostic or therapeutic
products. We may not be able to maintain product liability insurance or
sufficient coverage may not be available at a reasonable cost. In addition, as
we develop diagnostic or therapeutic products internally, we will have to make
significant investments in diagnostic or therapeutic product development,
marketing, sales and regulatory compliance resources. We will also have to
establish or contract for the manufacture of products, including supplies of
drugs used in clinical trials, under the current Good Manufacturing Practices,
or cGMP, of the FDA. We also cannot assure you that product issues will not
arise following successful clinical trials and FDA approval.
The rate of completion of clinical trials also depends on the rate of patient
enrollment. Patient enrollment depends on many factors, including the size of
the patient population, the nature of the protocol, the proximity of patients to
clinical sites and the eligibility criteria for the study. Delays in planned
patient enrollment may result in increased costs and delays, which could have a
harmful effect on our ability to develop the products in our pipeline. If we are
unable to develop and commercialize products on a timely basis or at all, our
business could be significantly and adversely affected.
Competition In Our Field Is Intense And Likely To Increase.
We face, and will continue to face, intense competition from one or more of the
following entities:
- pharmaceutical companies;
- biotechnology companies;
- bioinformatics companies;
- diagnostic companies;
- academic and research institutions; and
- government agencies.
All of our lines of business are subject to significant competition from
organizations that are pursuing technologies and products that are the same as
or similar to our technology and products. Many of the organizations competing
with us have greater capital resources, research and development staffs and
facilities and marketing capabilities.
Before we recover development expenses for our products and technologies, the
products or technologies may become obsolete as a result of technological
developments by others or us. Our products could also be made obsolete by new
technologies, which are less expensive or more effective. We may not be able to
21
make the enhancements to our technology necessary to compete successfully with
newly emerging technologies and failure to do so could significantly and
adversely affect our business.
We Rely Heavily On Our Collaborative Partners.
Our success depends in significant part upon the success of our collaborative
partners. We have entered into the following agreements for the sale, marketing,
distribution and manufacture of our products, product candidates and
technologies:
- license from The Dow Chemical Company relating to the Quadramet
technology;
- sub-license and marketing agreement with Berlex Laboratories, Inc.
relating to the Quadramet technology which we licensed from The Dow
Chemical Company;
- agreement for manufacture of Quadramet by Bristol Myers Squibb
(formerly The DuPont Pharmaceuticals Company);
- joint venture with Progenics Pharmaceuticals for the development of
PSMA for in vivo immunotherapy for prostate and other cancers;
- licensing agreement with Molecular Staging for technology to be used
in developing in vitro diagnostic tests using PSMA and prostate
specific antigen, or PSA;
- a Supply Agreement with Laureate Pharma L.P. for the production of our
ProstaScint product;
- an agreement with Matritech to market and distribute NMP22 BladderChek
to urologists and oncologists in the United States;
- marketing, license and supply agreements with Advanced Magnetics, Inc.
related to Combidex and Code 7228;
- a License Agreement between our joint venture, PSMA Development
Company LLC, and AlphaVax Human Vaccines, Inc.; and
- a Collaboration Agreement between our joint venture and Abgenix, Inc.
Because our collaborative partners are responsible for certain of our sales,
marketing, manufacturing and distribution activities, these activities are
outside our direct control. We cannot assure you that our partners will perform
their obligations under these agreements with us or that our partners will not
enter into arrangements with third parties that may negatively impact the
economic benefit we hope to derive from their agreements with us. For example,
Matritech retained the ability to market its NMP22 BladderChek to primary care
physicians and others and has begun such marketing efforts. In the event that
our collaborative partners do not successfully market and sell our products, are
entitled to enter into third party arrangements that may economically
disadvantage us, or breach their obligations under our agreements, our products
may not be commercially successful, any success may be delayed and new product
development could be inhibited with the result that our business could be
significantly and adversely affected.
Our Business Could Be Harmed If Our Collaborative Arrangements Expire Or Are
Terminated Early.
We cannot assure you that we will be able to maintain our existing collaborative
arrangements. If they expire or are terminated, we cannot assure you that they
will be renewed or that new arrangements will be available on acceptable terms,
if at all. In January 2003, we provided Draximage Inc. with notice of our intent
to terminate our Product Manufacturing and Supply Agreement and License
Agreement with Draximage relating to the BrachySeed products.
In addition, we cannot assure you that any new arrangements or renewals of
existing arrangements will be successful, that the parties to any new or renewed
agreements will perform adequately or that any former or potential collaborators
will not compete with us.
22
We cannot assure you that our existing or future collaborations will lead to the
development of product candidates or technologies with commercial potential,
that we will be able to obtain proprietary rights or licenses for proprietary
rights for our product candidates or technologies developed in connection with
these arrangements or that we will be able to ensure the confidentiality of
proprietary rights and information developed in such arrangements or prevent the
public disclosure thereof.
The Termination Of One Or More License Agreements That Are Important In The
Manufacture Of Our Current Products And New Product Research And Development
Activities Would Harm Our Business.
We are a party to license agreements under which we have rights to use
technologies owned by other companies in the manufacture of our products and in
our proprietary research, development and testing processes. We are the
exclusive licensee of certain patents and patent applications held by the
University of North Carolina at Chapel Hill covering part of the technology used
in the proteomics program and of certain patents and patent applications held by
the Memorial Sloan-Kettering Institute covering PSMA. We also depend upon the
enforceability of our license with The Dow Chemical Company with respect to
Quadramet. If the licenses were terminated, we may not be able to find suitable
alternatives to this technology on a timely basis or on reasonable terms, if at
all. The loss of the right to use these technologies that we have licensed would
significantly and adversely affect our business.
We Have Limited Sales, Marketing And Distribution Capabilities For Our Products.
We have established an internal sales force that is responsible for marketing
and selling ProstaScint and NMP22 BladderChek. However, such internal sales
force has limited sales, marketing and distribution capabilities for our
products, compared to those of many of our competitors. We depend on Berlex
Laboratories, Inc. for the sale, marketing and distribution of Quadramet in the
United States. In locations outside the United States, we have not established a
selling presence. If we are unable to establish and maintain significant sales,
marketing and distribution efforts, either internally or through arrangements
with third parties, our business may be significantly and adversely affected.
There Are Risks Associated With The Manufacture And Supply Of Our Products.
If we are to be successful, our products will have to be manufactured by
contract manufacturers in compliance with regulatory requirements and at costs
acceptable to us. We cannot assure you that we will be able to arrange for the
manufacture of our products on commercially reasonable terms. If we are unable
to successfully arrange for the manufacture of our products and product
candidates, we will not be able to successfully commercialize our products and
our business will be significantly and adversely affected.
ProstaScint was manufactured at a cGMP compliant manufacturing facility operated
by Laureate Pharma L.P. (formerly Bard BioPharma L.P.). We had access to
Purdue's facility for continued manufacturing of the product until January 2002.
We have built our inventory of ProstaScint to meet our product requirements in
the short term. We entered into a Development and Manufacturing Agreement with
DSM in July 2000, which we intended would replace our arrangement with Laureate
with respect to ProstaScint. We entered into a new Contract Manufacturing
Agreement with Laureate Pharma L.P. in January 2003. Our failure to maintain a
long term supply agreement on commercially reasonable terms will have a material
adverse effect on our business, financial condition and results of operations.
Quadramet is manufactured by Bristol-Myers Squibb (BMS) (formerly DuPont),
pursuant to an agreement with both Berlex and Cytogen. Some components of
Quadramet, particularly Samarium153 and EDTMP, are provided to BMS by outside
suppliers. Due to radioactive decay, Samarium153 must be produced on a weekly
basis. BMS obtains its requirements for Samarium153 from one supplier.
Alternative sources for these components may not be readily available. If BMS
cannot obtain sufficient quantities of the components on commercially reasonable
terms, or in a timely manner, it would be unable to manufacture Quadramet on a
timely and cost-effective basis, which could have a material adverse effect on
our business, financial condition and results of operations.
Pursuant to the terms of our distribution agreement with Matritech, we rely on
Matritech as the sole supplier of NMP22 BladderChek. Matritech uses independent
contractors to manufacture the product. If Matritech fails to, or is unable to
provide the product, we could experience a material adverse effect on our
business, financial condition and results of operations.
The Company, our contract manufacturers and testing laboratories are required to
adhere to United States Food & Drug Administration regulations setting forth
requirements for cGMP, and similar regulations in other countries, which include
23
extensive testing, control and documentation requirements. Ongoing compliance
with cGMP, labeling and other applicable regulatory requirements is monitored
through periodic inspections and market surveillance by state and federal
agencies, including the FDA, and by comparable agencies in other countries.
Failure of our contract vendors or us to comply with applicable regulations
could result in sanctions being imposed on us, including fines, injunctions,
civil penalties, failure of the government to grant premarket clearance or
premarket approval of drugs, delays, suspension or withdrawal of approvals,
seizures or recalls of products, operating restrictions and criminal
prosecutions any of which could significantly and adversely affect our business.
Failure Of Consumers To Obtain Adequate Reimbursement From Third-Party Payors
Could Limit Market Acceptance And Affect Pricing Of Our Products.
Our business, financial condition and results of operations will continue to be
affected by the efforts of governments and other third-party payors to contain
or reduce the costs of healthcare. There have been, and we expect that there
will continue to be, a number of federal and state proposals to implement
government control of pricing and profitability of therapeutic and diagnostic
imaging agents such as our products. In addition, an emphasis on managed care
increases possible pressure on pricing of these products. While we cannot
predict whether these legislative or regulatory proposals will be adopted, or
the effects these proposals or managed care efforts may have on our business,
the announcement of these proposals and the adoption of these proposals or
efforts could affect our stock price or our business. Further, to the extent
these proposals or efforts have an adverse effect on other companies that are
our prospective corporate partners, our ability to establish necessary strategic
alliances may be harmed.
Sales of our products depend in part on reimbursement to the consumer from
third-party payors, including Medicare, Medicaid and private health insurance
plans. Third-party payors are increasingly challenging the prices charged for
medical products and services. We cannot assure you that our products will be
considered cost-effective and that reimbursement to consumers will continue to
be available, or will be sufficient to allow us to sell our products on a
competitive basis. Approval of our products for reimbursement by a third-party
payor may depend on a number of factors, including the payor's determination
that our products are clinically useful and cost-effective, medically necessary
and not experimental or investigational. Reimbursement is determined by each
payor individually and in specific cases. The reimbursement process can be time
consuming. If we cannot secure adequate third-party reimbursement for our
products, our business could be significantly and adversely affected.
If We Are Unable To Comply With Applicable Governmental Regulation We May Not Be
Able To Continue Our Operations.
Any products tested, manufactured or distributed by us or on our behalf pursuant
to FDA approvals are subject to pervasive and continuing regulation by numerous
regulatory authorities, including primarily the FDA. We may be slow to adapt, or
we may never adapt to changes in existing requirements or adoption of new
requirements or policies. Our failure to comply with regulatory requirements
could subject us to enforcement action, including product seizures, recalls,
withdrawal, suspension, or revocation of approvals, restrictions on or
injunctions against marketing our products based on our technology, and civil
and criminal penalties. We cannot assure you that we will not be required to
incur significant costs to comply with laws and regulations in the future or
that laws or regulations will not create an unsustainable burden on our
business.
Numerous federal, state and local governmental authorities, principally the FDA,
and similar regulatory agencies in other countries, regulate the preclinical
testing, clinical trials, manufacture and promotion of any compounds or agents
we or our collaborative partners develop, and the manufacturing and marketing of
any resulting drugs. The product development and regulatory approval process is
lengthy, expensive, uncertain and subject to delays.
The regulatory risks we face also include the following:
- any compound or agent we or our collaborative partners develop must
receive regulatory agency approval before it may be marketed as a drug
in a particular country;
- the regulatory process, which includes preclinical testing and
clinical trials of each compound or agent in order to establish its
safety and efficacy, varies from country to country, can take many
years and requires the expenditure of substantial resources;
24
- in all circumstances, approval of the use of previously unapproved
radioisotopes in certain of our products requires approval of either
the Nuclear Regulatory Commission or equivalent state regulatory
agencies. A radioisotope is an unstable form of an element which
undergoes radioactive decay, thereby emitting radiation which may be
used, for example, to image or destroy harmful growths or tissue. We
cannot assure you that such approvals will be obtained on a timely
basis, or at all;
- data obtained from preclinical and clinical activities are susceptible
to varying interpretations which could delay, limit or prevent
regulatory agency approval; and
- delays or rejections may be encountered based upon changes in
regulatory agency policy during the period of product development
and/or the period of review of any application for regulatory agency
approval. These delays could adversely affect the marketing of any
products we or our collaborative partners develop, impose costly
procedures upon our activities, diminish any competitive advantages we
or our collaborative partners may attain and adversely affect our
ability to receive royalties.
We cannot assure you that, even after this time and expenditure, regulatory
agency approvals will be obtained for any compound or agent developed by or in
collaboration with us. Moreover, regulatory agency approval for a product or
agent may entail limitations on the indicated uses that could limit the
potential market for any such product. Furthermore, if and when such approval is
obtained, the marketing, manufacture, labeling, packaging, reporting, storage,
advertising and promotion and record keeping related to our products would
remain subject to extensive regulatory requirements. Discovery of previously
unknown problems with a drug, its manufacture or its manufacturer may result in
restrictions on such drug, manufacture or manufacturer, including withdrawal of
the drug from the market. Failure to comply with regulatory requirements could
result in fines, injunctions, seizures, recalls, suspension or withdrawal of
regulatory approvals, operating restrictions and criminal prosecution.
The United States Food, Drug and Cosmetics Act requires (i) that our products be
manufactured in FDA registered facilities subject to inspection, and (ii) that
we comply with cGMP, which imposes certain procedural and documentation
requirements upon us and our manufacturing partners with respect to
manufacturing and quality assurance activities. If we or our contract partners
do not comply with cGMP we may be subject to sanctions, including fines,
injunctions, civil penalties, recalls or seizures of products, total or partial
suspension of production, product recalls, failure of the government to grant
premarket clearance or premarket approval for drugs, withdrawal of marketing
approvals and criminal prosecution.
We Could Be Negatively Impacted By Future Interpretation Or Implementation Of
Federal And State Fraud And Abuse Laws, Including Anti-Kickback Laws, The
Federal Stark Law And Other Federal And State Anti-referral Laws.
We are subject to various federal and state laws pertaining to health care fraud
and abuse, including anti-kickback laws and physician self-referral laws.
Violations of these laws are punishable by criminal and/or civil sanctions,
including, in some instances, imprisonment and exclusion from participation in
federal and state health care programs, including Medicare, Medicaid and
Veterans Administration health programs. We have not been challenged by a
governmental authority under any of these laws and believe that our operations
are in compliance with such laws. However, because of the far-reaching nature of
these laws, we may be required to alter one or more of our practices to be in
compliance with these laws. Health care fraud and abuse regulations are complex
and even minor, inadvertent irregularities can potentially give rise to claims
that the statute has been violated. Any violations of these laws could result in
a material adverse effect on our business, financial condition and results of
operations. If there is a change in law, regulation or administrative or
judicial interpretations, we may have to change our business practices or our
existing business practices could be challenged as unlawful, which could have a
material adverse effect on our business, financial condition and results of
operations.
We could become subject to false claims litigation under federal statutes, which
can lead to civil money penalties, criminal fines and imprisonment, and/or
exclusion from participation in Medicare, Medicaid and other federal and state
health care programs. These false claims statutes include the False Claims Act,
which allows any person to bring suit alleging false or fraudulent claims under
federal programs or contracts claims or other violations of the statute and to
share in any amounts paid by the entity to the government in fines or
settlement. Such suits, known as qui tam actions, have increased significantly
in recent years and have increased the risk that a health care company will have
to defend a false claim action, pay fines or be excluded from the Medicare
program, Medicaid programs or other federal and state health care programs as a
result of an investigation arising out of such action. We cannot assure you that
we will not become subject to such litigation or, if we are not successful in
25
defending against such actions, that such actions will not have a material
adverse effect on our business, financial condition and results of operations.
We Depend On Attracting And Retaining Key Personnel.
We are highly dependent on the principal members of our management and
scientific staff. The loss of their services might significantly delay or
prevent the achievement of development or strategic objectives. Our success
depends on our ability to retain key employees and to attract additional
qualified employees. Competition for personnel is intense, and we cannot assure
you that we will be able to retain existing personnel or attract and retain
additional highly qualified employees in the future.
During 2002, we announced numerous changes to members of our senior management.
H. Joseph Reiser, Ph.D. who held the position of President and Chief Executive
Officer of the Company from April 1998 until December 2002, was replaced by
Michael D. Becker, our former Vice President of Business Development. Mr. Becker
was also unanimously elected to serve on our Board of Directors. Dr. Reiser has
remained a member of our Board of Directors. In addition, Lawrence R. Hoffman,
our Vice President and Chief Financial Officer since July 2000, left the Company
to pursue other opportunities as of December 31, 2002. Ms. Thu Dang, our
Director of Finance, was subsequently promoted to Vice President of Finance.
Additionally, in the first quarter of 2003: (i) William Goeckeler, our Vice
President of Research and Development, was promoted to Vice President of
Operations; (ii) Deborah Kaminsky, our Vice President of Sales and Marketing,
will shift her work focus, and will serve as our Vice President of Business
Development; (iii) Rita Auld, our Director of Human Resources, was promoted to
Vice President of Human Resources and Administration and Corporate Secretary;
and (iv) Corey Jacklin assumed the responsibilities of Senior Director of Sales.
We have an employee retention agreement with our President and Chief Executive
Officer, Michael D. Becker. We do not have similar retention agreements with our
other key personnel. If we are unable to hire and retain personnel in key
positions, our business could be significantly and adversely affected unless
qualified replacements can be found.
Our Business Exposes Us To Potential Liability Claims That May Exceed Our
Financial Resources, Including Our Insurance Coverage, And May Lead To The
Curtailment Or Termination Of Our Operations.
Our business is subject to product liability risks inherent in the testing,
manufacturing and marketing of our products. We cannot assure you that product
liability claims will not be asserted against us, our collaborators or our
licensees. While we currently maintain product liability insurance in amounts we
believe are adequate, we cannot assure you that such coverage will be adequate
to protect us against future product liability claims or that product liability
insurance will be available to us in the future on commercially reasonable
terms, if at all. Furthermore, we cannot assure you that we will be able to
avoid significant product liability claims and adverse publicity. If liability
claims against us exceed our financial resources we may have to curtail or
terminate our operations.
Our Business Involves Environmental Risks That May Result In Liability.
We are subject to a variety of local, state, federal and foreign government
regulations relating to storage, discharge, handling, emission, generation,
manufacture and disposal of toxic, infectious or other hazardous substances used
to manufacture our products. If we fail to comply with these regulations, we
could be liable for damages, penalties or other forms of censure and our
business could be significantly and adversely affected.
Our Intellectual Property Is Difficult To Protect.
Our business and competitive positions are dependent upon our ability to protect
our proprietary technology. Because of the substantial length of time and
expense associated with development of new products, we, like the rest of the
biopharmaceutical industry, place considerable importance on obtaining and
maintaining patent and trade secret protection for new technologies, products
and processes. We have filed patent applications for our technology for
diagnostic and therapeutic products and the methods for its production and use.
26
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including us, are generally uncertain and involve complex legal and
factual questions. Our patent applications may not protect our technologies and
products because, among other things:
- there is no guarantee that any of our pending patent applications will
result in issued patents;
- we may develop additional proprietary technologies that are not
patentable;
- there is no guarantee that any patents issued to us, our collaborators
or our licensors will provide a basis for a commercially viable
product;
- there is no guarantee that any patents issued to us or our
collaborators will provide us with any competitive advantage;
- there is no guarantee that any patents issued to us or our
collaborators will not be challenged, circumvented or invalidated by
third parties; and
- there is no guarantee that any patents previously issued to others or
issued in the future will not have an adverse effect on our ability to
do business.
In addition, patent law in the technology fields in which we operate is
uncertain and still evolving, and we cannot assure you as to the degree of
protection that will be afforded any patents we are issued or license from
others. Furthermore, we cannot assure you that others will not independently
develop similar or alternative technologies, duplicate any of our technologies,
or, if patents are issued to us, design around the patented technologies
developed by us. In addition, we could incur substantial costs in litigation if
we are required to defend ourselves in patent suits by third parties or if we
initiate such suits. We cannot assure you that, if challenged by others in
litigation, the patents we have been issued, or which have been assigned or have
been licensed from others will not be found invalid. We cannot assure you that
our activities would not infringe patents owned by others. Defense and
prosecution of patent matters can be expensive and time-consuming and,
regardless of whether the outcome is favorable to us, can result in the
diversion of substantial financial, managerial and other resources. An adverse
outcome could:
- subject us to significant liability to third parties;
- require us to cease any related research and development activities
and product sales; or
- require us to obtain licenses from third parties.
We cannot assure you that any licenses required under any such third-party
patents or proprietary rights would be made available on commercially reasonable
terms, if at all. Moreover, the laws of certain countries may not protect our
proprietary rights to the same extent as the laws of the United States. We
cannot predict whether us or our competitors' pending patent applications will
result in the issuance of valid patents which may significantly and adversely
affect our business.
We Cannot Be Certain That Our Security Measures Protect Our Unpatented
Proprietary Technology.
We also rely upon trade secret protection for some of our confidential and
proprietary information that is not subject matter for which patent protection
is available. To help protect our rights, we require all employees, consultants,
advisors and collaborators to enter into confidentiality agreements that require
disclosure, and in most cases, assignment to us, of their ideas, developments,
discoveries and inventions, and that prohibit the disclosure of confidential
information to anyone outside Cytogen or our subsidiaries. We cannot assure you,
however, that these agreements will provide adequate protection for our trade
secrets, know-how or other proprietary information or prevent any unauthorized
use or disclosure.
We Are Currently Subject To Patent Litigation.
On March 17, 2000, we were served with a complaint filed against us in the
United States Federal Court for the District of New Jersey by M. David
Goldenberg ("Goldenberg") and Immunomedics, Inc. (collectively "Plaintiffs").
The litigation claims that our Prostascint product infringes a patent
purportedly owned by Goldenberg and licensed to Immunomedics. We believe that
27
ProstaScint does not infringe this patent, and that the patent is invalid and
unenforceable. The patent sought to be enforced in the litigation has now
expired; as a result, the claim even if successful would not result in an
injunction barring the continued sale of ProstaScint or affect any other of our
products or technology. In addition, we have certain rights to indemnification
against litigation and litigation expenses from the inventor of technology used
in ProstaScint, which may be offset against royalty payments on sales of
ProstaScint. However, given the uncertainty associated with litigation, we
cannot give any assurance that the litigation could not result in a material
expenditure to us. On December 17, 2001, Cytogen filed a motion for summary
judgment of non-infringement of the asserted claims of the patent-in-suit. The
Plaintiffs opposed that motion and filed their own cross-motion for summary
judgment of infringement. On July 3, 2002, the Court denied both parties'
summary judgment motions, with leave to renew those motions after presenting
expert testimony and legal argument based upon that testimony. Subsequently, the
Court heard expert testimony and further argument, and received further
briefing, and the parties' renewed summary judgment motions are pending. The
Court has not indicated when it expects to issue a ruling.
Our Stock Price Has Been And May Continue To Be Volatile, And Your Investment In
Our Stock Could Decline In Value Or Fluctuate Significantly.
The market prices for securities of biotechnology and pharmaceutical companies
have historically been highly volatile, and the market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. The market price of our common
stock has fluctuated over a wide range and may continue to fluctuate for various
reasons, including, but not limited to, announcements concerning our competitors
or us regarding:
- results of clinical trials;
- technological innovations or new commercial products;
- changes in governmental regulation or the status of our regulatory
approvals or applications;
- changes in earnings;
- changes in health care policies and practices;
- developments or disputes concerning proprietary rights;
- litigation or public concern as to safety of the our potential
products; and
- changes in general market conditions.
These fluctuations may be exaggerated if the trading volume of our common stock
is low. These fluctuations may or may not be based upon any of our business or
operating results. Our common stock may experience similar or even more dramatic
price and volume fluctuations which may continue indefinitely.
The following table sets forth the high and low sale prices for our common stock
for each of the quarters in the period beginning January 1, 2000 through
December 31, 2002 as reported on the Nasdaq National Market, and as adjusted for
our one-for-ten reverse stock split effected October 25, 2002:
28
Quarter Ended High Low
------------- ---- ---
March 31, 2000 $218.13 $26.25
June 30, 2000 $106.25 $38.13
September 30, 2000 $113.75 $55.00
December 31, 2000 $71.88 $20.00
March 31, 2001 $65.63 $23.13
June 30, 2001 $61.00 $21.88
September 30, 2001 $53.90 $19.00
December 31, 2001 $45.50 $20.50
March 31, 2002 $34.70 $21.10
June 30, 2002 $22.40 $9.10
September 30, 2002 $11.50 $3.20
December 31, 2002 $8.44 $2.68
We Have Adopted Various Anti-Takeover Provisions Which May Affect The Market
Price Of Our Common Stock.
Our Board of Directors has the authority, without further action by the holders
of common stock, to issue from time to time, up to 5,400,000 shares of preferred
stock in one or more classes or series, and to fix the rights and preferences of
the preferred stock. Pursuant to these provisions, we have implemented a
stockholder rights plan by which one preferred stock purchase right is attached
to each share of common stock, as a means to deter coercive takeover tactics and
to prevent an acquirer from gaining control of us without some mechanism to
secure a fair price for all of our stockholders if an acquisition was completed.
These rights will be exercisable if a person or group acquires beneficial
ownership of 20% or more of our common stock and can be made exercisable by
action of our board of directors if a person or group commences a tender offer
which would result in such person or group beneficially owning 20% or more of
our common stock. Each right will entitle the holder to buy one one-thousandth
of a share of a new series of our junior participating preferred stock for $20.
If any person or group becomes the beneficial owner of 20% or more of our common
stock (with certain limited exceptions), then each right not owned by the 20%
stockholder will entitle its holder to purchase, at the right's then current
exercise price, common shares having a market value of twice the exercise price.
In addition, if after any person has become a 20% stockholder, we are involved
in a merger or other business combination transaction with another person, each
right will entitle its holder (other than the 20% stockholder) to purchase, at
the right's then current exercise price, common shares of the acquiring company
having a value of twice the right's then current exercise price.
We are subject to provisions of Delaware corporate law which, subject to certain
exceptions, will prohibit us from engaging in any "business combination" with a
person who, together with affiliates and associates, owns 15% or more of our
common stock for a period of three years following the date that the person came
to own 15% or more of our common stock unless the business combination is
approved in a prescribed manner.
These provisions of the stockholder rights plan, our certificate of
incorporation, and of Delaware law may have the effect of delaying, deterring or
preventing a change in control of Cytogen, may discourage bids for our common
stock at a premium over market price and may adversely affect the market price,
and the voting and other rights of the holders, of our common stock.
The Liquidity Of Our Common Stock Could Be Adversely Affected If We Are Delisted
From The Nasdaq National Market.
On August 14, 2002, we announced that we had received notification from the
Nasdaq Stock Market, Inc. that our common stock had closed below the minimum
$1.00 per share requirement for the previous 30 consecutive trading days as
required under Marketplace Rule 4450(a)(5). In accordance with Marketplace Rule
4450 (e)(2), we were provided with 90 calendar days, or until November 12, 2002,
to regain compliance by having the bid price for our common stock close at $1.00
or greater for a minimum period of 10 consecutive trading days.
On September 26, 2002, we announced that our Board of Directors unanimously
approved, and recommended to our stockholders, a proposal that would give the
Board of Directors authority to effect a reverse stock split of our common
stock, at a ratio of up to one-for-ten at any time prior to December 31, 2002. A
special meeting of our stockholders was held on October 25, 2002 to consider
such recommendation. Pursuant to the authority granted to our Board of Directors
at the special meeting, on October 25, 2002, we implemented a one-for-ten
reverse split of our outstanding and authorized shares of common stock.
29
We subsequently achieved compliance with Nasdaq Marketplace Rule 4450(a)(5), and
received a letter from Nasdaq notifying us of such compliance on November 11,
2002.
We cannot assure you that we will continue to maintain compliance with this
Marketplace Rule, or any other Listing Standards which may apply to us, and as
such, we may once again face delisting from the Nasdaq National Market in the
future. Specifically, we cannot assure you that we will be able to maintain
compliance with the minimum equity and market value of listed securities
requirements for continued listing on the Nasdaq National Market as set forth in
Marketplace Rule 4310(c)(2)(B).
In the event that we are unable maintain compliance with all relevant Nasdaq
listing standards, our securities may be subject to delisting from the Nasdaq
National Market. If such delisting occurs, the market price and market liquidity
of our common stock may be adversely affected.
Alternatively, if faced with such delisting, we may submit an application to
transfer the listing of our common stock to the Nasdaq SmallCap Market. The
Nasdaq SmallCap Market also has a $1.00 minimum bid price requirement.
If our common stock is delisted by Nasdaq, our common stock would be eligible to
trade on the OTC Bulletin Board maintained by Nasdaq, another over-the-counter
quotation system, or on the pink sheets where an investor may find it more
difficult to dispose of or obtain accurate quotations as to the market value of
our common stock. In addition, we would be subject to a rule promulgated by the
Securities and Exchange Commission that, if we fail to meet criteria set forth
in such rule, imposes various practice requirements on broker-dealers who sell
securities governed by the rule to persons other than established customers and
accredited investors. Consequently, such rule may deter broker-dealers from
recommending or selling our common stock, which may further affect the liquidity
of our common stock.
Delisting from Nasdaq will make trading our common stock more difficult for
investors, potentially leading to further declines in our share price. It would
also make it more difficult for us to raise additional capital. Further, if we
are delisted we would also incur additional costs under state blue sky laws in
connection with any sales of our securities. These requirements could severely
limit the market liquidity of our common stock and the ability of our
shareholders to sell our common stock in the secondary market.
A Large Number Of Our Shares Are Eligible For Future Sale Which May Adversely
Impact The Market Price Of Our Common Stock.
A large number of shares of our common stock are already outstanding, issuable
upon exercise of options and warrants, or the achievement of certain milestones
under previously completed acquisitions and may be eligible for resale, which
may adversely affect the market price of our common stock. As of December 31,
2002 we had 8,758,235 shares of common stock outstanding, which number of
shares: (i) includes an aggregate of 241 shares of common stock to be issued to
prior holders of securities of CytoRad Incorporated and Cellcor, Inc., which we
acquired in 1995, upon each such holders respective exchange of such securities;
(ii) excludes 50,000 shares of common stock previously issued by us and
currently held in escrow pending release, upon certain conditions, to Advanced
Magnetics, who currently maintains voting control of such securities; and (iii)
excludes 32,538 shares previously issued by us and currently held for issuance
by the custodian of our Employee Stock Purchase Plan to the participants
thereunder, in the event they elect to purchase such shares. An additional
472,106 shares of common stock are issuable upon the exercise of outstanding
stock options and an additional 32,363 shares of common stock are issuable upon
the exercise of outstanding warrants. Substantially all of such shares subject
to outstanding options and warrants will, when issued upon exercise thereof, be
available for immediate resale in the public market pursuant to either a
currently effective registration statement under the Securities Act of 1933, as
amended, or pursuant to Rule 144 or Rule 701 promulgated thereunder. In
addition, there are 68,510 additional shares of common stock reserved for future
issuance under our current stock options plans, 7,569 additional shares of
common stock reserved for issuance under our 401(k) Plan and 22,751 additional
shares of common stock reserved for the future issuance under our employee bonus
plan. All such reserved shares have been registered with the Securities and
Exchange Commission pursuant to currently effective registration statements. In
addition, there are 81,429 additional shares of common stock, subject to certain
adjustments, reserved for future issuance in connection with the issuance of a
convertible promissory note, having a seven (7) year maturity, to ELAN
Corporation, plc in August 1998.
30
In connection with our acquisition of Prostagen, Inc. in June 1999, we issued
205,000 unregistered shares of our common stock to the then stockholders of
Prostagen, which shares may be sold from time to time pursuant to Rule 144 under
the Securities Act. Such stockholders also have certain piggyback registration
rights with respect to these shares of common stock. An additional 127,699
shares have been issued in 2002 and were subsequently registered on a
registration statement on Form S-3. An additional $2.0 million worth of Cytogen
common stock, which we are obligated to register under the Securities Act of
1933, as amended, may be issued if certain milestones are achieved in the PSMA
development programs.
On October 25, 2001, we filed with the Securities and Exchange Commission a
shelf registration statement on Form S-3 covering one million (1,000,000) shares
of our common stock. 297,066 and 416,670 of such registered shares were issued
to the State of Wisconsin Investment Board in private offering transactions in
each of January 2002 and June 2002, respectively.
Availability of a significant number of additional shares of our common stock
could depress the price of our common stock.
Because We Do Not Intend to Pay Any Cash Dividends On Our Shares of Common
Stock, Our Stockholders Will Not Be Able to Receive a Return on Their Shares
Unless They Sell Them.
We have never paid or declared any cash dividends on our common stock or other
securities and intend to retain any future earnings to finance the development
and expansion of our business. We do not anticipate paying any cash dividends on
our common stock in the foreseeable future. Unless we pay dividends, our
stockholders will not be able to receive a return on their shares unless they
sell them.
Item 2. Properties
In August 2002, we moved our offices from 600 College Road East to 650 College
Road East in Princeton, New Jersey. We currently sublease approximately 11,500
square feet of administrative space in Princeton, New Jersey. The sublease on
this space expires in July 2005. We intend to remain in Princeton, New Jersey
for the foreseeable future.
We also lease approximately 9,200 square feet of laboratory and office space in
Newtown, Pennsylvania, which is occupied by our AxCell Biosciences subsidiary,
under a lease expiring in 2004. In February 2001, we expanded the AxCell
facility by amending the lease to include approximately an additional 5,700
square feet, which additional lease space will expire in September 2006. We
sublease approximately 2,400 square feet of the Axcell space to another company.
Such sublease will expire in August 2006.
We own substantially all of the equipment used in our laboratories and offices.
We believe our facilities are adequate for our operations at present.
Item 3. Legal Proceedings
On March 17, 2000, we were served with a complaint filed against us in the
United States Federal Court for the District of New Jersey by M. David
Goldenberg ("Goldenberg") and Immunomedics, Inc. (collectively "Plaintiffs").
The litigation claims that our Prostascint product infringes a patent
purportedly owned by Goldenberg and licensed to Immunomedics. We believe that
ProstaScint does not infringe this patent, and that the patent is invalid and
unenforceable. The patent sought to be enforced in the litigation has now
expired; as a result, the claim even if successful would not result in an
injunction barring the continued sale of ProstaScint or affect any other of our
products or technology. In addition, we have certain rights to indemnification
against litigation and litigation expenses from the inventor of technology used
in ProstaScint, which may be offset against royalty payments on sales of
ProstaScint. However, given the uncertainty associated with litigation, we
cannot give any assurance that the litigation could not result in a material
expenditure to us. On December 17, 2001, Cytogen filed a motion for summary
judgment of non-infringement of the asserted claims of the patent-in-suit. The
Plaintiffs opposed that motion and filed their own cross-motion for summary
judgment of infringement. On July 3, 2002, the Court denied both parties'
summary judgment motions, with leave to renew those motions after presenting
expert testimony and legal argument based upon that testimony. Subsequently, the
Court heard expert testimony and further argument, and received further
briefing, and the parties' renewed summary judgment motions are pending. The
Court has not indicated when it expects to issue a ruling.
31
Item 4. Submission of Matters to a Vote of Security Holders
On October 25, 2002, we held a special meeting of our stockholders, during which
meeting our stockholders duly approved a reverse stock split of our issued,
authorized and outstanding shares of common stock, up to a ratio of one-for-ten
at the discretion of our Board of Directors. Other information relating to the
matters voted upon at the special meeting and the number of votes cast for,
against and withheld with respect to each such matter is contained in our
Current Report on Form 8-K which was filed with the Commission on October 25,
2002. There were no broker non-votes with respect to either proposal presented
to our stockholders at the special meeting.
32
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
Our common stock is traded on the Nasdaq National Market under the trading
symbol "CYTO."
The table below sets forth the high and low bid information for our common stock
for each of the calendar quarters indicated, as reported on the Nasdaq National
Market. Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, may not represent actual transactions and have been
adjusted to reflect the Company's one-for-ten reverse stock split executed
October 25, 2002.
2001 High Low
- ---- ---- ---
First Quarter.......................................... $65.31 $23.13
Second Quarter......................................... 60.90 21.88
Third Quarter.......................................... 53.80 19.00
Fourth Quarter......................................... 44.60 20.50
2002
- ----
First Quarter.......................................... $34.40 $21.10
Second Quarter......................................... 22.00 9.10
Third Quarter.......................................... 11.00 3.10
Fourth Quarter......................................... 8.40 3.30
As of March 1, 2003, there were approximately 960 holders of record of our
common stock and there were approximately 43,515 beneficial holders of our
common stock.
We have never paid any cash dividends on our common stock and we do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We intend to retain any future earnings to fund the development and
growth of our business. Any future determination to pay dividends will be at the
discretion of the board of directors.
On December 17, 2002, we issued options to purchase 200,000 shares of our common
stock, $0.01 par value per share, to Michael D. Becker, in connection with, and
upon his promotion to, President and Chief Executive Officer of the Company. The
exercise price of such options is $3.54 per share, the fair market value of our
common stock on the date of grant. 50,000 of such options were granted under our
1995 Stock Option Plan and vested immediately upon grant, and the remaining
150,000 options were granted outside of any stock option plan and will vest in
three equal tranches, based upon Mr. Becker's achievement of certain milestones
that will be established by our Board of Directors.
We believe that the issuance of the Options to Mr. Becker was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as a
transaction not involving any public offering.
33
Item 6. Selected Financial Data
The following selected financial information has been derived from our audited
consolidated financial statements for each of the five years in the period ended
December 31, 2002. The selected financial data set forth below should be read in
conjunction with the consolidated financial statements, including the notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other information provided elsewhere in this report.
Year Ended December 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Statements of Operations Data: (All amounts in thousands, except per share data)
Revenues:
Product sales.......................................... $ 10,626 $ 8,782 $ 7,523 $ 7,073 $ 9,085
Royalties.............................................. 1,842 2,063 2,004 1,060 1,664
License and contract................................... 463 912 1,024 3,171 9,239
-------- -------- -------- -------- --------
Total revenues....................................... 12,931 11,757 10,551 11,304 19,988
-------- -------- -------- --------- --------
Operating Expenses:
Cost of product and contract
manufacturing revenues ............................... 4,748 4,216 4,513 4,213 12,393
Impairment of intangible assets(1)..................... 1,729 - - - -
Research and development............................... 7,605 10,091 6,957 3,849 9,967
Acquisition of marketing and technology rights (2)..... - - 13,241 1,214 -
Equity loss in PSMA LLC................................ 2,886 332 - - -
Equity loss in Targon subsidiary....................... - - - - 1,020
Selling and marketing.................................. 5,846 6,314 6,126 4,210 5,103
General and administrative............................. 5,401 4,864 4,934 3,501 7,420
-------- -------- -------- -------- --------
Total operating expenses............................. 28,215 25,817 35,771 16,987 35,903
-------- -------- -------- -------- --------
Operating loss....................................... (15,284) (14,060) (25,220) (5,683) (15,915)
Loss on investment....................................... (516) - - - -
Gain on sale of laboratory and manufacturing facilities.. - - - 3,298 -
Gain on sale of Targon subsidiary........................ - - - - 2,833
Other income (expense)................................... 101 857 611 412 (70)
-------- -------- -------- -------- --------
Loss before income taxes and cumulative effect of
accounting change.................................. (15,699) (13,203) (24,609) (1,973) (13,152)
Income tax benefit....................................... - (1,103) (1,625) (2,702) -
-------- -------- -------- -------- --------
Income (loss) before cumulative effect of
accounting change ................................. (15,699) (12,100) (22,984) 729 (13,152)
Cumulative effect of accounting change (3)............... - - (4,314) - -
-------- -------- -------- -------- --------
Net income (loss)........................................ (15,699) (12,100) (27,298) 729 (13,152)
Dividends, including deemed
dividends on preferred stock............................ - - - - (119)
-------- -------- -------- -------- --------
Net income (loss) to common stockholders................. $(15,699) $(12,100) $(27,298) $ 729 $(13,271)
======== ======== ======== ======== ========
Net income (loss) per common share:
Basic and diluted net income (loss) before
cumulative effect of accounting change ........... $ (1.85) $ (1.56) $ ( 3.13) $ 0.11 $ (2.35)
Cumulative effect of accounting change (3) ......... - - (0.59) - -
-------- -------- -------- -------- --------
Basic and diluted net income (loss) ................ $ (1.85) $ (1.56) $ ( 3.72) $ 0.11 $ (2.35)
======== ======== ======== ======== ========
Weighted average common shares outstanding:
Basic............................................... 8,466 7,778 7,334 6,718 5,642
======== ======== ======== ======== ========
Diluted............................................ 8,466 7,778 7,334 6,819 5,642
======== ======== ======== ======== ========
Pro forma amounts assuming accounting
change is applied retroactively:
Net loss to common stockholders........................ $(22,984) $ (484) $(16,373)
======== ======== ========
Basic and diluted net loss per common share............ $ (3.13) $ (0.07) $ (2.90)
======== ======== ========
34
December 31,
------------------------------------------------------------
Consolidated Balance Sheet Data: 2002 2001 2000 1999 1998
-------------------------------------------------------------
(in thousands)
Cash, short-term investments and restricted cash... $ 14,725 $ 11,309 $ 11,993 $ 12,394 $ 3,015
Total assets....................................... 19,894 21,492 20,416 18,605 10,900
Long-term liabilities.............................. 2,614 2,291 2,374 2,416 2,223
Accumulated deficit................................ (356,380) (340,681) (328,581) (301,283) (302,012)
Stockholders' equity............................... 10,588 11,214 7,218 10,549 443
(1) Reflects a non-cash charge to write off the carrying value of the
licensing fees associated with BrachySeed I-125 and BrachySeed Pd-103.
(2) In August 2000, the Company licensed product rights from Advanced
Magnetics, Inc. In June 1999, the Company acquired Prostagen, Inc.
(3) In 2000, the Company recorded a non-cash charge for the cumulative
effect related to the adoption of SEC Staff Accounting Bulletin No.
101. See Note 1 of the Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included in this Annual Report on form 10-K
regarding our strategy, future operations, financial position, future revenues,
projected costs, prospects, plans and objectives of management are
forward-looking statements. The words "anticipates," "believes," "estimates,"
"expects," "intends," "may," "plans," "projects," "will," "would" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. Such
forward-looking statements involve a number of risks and uncertainties and
investors are cautioned not to put any undue reliance on any forward-looking
statement. We cannot guarantee that we will actually achieve the plans,
intentions or expectations disclosed in any such forward-looking statements.
Factors that could cause actual results to differ materially, include, but are
not limited to those identified under the caption "Additional Factors That May
Affect Future Results", provided elsewhere in this report. Investors are
cautioned not to put undue reliance on any forward looking statement.
Cautionary Statement
Our actual results may differ materially from our historical results of
operations and those discussed in the forward-looking statements for various
reasons, including, but not limited to, our ability to: (i) access the capital
markets in the near term and in the future for continued funding of our
operations including existing and new projects and to maintain the listing of
our common stock on the Nasdaq National Market; (ii) attract and retain
personnel needed for business operations and strategic plans; (iii) carry out
our business and financial plans; (iv) attract, and the ultimate success of,
strategic partnering arrangements, collaborations, and acquisition candidates;
(v) successfully develop and commercialize in-licensed products such as NMP22
BladderChek, including programs designed to facilitate the use of our products,
such as the Partners in Excellence or PIE Program; (vi) establish and
successfully complete clinical trials where required for product approval; (vii)
obtain foreign regulatory approvals for products and to establish marketing
arrangements in countries where approval is obtained; (viii) demonstrate, over
time, the efficacy and safety of our products; (ix) determine and implement the
appropriate strategic initiative for our AxCell Biosciences subsidiary; and (x)
fund development necessary for existing products and for the pursuit of new
product opportunities. Additional risks that we face include, but are not
limited to: (i) the risk of whether marketable and valuable products result from
our development activities; (ii) the possibility that we may not be able to
adequately protect our intellectual property portfolio; (iii) the degree of
competition we may face from existing or new products; (iv) the risks associated
with obtaining the necessary regulatory approvals; (v) the ability of Advanced
Magnetics to satisfy the conditions specified by the FDA regarding approval to
market Combidex in the United States; (vi) shifts in the regulatory environment
affecting sale of our products such as third-party payor reimbursement issues
and dependence on our partners for development of certain projects; (vii)
competitive products and technologies; (viii) price pressure; and (ix) other
factors discussed in our press releases and from time-to-time in our other
filings with the Securities and Exchange Commission. Any forward-looking
statements made by us do not reflect the potential impact of any future
35
acquisitions, mergers, dispositions, joint ventures or investments we may make.
We do not assume, and specifically disclaim, any obligation to update any
forward-looking statements, and these statements represent our current outlook
only as of the date given.
The following discussion and analysis should be read in conjunction with the
Financial Statements and related notes thereto contained elsewhere herein, as
well as from time to time in our other filings with the Securities and Exchange
Commission.
Significant Events in 2002
In September 2002, in an effort to reduce expenses and position Cytogen for
stronger long-term growth in oncology, we restructured our AxCell Biosciences
subsidiary. Management intends that the plan, which included a 75% reduction of
AxCell's workforce, will allow continued research related to the role of novel
proteins and signal transduction pathways in disease progression through both
external collaborations and internal data mining. While AxCell continues to
pursue opportunities in the area of signal transduction research, the
restructuring reinforces our corporate objectives of developing and marketing
oncology products.
In October 2002, we entered into a five-year agreement with Matritech Inc. to be
the sole distributor for Matritech's NMP22 BladderChek test to urologists and
oncologists, in the United States. Retention of exclusivity rights depends upon
meeting certain minimum annual purchases. NMP22 BladderChek is a point-of-care
test for bladder cancer that requires only a few drops of a patient's urine.
NMP22 BladderChek returns results in thirty minutes and provides urologists with
an adjunct technology to cystoscopy, a clinical procedure for the visual
identification of tumors in the bladder, for improved detection and early
diagnosis. During November 2002, we began promoting NMP22 BladderChek to
urologists in the United States, using our in-house urologic focused sales
force.
On October 25, 2002, upon the receipt of approval of our stockholders at a duly
called and held special meeting of stockholders, our Board of Directors
authorized and implemented a reverse stock split of our issued, outstanding and
authorized shares of common stock at a ratio of one-for-ten. As a result of the
reverse split, one new share of common stock was issued for every ten shares of
common stock held by stockholders of record as of the close of business on
October 25, 2002. The reverse split was intended, in part, to help increase the
market price of our common stock above the minimum $1.00 per share as required
by the Nasdaq National Market's maintenance listing standards. On November 11,
2002, we announced that we had received notification from the Nasdaq Stock
Market, Inc. that we had regained compliance with such listing standards
regarding minimum bid price.
On December 17, 2002, we announced that H. Joseph Reiser, Ph.D. resigned his
position as our President and Chief Executive Officer, for personal reasons,
effective immediately. Dr. Reiser had served in such capacities since April
1998, and has, since his resignation, remained a member of our Board of
Directors. Michael D. Becker, our Vice President of Business Development, was
unanimously elected by our Board of Directors to serve as Dr. Reiser's
replacement as President and Chief Executive Officer. Mr. Becker was also
unanimously elected to serve as a member of our Board of Directors.
Also, on December 17, 2002, we announced that Lawrence Hoffman, our Vice
President and Chief Financial Officer resigned his position with the Company to
pursue other opportunities, effective December 31, 2002. Mr. Hoffman had served
in such capacity since July 2000. Ms. Thu Dang, our Director of Finance was
promoted to the position of Vice President of Finance, effective January 1,
2003.
Other recent management changes include:
- William Goeckeler, our Vice President of Research and Development, was
promoted to Vice President of Operations. Mr. Goeckeler has been with
the Company since April 1994;
- Deborah Kaminsky, our Vice President of Sales and Marketing will shift
her focus as our Vice President of Business Development. Ms. Kaminsky
has been with the Company since December 2000;
- Rita Auld, our Director of Human Resources, was promoted to Vice
President of Human Resources and Administration and Corporate
Secretary. Ms. Auld has been with the Company since October 2000; and
- Corey Jacklin, who has been with the Company since January 2003,
assumed the responsibilities of Senior Director of Sales.
36
In January 2003, we provided Draximage with notice of termination for each of
our License and Distribution Agreement and Product Manufacturing and Supply
Agreement with respect to both of Draximage's BrachySeed I-125 and BrachySeed
Pd-103 products. We launched BrachySeed I-125 and BrachySeed Pd-103 in February
2001 and May 2002, respectively. Effective January 24, 2003, we no longer accept
or fill new orders for the BrachySeed I-125 and BrachySeed Pd-103 products.
RESULTS OF OPERATIONS
Years ended December 31, 2002, 2001 and 2000
Revenues
Total revenues were $12.9 million in 2002, $11.8 million in 2001 and $10.6
million in 2000. The increase in 2002 from 2001 and 2000 was primarily due to
higher product related revenues from increased sales of ProstaScint and
BrachySeed, partially offset by lower license and contract revenues. In January
2003, we served notice of termination for each of our License and Distribution
Agreement and Product Manufacturing and Supply Agreement with Draximage with
respect to the BrachySeed I-125 and BrachySeed Pd-103 products. As a result,
effective January 24, 2003, we no longer accept or fill new orders for the
BrachySeed products. Product related revenues, including product sales and
royalty revenues, accounted for 96%, 92% and 90% of revenues in 2002, 2001 and
2000, respectively. License and contract revenues accounted for the remainder of
revenues.
Product related revenues were $12.5 million, $10.8 million and $9.5 million in
2002, 2001 and 2000, respectively. The increase in 2002 from 2001 and 2000 was
due primarily to an increase in the sale of ProstaScint and BrachySeed I-125 and
Pd-103. Effective January 24, 2003, we discontinued selling and marketing the
BrachySeed products.
Sales from ProstaScint were $7.9 million, $7.6 million and $7.0 million in 2002,
2001 and 2000, respectively, and accounted for 64%, 70% and 74% of the product
related revenues, respectively. Beginning in July 2000, we assumed sole
responsibility for selling and marketing ProstaScint from Bard Urological
Division of C.R. Bard Inc., our former co-marketing partner. We believe that
future growth and market penetrations of ProstaScint is dependent upon, among
other things, the implementation and continued research of new product
applications, such as: (i) combining or fusing ProstaScint with CT (computed
tomography) or MRI (magnetic resonance imaging) scans in a digital overlay
("fusion imaging"); (ii) using ProstaScint scans to guide therapy ("image-guided
therapy"), which is not limited to enhancing the placement of brachytherapy
seeds, but can also be applied to cryosurgery and external beam radiation, such
as intensity modulated radiation therapy (IMRT), an advanced and more powerful
form of therapy that uses computers to focus radiation more precisely on the
target; and (iii) competitive reimbursement by federal and private agencies.
There can be no assurance, however, that such initiatives will significantly
increase the sale of ProstaScint.
Sales of BrachySeed were $2.5 million in 2002, compared to $779,000 in 2001 and
accounted for 20% of product related revenues during 2002, compared to 7% of
product related revenues during 2001. We launched BrachySeed I-125 in February
2001 and BrachySeed Pd-103 in May 2002. The increase in 2002 over the prior
period was due to increased market penetration of BrachySeed products, the
agreements for which were subsequently terminated as described above. As a
result, effective January 24, 2003, we no longer accept or fill new orders for
the BrachySeed I-125 and BrachySeed Pd-103.
Royalties from Quadramet were $1.8 million, $2.1 million and $2.0 million in
2002, 2001 and 2000, respectively, and accounted for 15%, 19% and 21% of product
related revenues, respectively. We believe that the future growth and market
penetration of Quadramet is largely dependent upon, among other things: (i) new
clinical data supporting the expanded and earlier use of Quadramet in various
cancers and in combination with other therapies, such as chemotherapy and
bisphophonates; (ii) establishing the use of Quadramet at higher doses to target
and treat primary bone cancers; and (iii) increased marketing and sales
penetration to radiation and medical oncologists. Quadramet is currently
marketed by our marketing partner, Berlex Laboratories Inc. Although we believe
that Berlex is an advantageous marketing partner, there can be no assurance that
Quadramet will achieve greater market penetration on a timely basis or result in
significant revenues for us.
Sales from OncoScint CR/OV were $182,000, $363,000 and $519,000 in 2002, 2001
and 2000, respectively. The market for OncoScint CR/OV for diagnosis of
colorectal disease has been negatively affected by positron emission tomography
or "PET" scans which have shown the same or higher sensitivity than OncoScint
CR/OV. Accordingly, we discontinued selling OncoScint at the end of 2002 in
order to focus on our other oncology products.
37
The initial sales of NMP22 BladderChek were $14,000 in 2002. During the fourth
quarter of 2002, we entered into a five-year agreement with Matritech Inc. for
Cytogen to be the sole distributor for Matritech's NMP22 BladderChek test to
urologists and oncologists in the United States. Retention of exclusivity rights
depends upon meeting certain minimum annual purchases. We began introducing
NMP22 BladderChek to urologists during November 2002.
Effective January 1, 2000, we adopted U.S. Securities and Exchange Commission
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
("SAB 101") which requires up-front, non-refundable license fees to be deferred
and recognized over the performance period. The cumulative effect of adopting
SAB 101 resulted in a one-time, non-cash charge of $4.3 million or $0.59 per
share in 2000, which reflects the deferral of an up-front license fee received
from Berlex, net of associated costs, related to the licensing of Quadramet
recognized in 1998 and a license fee for certain applications of PSMA to a joint
venture formed by Cytogen and Progenics recognized in 1999. Previously, we had
recognized up-front license fees when we had no obligations to return the fees
under any circumstances. Under SAB 101 these payments are recorded as deferred
revenue to be recognized over the remaining term of the related agreements. In
2002, 2001 and 2000, we recognized $410,000, $860,000 and $859,000,
respectively, of license revenue that was included in the cumulative effect
adjustment as of January 1, 2000.
Revenues from contract research services were $53,000, $43,000 and $165,000 in
2002, 2001 and 2000, respectively. In 2002, we performed limited research and
development services for the PSMA Development Company LLC, our joint venture
with Progenics Pharmaceuticals, Inc. The level of future revenues from the joint
venture will be dependent upon the extent of research and development services
requested by the joint venture. In 2000, we discontinued our contract
manufacturing services business as a result of the sale of our laboratory and
manufacturing facilities. Contract revenues have fluctuated in the past and may
fluctuate in the future.
Operating Expenses
Total operating expenses were $28.2 million, $25.8 million and $35.8 million in
2002, 2001 and 2000, respectively. The increase in 2002 from 2001 is due
primarily to a non-cash charge of $1.7 million for the intangible asset
impairment related to the write-off of license fees of BrachySeed products,
$869,000 for the restructuring of AxCell in September 2002, a non-cash milestone
payment of $2.0 million related to the progress of the dendritic cell prostate
cancer clinical trials at Northwest Biotherapeutics, Inc. and increased expenses
relating to the development of the PSMA technologies through our joint venture
with Progenics Pharmaceuticals, Inc., the PSMA Development Company LLC,
partially offset by a reduction in funding for research activities at our AxCell
subsidiary and the development of a new manufacturing and purification process
for ProstaScint. The decrease in 2001 from 2000 was due to a charge in 2000 for
the acquisition of Combidex and Code 7228 from Advanced Magnetics, partially
offset by increased development efforts at AxCell in 2001 for AxCell's
proteomics programs, the development of a new manufacturing process for
ProstScint and the 2001 launch of BrachySeed I-125. The 2000 operating expenses
included a $13.2 million charge related to the acquisition of the marketing and
technology rights to Combidex (for all applications) and Code 7228 (for oncology
applications only), of which $13.1 million was non-cash as we issued our common
stock as consideration. At this time, Advanced Magnetics does not intend to
develop Code 7228 for oncology imaging.
Costs of product sales were $4.7 million, $4.2 million and $4.5 million in 2002,
2001 and 2000, respectively. The increase in 2002 from 2001 was due primarily to
an increase in sales of BrachySeed and a $169,000 charge to reserve for excess
inventory for OncoScint and ProstaScint, partially offset by lower facility
related costs associated with the manufacturing of ProstaScint. The decrease in
2001 compared to 2000 was due primarily to lower manufacturing costs that result
from better manufacturing yields for ProstaScint, partially offset by costs
associated with the purchase of BrachySeeds, which became commercially available
in 2001. Effective January 24, 2003, we no long accept or fill orders for the
BrachySeed products.
During 2002, we recorded a non-cash charge of $1.7 million to impairment of
intangible assets which represents the write-off of the carrying value of the
upfront licensing fees associated with BrachySeed I-125 and BrachySeed Pd-103,
as the carrying value will not be recoverable. In January 2003 we served notice
of termination for each of our License and Distribution Agreement and Product
Manufacturing and Supply Agreement with Draximage with respect to the BrachySeed
products. As of January 24, 2003, we no longer accept or fill new orders for
BrachySeed.
38
Research and development expenses were $7.6 million in 2002, $10.1 million in
2001 and $7.0 million in 2000. The decrease in 2002 from 2001 was due to
decreased funding during 2002 for signal transduction research programs at
AxCell and reduction in expenses related to the development of a new
manufacturing and purification process by DSM Biologics Company B.V. with
respect to ProstaScint, partially offset by a stock-based milestone payment of
$2.0 million in 2002 related to the progress of the dendritic cell prostate
cancer clinical trials at Northwest Biotherapeutics, Inc. The increase in 2001
from 2000 was due, in part, to the development of a new manufacturing and
purification process for ProstaScint. In 2002, 2001 and 2000 we invested $3.6
million, $4.9 million and $3.4 million, respectively, in AxCell's research
programs and $551,000, $3.2 million and $559,000 respectively, in our
manufacturing process development. Our relationship with DSM providing for the
development of a new manufacturing process for ProstaScint ceased in 2002. In
connection with the AxCell restructuring plan in September 2002, cost-saving
measures implemented at AxCell are expected to lower our annual operating
expenses by $2.2 million, which have begun in the fourth quarter of 2002.
Acquisition of marketing and technology rights of $13.2 million in 2000
represents a non-cash charge of $13.1 million related to the acquisition of
certain rights to product candidates Combidex (for all applications) and Code
7228 (for oncology applications only) from Advanced Magnetics. At this time,
Advanced Magnetics does not intend to develop Code 7228 for oncology imaging.
Our share in the equity loss in the PSMA Development Company LLC, our joint
venture with Progenics, was $2.9 million for 2002, and represented 50% of the
joint venture's operating results. The joint venture is equally owned by us and
Progenics. We account for the joint venture using the equity method of
accounting. Progenics was obligated to fund the initial $3.0 million of
development costs of the joint venture, in addition to $2.0 million in
supplemental capital contributions funded at certain defined dates. Beginning in
December 2001, we began to equally share the costs of the joint venture with
Progenics. Our share in the equity loss in the joint venture was $332,000 for
2001. We expect our share of losses and funding in the joint venture to continue
at even higher levels in subsequent periods. The joint venture is funded by
equal capital contributions from each of Progenics and Cytogen in accordance
with an annual budget approved by the joint venture representatives from each
such party. As of March 28, 2003, the parties are in the process of negotiating
the 2003 annual budget for the joint venture and have agreed that the operating
budget for 2003 will be no less than the 2002 operating expenses for the joint
venture. Contract research and development services provided by Progenics to the
joint venture during 2002 were in accordance with a services agreement between
the parties. As of March 28, 2003, the parties are negotiating the terms of a
new services agreement and believe that if mutual agreement is not achieved, the
parties can successfully negotiate with outside third parties for necessary
services.
Selling and marketing expenses were $5.8 million, $6.3 million and $6.1 million
in 2002, 2001 and 2000, respectively. The decrease in 2002 from 2001 was due to
costs incurred in 2001 for the launch of BrachySeed I-125. The increase in 2001
from 2000 reflected the launch costs in 2001 for BrachySeed I-125, partially
offset by costs associated with the expansion of our in-house sales force in
2000. We assumed sole responsibility for the selling and marketing of
ProstaScint in July 2000.
General and administrative expenses were $5.4 million, $4.9 million and $4.9
million in 2002, 2001 and 2000, respectively. The increase in 2002 from 2001 and
2000 was due primarily to a charge of $869,000 related the restructuring of
AxCell in September 2002, and a stock-based compensation charge for a key
employee, partially offset by decreased spending in legal and professional fees
in 2002.
Insurance Reimbursement
During 2001, we received a one-time payment of $402,000 from an insurance claim
filed by us in 2000 to recover the loss of product resulting from the rupture of
a tube during the manufacture of a batch of ProstaScint.
Loss On Investment
We recorded a non-cash charge of $516,000 during 2002 for an impairment in the
carrying value of an investment in shares of Northwest Biotherapeutics, Inc.
common stock, which the Company had received as part of the acquisition of
Prostagen in 1999. The fair value of such investment, based on the quoted market
prices, had significantly decreased from its original carrying value of
$516,000. Based on an evaluation of the financial condition of Northwest and the
significant decline in stock price, we concluded that the decline was other than
temporary and that the carrying amount of this investment would not be
recoverable.
39
Interest Income/Expense
Interest income was $274,000, $635,000 and $774,000 for 2002, 2001 and 2000,
respectively. The declines in 2002 and 2001 from 2000 were due to lower average
yields on investments for each of the respective periods, partially offset by
higher average cash and cash equivalent balances during the periods.
Interest expense was $173,000, $180,000 and $163,000 in 2002, 2001 and 2000,
respectively. Interest expense includes interest on outstanding debt and finance
charges related to various equipment leases.
Income tax benefit
During 2001 and 2000, we sold New Jersey State net operating loss carryforwards
and research and development credits, which resulted in the recognition of $1.1
million and $1.6 million income tax benefit, respectively. In January 2003, we
sold additional New Jersey State net operating loss carryforwards which resulted
in $584,000 of income tax benefit, which will be recorded in the first quarter
of 2003. Assuming the State of New Jersey continues to fund this program, which
is uncertain, the actual amount of net operating losses and tax credits we may
sell will also depend upon the allocation among qualifying companies of an
annual pool established by the State of New Jersey.
Net Loss
Net loss was $15.7 million, $12.1 million and $27.3 million in 2002, 2001 and
2000, respectively. Net loss per share in 2002 was $1.85, compared to $1.56 in
2001 and $3.72 in 2000. Net loss was based on weighted average common shares
outstanding of 8.5 million, 7.8 million and 7.3 million, in each of 2002, 2001
and 2000, respectively. The 2000 net loss included $4.3 million, or $0.59 per
share, for the cumulative effect of accounting change as a result of the
adoption of SAB 101.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were $14.7 million as of December 31, 2002,
compared to $11.3 million as of December 31, 2001. The increase in 2002 from
2001 was primarily due to the proceeds of approximately $13 million from the
sale of Cytogen common stock offset by cash used for operating activities. In
2002, 2001 and 2000, the cash used for operating activities was $8.3 million,
$13.4 million, and $9.0 million, respectively. The 2002 decrease from 2001 and
2000 was primarily due to improved working capital management, which included a
build-up of ProstaScint inventory in 2001 and 2000 compared to a reduction in
2002. In January 2003, we secured a new supply arrangement for the manufacturing
of ProstaScint with Laureate Pharma L.P. and as a result, expect to use
significant resources to build ProstaScint inventory levels to a two-year
requirement.
Historically, our primary sources of cash have been proceeds from the issuance
and sale of our stock through public offerings and private placements, product
related revenues, revenues from contract research services, fees paid under
license agreements and interest earned on cash and short-term investments. In
October 2000, we entered into an equity financing facility with Acqua Wellington
North American Equities Fund, L.P. which provided for the sale of up to $70
million of our common stock to Acqua Wellington at a small discount to market
price. Pursuant to this equity financing facility, in February 2001, we sold to
Acqua Wellington 127,656 shares of our common stock for an aggregate purchase
price of $6.5 million. The equity financing facility was terminated in June
2001.
In June 2001, we entered into a Share Purchase Agreement with the State of
Wisconsin Investment Board, or SWIB, pursuant to which we sold 182,000 shares of
our common stock to SWIB for an aggregate purchase price of $8.2 million, before
transaction costs. In connection with the Share Purchase Agreement, we were
required to discontinue the use of the equity financing facility with Acqua
Wellington and such agreement was terminated.
In October 2001, we filed a shelf registration statement on Form S-3 to register
1,000,000 shares of our common stock. Such registration statement was declared
effective by the Securities and Exchange Commission in November 2001.
In January 2002, we sold 297,067 shares of our common stock to SWIB for an
aggregate purchase price of $8.0 million. Additionally, in June 2002, we sold
416,670 shares of our common stock to SWIB for an aggregate purchase price of
$5.0 million. Such issuances and sales of our common stock to SWIB in January
2002 and June 2002 were registered on our shelf registration statement on Form
S-3.
40
In connection with our stock issuances to SWIB, we agreed not to enter into
equity line arrangements in the future, issue certain securities at less than
fair market value or undertake certain other securities issuances without
requisite stockholder approval. Our stockholders have approved, and we have
implemented, amendments to our By-Laws and certain of our stock option plans to
effect these restrictions.
In January 2003, we received cash of $584,000 relating to a sale of New Jersey
State net operating losses and research and development credits. Assuming the
State of New Jersey continues to fund this program, which is uncertain, the
actual amount of net operating losses and tax credits we may sell will also
depend upon the allocation among qualifying companies of an annual pool
established by the State of New Jersey.
Because the market value of our common stock held by non-affiliates of the
Company is less than $75 million, we are ineligible to utilize a registration
statement on Form S-3 for primary offerings in which our common stock is offered
for cash on our behalf. We cannot guarantee you that the market value of our
common stock held by non-affiliates will ever increase above $75 million, and as
a result, that we will thereby regain eligibility to utilize a Form S-3
registration statement for such primary offerings.
We have relied upon revenues from sales of the BrachySeed products to partially
fund ongoing operations. For the years ended December 31, 2002 and December 31,
2001, revenue from the sale of BrachySeed products was $2.5 million and
$779,000, respectively. In December 2002, we served notice of termination for
each of our License and Distribution Agreement and Product Manufacturing and
Supply Agreement with Draximage with respect to both the BrachySeed I-125 and
BrachySeed Pd-103 products. As a result, effective January 24, 2003, we no
longer accept or fill new orders for the BrachySeed products.
Beginning in December 2001, we began to equally share the costs of the PSMA
Development Company LLC, our joint venture with Progenics Pharmaceuticals, Inc.
Since December 31, 2001, we have recognized 50% of the joint venture's operating
results, of which our share was $2.9 million for 2002 and $332,000 for 2001. We
expect our share of losses and funding in the joint venture to continue at a
even higher level in the subsequent periods. The joint venture is funded by
equal capital contributions from each of Progenics and Cytogen in accordance
with an annual budget approved by the joint venture representatives from each
such party. As of March 28, 2003, the parties are in the process of negotiating
the 2003 annual budget for the joint venture and have agreed that the operating
budget for 2003 will be no less than the 2002 operating expenses for the joint
venture. Contract research and development services provided by Progenics to the
joint venture during 2002 were in accordance with a services agreement between
the parties. As of March 28, 2003, the parties are negotiating the terms of a
new services agreement and believe that if mutual agreement is not achieved, the
parties can successfully negotiate with outside third parties for necessary
services.
Our capital and operating requirements may change depending upon various
factors, including: (i) whether we and our strategic partners achieve success in
manufacturing, marketing and commercialization of our products; (ii) the amount
of resources which we devote to clinical evaluations and the expansion of
marketing and sales capabilities; (iii) results of clinical trials and research
and development activities; and (iv) competitive and technological developments,
in particular, we expect to incur significant costs for the development of our
PSMA technologies.
Our financial objectives are to meet our capital and operating requirements
through revenues from existing products and licensing arrangements. To achieve
our strategic objectives, we may enter into research and development
partnerships and acquire, in-license and develop other technologies, products or
services. Certain of these strategies may require payments by us in either cash
or stock in addition to the costs associated with developing and marketing a
product or technology. However, we believe that, if successful, such strategies
may increase long-term revenues. There can be no assurance as to the success of
such strategies or that resulting funds will be sufficient to meet cash
requirements until product revenues are sufficient to cover operating expenses,
if ever. To fund these strategic and operating activities, we may sell equity or
debt securities as market conditions permit or enter into credit facilities.
We have incurred negative cash flows from operations since our inception, and
have expended, and expect to continue to expend in the future, substantial funds
to implement our planned product development efforts, including acquisition of
products and complementary technologies, research and development, clinical
studies and regulatory activities, and to further our marketing and sales
programs. We expect that our existing capital resources should be adequate to
fund our operations and commitments into the first quarter of 2004. We cannot
assure you that our business or operations will not change in a manner that
would consume available resources more rapidly than anticipated. We expect that
we will have additional requirements for debt or equity capital, irrespective of
whether and when we reach profitability, for further product development costs,
product and technology acquisition costs, and working capital.
41
Our future capital requirements and the adequacy of available funds will depend
on numerous factors, including: (i) the successful commercialization of our
products; (ii) the costs associated with the acquisition of complementary
products and technologies; (iii) progress in our product development efforts and
the magnitude and scope of such efforts; (iv) progress with clinical trials; (v)
progress with regulatory affairs activities; (vi) the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights; (vii) competing technological and market developments; and
(viii) the expansion of strategic alliances for the sales, marketing,
manufacturing and distribution of our products. To the extent that the currently
available funds and revenues are insufficient to meet current or planned
operating requirements, we will be required to obtain additional funds through
equity or debt financing, strategic alliances with corporate partners and
others, or through other sources. There can be no assurance that the financial
sources described above will be available when needed or at terms commercially
acceptable to us. If adequate funds are not available, we may be required to
delay, further scale back or eliminate certain aspects of our operations or
attempt to obtain funds through arrangements with collaborative partners or
others that may require us to relinquish rights to certain of our technologies,
product candidates, products or potential markets. If adequate funds are not
available, our business, financial condition and results of operations will be
materially and adversely affected.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 to our Consolidated Financial Statements in this
Annual Report on Form 10-K includes a summary of our significant accounting
policies and methods used in the preparation of our Consolidated Financial
Statements. The following is a brief discussion of the more significant
accounting policies and methods used by us. The preparation of our Consolidated
Financial Statements requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Our actual results
could differ materially from those estimates.
Revenue Recognition
We recognize revenue from the sale of our products upon shipment. We do not
grant price protection to customers. Quadramet royalties are recognized when
earned. The Securities and Exchange Commission has issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition", which provides guidance on the
recognition of up-front, non-refundable license fees. Accordingly, we defer
up-front license fees and recognize them over the estimated performance period
of the related agreement, when we have continuing involvement. Since the term of
the performance periods is subject to management's estimates, future revenues to
be recognized could be affected by changes in such estimates.
Accounts Receivable
Our accounts receivable balances are net of an estimated allowance for
uncollectible accounts. We continuously monitor collections and payments from
our customers and maintain an allowance for uncollectible accounts based upon
our historical experience and any specific customer collection issues that we
have identified. While we believe our reserve estimate to be appropriate, we may
find it necessary to adjust our allowance for uncollectible accounts if the
future bad debt expense exceeds our estimated reserve. We are subject to
concentration risks as a limited number of our customers provide a high percent
of total revenues, and corresponding receivables.
Inventories
Inventories are stated at the lower of cost or market, as determined using the
first-in, first-out method, which most closely reflects the physical flow of our
inventories. Our products and raw materials are subject to expiration dating. We
regularly review quantities on hand to determine the need for reserves for
excess and obsolete inventories based primarily on our estimated forecast of
product sales. Our estimate of future product demand may prove to be inaccurate,
in which case we may have understated or overstated our reserve for excess and
obsolete inventories.
Carrying Value of Fixed and Intangible Assets
Our fixed assets and certain of our acquired rights to market our products have
been recorded at cost and are being amortized on a straight-line basis over the
estimated useful life of those assets. If indicators of impairment exist, we
assess the recoverability of the affected long-lived assets by determining
42
whether the carrying value of such assets can be recovered through undiscounted
future operating cash flows. If impairment is indicated, we measure the amount
of such impairment by comparing the carrying value of the assets to the present
value of the expected future cash flows associated with the use of the asset.
Adverse changes regarding future cash flows to be received from long-lived
assets could indicate that an impairment exists, and would require the write
down of the carrying value of the impaired asset at that time.
During 2002, we recorded a non-cash charge of $1.7 million to impairment of
intangible assets, which represents the write-off of the carrying value of the
licensing fees associated with BrachySeed I-125 and BrachySeed Pd-103, as the
carrying value will not be recoverable.
In October 2002, we entered into a five-year agreement with Matritech Inc. to be
the sole distributor for Matritech's NMP22 BladderChek point-of-care test to
urologists and oncologists in the United States. Retention of exclusivity rights
depends upon meeting certain minimum annual purchases. We paid Matritech
$150,000 upon the execution of the agreement, which was recorded as other assets
in the accompanying consolidated balance sheet for the respective period and is
being amortized over the five year estimated performance period of the
agreement. We determined that we did not have any impairment regarding
Matritech's license fee at December 31, 2002.
COMMITMENTS
As outlined in Notes 7, 10 and 16 of the Notes to our Consolidated Financial
Statements, we have entered into various contractual obligations and commercial
commitments. The following table summarizes our contractual obligations as of
December 31, 2002:
Less than 1 1 to 3 4 to 5 After 5
Contractual Obligation year years years years Total
- ------------------------------ ------------ ----------- ----------- ----------- -----------
Long-term debt ............... $ - $ 2,280,000 $ - $ - $ 2,280,000
Capital lease obligations .... 80,000 82,000 - - 162,000
Facility leases .............. 609,000 899,000 103,000 - 1,611,000
Other operating leases ....... 228,000 8,000 - - 236,000
Manufacturing and research and
development contracts ........ 1,317,000 327,000 260,000 1,140,000 3,044,000
Minimum royalty payments ..... 1,000,000 2,000,000 2,000,000 7,000,000 12,000,000
----------- ----------- ----------- ----------- -----------
Total ........................ $ 3,234,000 $ 5,596,000 $ 2,363,000 $ 8,140,000 $19,333,000
=========== =========== =========== =========== ===========
In addition to the above, we are obligated to make certain royalty payments
based on sales of the related product and certain milestone payments if our
collaborative partners achieved specific development milestones or commercial
milestones as outlined in Notes 5 and 7 of the Notes to our Consolidated
Financial Statements.
In subsequent periods, we expect to provide funding for the development of the
PSMA technologies through our joint venture with Progenics at even higher levels
than the current year. Such funding amount may vary dependent upon, among other
things, the results of the clinical trials and research and development
activities, competitive and technological developments, and market
opportunities.
Recently Enacted Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board isssued Statement of
Financial Accounting Standard No. 146, "Accounting for Exit or Disposal
Activities." SFAS 146 addresses significant issues regarding the recognition,
measurement and reporting of costs associated with exit and disposal activities,
including restructuring activities. SFAS 146 also addresses recognition of
certain costs related to terminating a contract that is not a capital lease,
costs to consolidate facilities or relocate employees and termination of
benefits provided to employees that are involuntarily terminated under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred compensation contract. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002.
43
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We do not have operations subject to risks of foreign currency fluctuations, nor
do we use derivative financial instruments in our operations or investment
portfolio. As of December 31, 2002, the Company had $2.3 million of debt
outstanding with a fixed interest rate of 7%. We do not have exposure to market
risks associated with changes in interest rates, as we have no variable interest
rate debt outstanding. Changes in interest rates could expose us to market risk
associated with a fixed interest rate debt. We do not believe that this note
will have material exposure to market risks associated with interest rates.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this Item 8 are submitted as a separate
section of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information required to be disclosed under this Item regarding former
accountants was previously reported by the Company on: (i) a Current Report on
Form 8-K filed with the Securities & Exchange Commission on May 20, 2002, and an
amendment thereto filed with the Securities & Exchange Commission on May 22,
2002; and (ii) a Current Report on Form 8-K filed with the Securities & Exchange
Commission on May 24 2002.
44
PART III
Item 10. Directors and Executive Officers of the Company
The information relating to our directors, nominees for election as directors
and executive officers under the headings "Election of Directors", "Executive
Officers" and "Compliance with Section 16(a) of the Exchange Act" in our
definitive proxy statement for the 2003 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.
Item 11. Executive Compensation
The discussion under the heading "Executive Compensation" in our definitive
proxy statement for the 2003 Annual Meeting of Stockholders is incorporated
herein by reference to such proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters" in our definitive proxy
statement for the 2003 Annual Meeting of Stockholders is incorporated herein by
reference to such proxy statement.
Item 13. Certain Relationships and Related Transactions
The discussion under the heading "Certain Relationships and Related
Transactions" in our definitive proxy statement for the 2003 Annual Meeting of
Stockholders is incorporated herein by reference to such proxy statement.
Item 14. Controls and Procedures
(1) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing date of this Annual Report on Form 10-K, the
Company's chief executive officer and principal financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities & Exchange
Commission's rules and forms and are operating in an effective manner.
(2) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
45
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as a part of the Report:
(1) and (2) The response to this portion of Item 15 is submitted as
a separate section of this Form 10-K.
(3) Exhibits -
Exhibit No.
- -----------
3.1 Restated Certificate of Incorporation of Cytogen Corporation, as
amended. Filed as an exhibit to Form 10-Q Quarterly Report for the
quarter ended June 30, 1996, and incorporated herein by reference.
3.2 Certificate of Amendment to the Restated Certificate of Incorporation
of Cytogen Corporation, as amended. Filed as an exhibit to Form 10-Q
Quarterly Report for the quarter ended June 30, 2000, and incorporated
herein by reference.
3.3 Certificate of Amendment to the Restated Certificate of Incorporation,
as amended, as filed with the Secretary of State of the State of
Delaware on October 25, 2002. Filed as an exhibit to the Company's
Current Report on Form 8-K, filed with the Commission on October 25,
2002, and incorporated herein by reference.
3.4 Certificate of Designations of Series C Junior Participating Preferred
Stock of Cytogen Corporation. Filed as an exhibit to the Company's
Registration Statement on Form S-8 (File No. 333-59718), filed with
the Commission on April 27, 2001, and incorporated herein by
reference.
3.5 By-Laws of Cytogen Corporation, as amended. Filed herewith.
4.1 Amended and Restated Rights Agreement, dated as of October 19, 1998
between Cytogen Corporation and Chase Mellon Shareholder Services,
L.L.C., as Rights Agent. The Amended and Restated Rights Agreement
includes the Form of Certificate of Designations of Series C Junior
Participating Preferred Stock as Exhibit A, the form of Right
Certificate as Exhibit B and the Summary of Rights as Exhibit C. Filed
as an exhibit to Form 10-Q Quarterly Report for the quarter ended
September 30, 1998, and incorporated herein by reference.
10.1 Lease Agreement, dated as of March 16, 1987, by and between Peregrine
Investment Partners I, as lessor, and Cytogen Corporation, as lessee.
Filed as an exhibit to Form 10-K Annual Report for Year Ended January
2, 1988, and incorporated herein by reference.
10.2 Amendment, dated as of October 16, 1987, to Lease Agreement between
Peregrine Investment Partners I and Cytogen Corporation. Filed as an
exhibit to Form S-8 Registration Statement (No. 33-30595), and
incorporated herein by reference.
10.3 1989 Employee Stock Option Plan. Filed as an exhibit to Form S-8
Registration Statement (No. 33-30595), and incorporated herein by
reference. +
10.4.1 1988 Stock Option Plan for Non-Employee Directors. Filed as an
exhibit to Form S-8 Registration Statement (No. 33-30595), and
incorporated herein by reference. +
10.4.2 Amendment to the Cytogen Corporation 1988 Stock Option Plan for
Non-Employee Directors dated May 22, 1996. Filed as an exhibit to Form
10-Q Quarterly Report for the quarter ended June 30, 1996, and
incorporated herein by reference. +
46
10.5 Standard Form of Indemnification Agreement entered into between
Cytogen Corporation and its officers, directors, and consultants.
Filed as an exhibit to Amendment No. 1 to Form S-1 Registration
Statement (No. 33-31280), and incorporated herein by reference. +
10.6 1989 Stock Option Policy for Outside Consultants. Filed as an exhibit
to Amendment No. 1 to Form S-1 Registration Statement (No. 33-31280),
and incorporated herein by reference. +
10.7.1 License Agreement dated as of March 31, 1993 between Cytogen
Corporation and The Dow Chemical Company. Filed as an exhibit to Form
10-Q/A-1 Amendment to Quarterly Report for the quarter ended July 3,
1993, and incorporated herein by reference.*
10.7.2 Amendment of the License Agreement between Cytogen Corporation and
The Dow Chemical Company dated September 5, 1995. Filed as an exhibit
to Form 10-Q Quarterly Report for the quarter ended March 31, 1996,
and incorporated herein by reference.*
10.7.3 Second Amendment to the License Agreement between Cytogen
Corporation and The Dow Chemical Company dated May 20, 1996. Filed as
an exhibit to Form 10-Q/A-1 Amendment to Quarterly Report for the
quarter ended June 30, 1996, and incorporated herein by reference.*
10.8 1992 Cytogen Corporation Employee Stock Option Plan II, as amended.
Filed as an exhibit to Form S-4 Registration Statement (No. 33-88612),
and incorporated herein by reference. +
10.9 License Agreement, dated March 10, 1993, between Cytogen Corporation
and The University of North Carolina at Chapel Hill, as amended. Filed
as an exhibit to Form 10-K Annual Report for the year ended December
31, 1994, and incorporated herein by reference.*
10.10 Option and License Agreement, dated July 1, 1993, between Cytogen
Corporation and Sloan-Kettering Institute for Cancer Research. Filed
as an exhibit to Form 10-K Annual Report for the year ended December
31, 1994, and incorporated herein by reference.*
10.11 Cytogen Corporation Amended and Restated 1995 Stock Option Plan.
Filed herewith.
10.12 Horosziewicz - Cytogen Agreement, dated April 20, 1989, between
Cytogen Corporation and Julius S. Horosziewicz, M.D., DMSe. Filed as
an exhibit to Form 10-K Annual Report for the year ended December 31,
1995, and incorporated herein by reference.*
10.13 Marketing and Co-Promotion Agreement between Cytogen Corporation and
C.R. Bard, Inc. effective August 1, 1996. Filed as an exhibit to Form
10-Q Quarterly Report for the quarter ended September 30, 1996, and
incorporated herein by reference.*
10.14 Severance Agreement effective as of March 26, 1996 between Cytogen
Corporation and John D. Rodwell, Ph.D. Filed as an exhibit to Form
10-K Annual Report for the year ended December 31, 1996, and
incorporated herein by reference. +
10.15 Cytogen Corporation Employee Stock Purchase Plan, as amended. Filed
herewith. +
10.16 License Agreement between Targon Corporation and Elan Corporation,
plc dated July 21, 1997. Filed as an exhibit to Form 10-Q Quarterly
Report for the quarter ended June 30, 1997, and incorporated herein by
reference.*
10.17 Convertible Promissory Note dated as of August 12, 1998 between
Cytogen Corporation and Elan International Services, Ltd. Filed as an
exhibit to Form 10-Q Quarterly Report for the quarter ended June 30,
1998, and incorporated herein by reference.
47
10.18 Employment agreement effective as of August 20, 1998 between Cytogen
Corporation and H. Joseph Reiser. Filed as an exhibit to Form 10-Q
Quarterly Report for the quarter ended September 30, 1998, and
incorporated herein by reference. +
10.19 License Agreement by and between Berlex Laboratories, Inc. and
Cytogen Corporation dated as of October 28, 1998. Filed as an exhibit
to Form 10-Q/A-1 Amendment to Quarterly Report for the quarter ended
September 30, 1998, and incorporated herein by reference.
10.20 Manufacturing Space Agreement between Bard BioPharma L.P. and Cytogen
Corporation dated as of January 7, 1999. Filed as an exhibit to Form
S-1/A-1 Amendment to Registration Statement, filed with the Commission
on January 27, 1999, and incorporated herein by reference.
10.21 Employment Agreement effective as of June 10, 1997 between Cytogen
Corporation and Donald F. Crane, Jr. Filed as an exhibit to Form 10-K
Annual Report for the year ended December 31, 1999, and incorporated
herein by reference. +
10.22 Amended and Restated 1999 Stock Option Plan for Non-Employee
Directors. Filed herewith.
10.23 Strategic Alliance Agreement between AxCell Biosciences Corporation
and InforMax, Inc. dated as of September 15, 1999. Filed as an exhibit
to Form 10-K Annual Report for the year ended December 31, 1999, and
incorporated herein by reference.*
10.24 AxCell Biosciences Corporation Employee Stock Option Plan. Filed as
an exhibit to Form 10-K Annual Report for the year ended December 31,
1999, and incorporated herein by reference. +
10.25 Master Loan and Security Agreement No. S7600 among Cytogen
Corporation, AxCell Biosciences Corporation and Finova Capital
Corporation dated December 30, 1999. Filed as an exhibit to Form 10-K
Annual Report for the year ended December 31, 1999, and incorporated
herein by reference.
10.26 Amendment No. 1 to Marketing and Co-Promotion Agreement effective as
of January 1, 2000 by and between Cytogen Corporation and C.R. Bard,
Inc. Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000, and incorporated herein by
reference.
10.27 License and Marketing Agreement by and between Cytogen Corporation
and Advanced Magnetics, Inc. dated August 25, 2000. Filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000, and incorporated herein by reference.*
10.28 Development and Manufacturing Agreement by and between Cytogen
Corporation and DSM Biologics Company B.V. dated July 12, 2000. Filed
as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, and incorporated herein by
reference.*
10.29 Common Stock Purchase Agreement, dated September 29, 2000, by and
between Cytogen Corporation and Acqua Wellington North American
Equities Fund, Ltd. Filed as an exhibit to the Company's Current
Report on Form 8-K, filed with the Commission on October 5, 2000, and
incorporated herein by reference.
10.30 Common Stock Purchase Agreement, dated October 4, 2000, by and
between Cytogen Corporation and Acqua Wellington North American
Equities Fund, Ltd. Filed as an exhibit to the Company's Current
Report on Form 8-K, filed with the Commission on October 12, 2000, and
incorporated herein by reference.
48
10.31 Written Compensatory Agreement by and between Cytogen Corporation and
H. Joseph Reiser dated August 24, 1998, as revised on July 11, 2000.
Filed as an exhibit to the Company's Registration Statement on Form
S-8 (File No. 333-48454), filed with the Commission on October 23,
2000, and incorporated herein by reference. +
10.32 Written Compensatory Agreement by and between Cytogen Corporation and
Lawrence Hoffman dated July 10, 2000. Filed as an exhibit to the
Company's Registration Statement on Form S-8 (File No. 333-48454),
filed with the Commission on October 23, 2000, and incorporated herein
by reference. +
10.33 Product Manufacturing and Supply Agreement by and between Cytogen
Corporation and Draximage Inc. dated December 5, 2000. Filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000. *
10.34 License and Distribution Agreement by and between Cytogen Corporation
and Draximage Inc. dated December 5, 2000. Filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000. *
10.35 Form of Executive Change of Control Severance Agreement by and
between the Company and each of its Executive Officers. Filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, and incorporated herein by reference. +
10.36.1 Lease Agreement by and between Newtown Associates, L.P. and AxCell
Biosciences Corporation dated as of July 23, 1999. Filed as an exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, and incorporated herein by reference.
10.36.2 First Amendment to the Lease Agreement by and between 826 Newtown
Associates, L.P. and AxCell Biosciences Corporation dated as of March
16, 2001. Filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2001, and incorporated
herein by reference.
10.37 Cytogen Corporation Stock Payment Bonus Plan Program. Filed as an
exhibit to the Company's Registration Statement on Form S-8 (File No.
333-58384), filed with the Commission on April 6, 2001, and
incorporated herein by reference. +
10.38 MFS Fund Distributors, Inc. 401(K) Profit Sharing Plan and Trust.
Filed as an exhibit to the Company's Registration Statement on Form
S-8 (File No. 333-59718), filed with the Commission on April 27, 2001,
and incorporated herein by reference. +
10.39 Adoption Agreement for MFS Fund Distributors, Inc. Non-Standardized
401(K) Profit Sharing Plan and Trust, with amendments. Filed as an
exhibit to the Company's Registration Statement on Form S-8 (File No.
333-59718), filed with the Commission on April 27, 2001, and
incorporated herein by reference.
10.40 Cytogen Corporation Performance Bonus Plan with Stock Payment
Program. Filed as an exhibit to Company's Registration Statement on
Form S-8 (File No. 333-75304), filed with the Commission on December
17, 2001, and incorporated herein by reference. +
10.41 Share Purchase Agreement by and between Cytogen Corporation and the
State of Wisconsin Investment Board dated as of June 18, 2001. Filed
as an exhibit to the Company's Current Report on Form 8-K, filed with
the Commission on June 19, 2001, and incorporated herein by reference.
10.42 Share Purchase Agreement by and between Cytogen Corporation and the
State of Wisconsin Investment Board dated as of January 18, 2002.
Filed as an exhibit to the Company's Current Report on Form 8-K, filed
with the Commission on January 24, 2002, and incorporated herein by
reference.
49
10.43 Limited Liability Company Agreement of PSMA Development Company LLC
by and between Cytogen Corporation, Progenics Pharmaceuticals, Inc.
and the PSMA Development Company LLC dated June 15, 1999. Filed as an
exhibit to the Company's Registration Statement on Form S-3, filed
with the Commission on July 20, 1999, and incorporated herein by
reference.
10.44 Amendment No. 1 to Limited Liability Company Agreement of PSMA
Development Company LLC by and between Cytogen Corporation, Progenics
Pharmaceuticals, Inc. and PSMA Development Company LLC dated as of
March 22, 2002. Filed as an exhibit to the Company's Quarterly Report
on Form 10-Q, filed with the Commission on May 14, 2002, and
incorporated herein by reference.
10.45 Sublease Agreement by and between Cytogen Corporation and Hale and
Dorr LLP dated as of May 23, 2002. Filed as an exhibit to the
Company's Quarterly Report on Form 10-Q, filed with the Commission on
August 14, 2002, and incorporated herein by reference.
10.46 Addendum to Stock Exchange Agreement among Cytogen Corporation and
the Shareholders and Debtholders of Prostagen, Inc. dated as of May
14, 2002, and amended as of August 13, 2002. Filed as an exhibit to
the Company's Quarterly Report on Form 10-Q, filed with the Commission
on August 14, 2002, and incorporated herein by reference.
10.47 Distribution Agreement by and between Cytogen Corporation and
Matritech Inc. dated October 18, 2002. Filed herewith. **
10.48 Written Compensatory Agreement by and between Cytogen Corporation and
Michael D. Becker dated December17, 2002. Filed herewith. +
10.49 Contract Manufacturing Agreement by and between Cytogen Corporation
and Laureate Pharma L.P. dated January 15, 2003. Filed herewith. **
10.50 Quality Agreement by and between Cytogen Corporation and Laureate
Pharma L.P. dated January 15, 2003. Filed herewith.**
16.1 Letter from Arthur Andersen LLP to the Securities and Exchange
Commission dated May 20, 2002. Filed as an exhibit to the Company's
Current Report on Form 8-K, filed with the Commission on May 20, 2002,
and incorporated herein by reference.
16.2 Letter from Arthur Andersen LLP to the Securities and Exchange
Commission dated May 22, 2002. Filed as an exhibit to the Company's
Current Report on Form 8-K/A, filed with the Commission on May 22,
2002, and incorporated herein by reference.
16.3 Letter from Arthur Andersen LLP to the Securities and Exchange
Commission dated May 24, 2002. Filed as an exhibit to the Company's
Current Report on Form 8-K, filed with the Commission on May 24, 2002,
and incorporated herein by reference.
21 Subsidiaries of Cytogen Corporation. Filed herewith.
23.1 Consent of KPMG LLP. Filed herewith.
23.2 Consent of PricewaterhouseCoopers filed herewith.
99.1 Certification pursuant to Section 18 U.S.C 1350. Filed herewith.
99.2 Code of Ethics of Cytogen Corporation adopted by the Company as of
March 2003. Filed herewith.
+ Management contract or compensatory plan or arrangement.
50
* We have received confidential treatment of certain provisions contained in
this exhibit pursuant to an order issued by the Securities and Exchange
Commission. The copy filed as an exhibit omits the information subject to the
confidentiality grant.
** We have submitted an application for confidential treatment with the
Securities and Exchange Commission with respect to certain provisions contained
in this exhibit. The copy filed as an exhibit omits the information subject to
the confidentiality application.
(b) Reports on Form 8-K:
We filed two current reports on Form 8-K during the quarter ended
December 31, 2002.
On October 25, 2002, we filed a current report on Form 8-K with the
Securities and Exchange Commission reporting the results of our
special meeting of stockholders held on October 25, 2002, and that we
filed a Certificate of Amendment to our Restated Certificate of
Incorporation, as amended, with the Secretary of State of the State of
Delaware to affect a one-for-ten reverse stock split of all
outstanding, issued and authorized shares of our common Stock, $0.01
par value per share.
On December 17, 2002, we filed a current report on Form 8-K with the
Securities and Exchange Commission reporting certain changes to our
senior management team.
(c) Exhibits:
The Exhibits filed with this Form 10-K are listed above in response to
Item 15(a)(3).
(d) Financial Statement Schedules:
None.
51
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 on the 28th day of
March 2003.
Cytogen Corporation
By: /s/ Michael D. Becker
----------------------------------------
Michael D. Becker,
President and Chief Executive Officer
52
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
------------------------------------------------- ------------------------------------- --------------
By: /s/ Michael D. Becker Chief Executive Officer and President March 28, 2003
----------------------------------------- (Principal Executive Officer and
Michael D. Becker Director)
By: /s/ Thu A. Dang Vice President, Finance March 28, 2003
----------------------------------------- (Principal Financial and Accounting
Thu A. Dang Officer)
By: /s/ John E. Bagalay, Jr. Director March 28, 2003
-----------------------------------------
John E. Bagalay, Jr.
By: /s/ Stephen K. Carter Director March 28, 2003
-----------------------------------------
Stephen K. Carter
By: /s/ James A. Grigsby Director and Chairman of the Board March 28, 2003
-----------------------------------------
James A. Grigsby
By: /s/ Robert F. Hendrickson Director March 28, 2003
-----------------------------------------
Robert F. Hendrickson
By: /s/ Kevin G. Lokay Director March 28, 2003
-----------------------------------------
Kevin G. Lokay
By: /s/ H. Joseph Reiser Director March 28, 2003
-----------------------------------------
H. Joseph Reiser
53
Form 10-K Item 15(a)(1) and (2)
CYTOGEN CORPORATION AND SUBSIDIARIES
(1) Index to Financial Statements
------------------------------
Independent Auditors' Report......................................................................... F-2
Report of Independent Public Accountants on PSMA Development Company LLC............................. F-3
Report of Independent Public Accountants on Cytogen Corporation...................................... F-4
Consolidated Balance Sheets as of December 31, 2002 and 2001......................................... F-5
Consolidated Statements of Operations--Years Ended December 31, 2002, 2001 and 2000 ................. F-6
Consolidated Statements of Stockholders' Equity--Years Ended December 31, 2002, 2001 and 2000........ F-7
Consolidated Statements of Cash Flows--Years Ended December 31, 2002, 2001 and 2000.................. F-8
Notes to Consolidated Financial Statements........................................................... F-9
F-1
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Cytogen Corporation:
We have audited the accompanying consolidated balance sheet of Cytogen
Corporation and subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the financial
statements of PSMA Development Company LLC (a development stage enterprise), a
50% owned unconsolidated investee company. The Company's equity interest in the
loss of PSMA Development Company LLC was $2.9 million for the year ended
December 31, 2002. The financial statements of PSMA Development Company LLC were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for PSMA Development
Company LLC, is based solely on the report of the other auditors. The
consolidated financial statements of Cytogen Corporation and subsidiaries as of
December 31, 2001 and for each of the years in the two-year period ended
December 31, 2001, were audited by other auditors who have ceased operations.
Those auditors' report dated February 5, 2002, on those consolidated financial
statements was unqualified before the restatement described in Note 1 to the
consolidated financial statements, and included an explanatory paragraph that
described the change in Cytogen Corporation's method of accounting for revenue
recognition discussed in Note 1 to the consolidated financial statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit and the report of
other auditors provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the 2002
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cytogen Corporation and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed above, the consolidated financial statements of Cytogen Corporation
and subsidiaries as of December 31, 2001 and for each of the years in the
two-year period ended December 31, 2001, were audited by other auditors who have
ceased operations. As described in Note 1, the Company implemented a reverse
stock split in 2002, and the number of shares and per share amounts in the
accompanying 2001 and 2000 consolidated financial statements have been restated
to reflect such reverse stock split. We audited the adjustments that were
applied to restate the number of shares and per share amounts reflected in the
2001 and 2000 consolidated financial statements for the reverse stock split. In
our opinion, such adjustments are appropriate and have been properly applied.
However, we were not engaged to audit, review or apply any procedures to the
2001 and 2000 consolidated financial statements of Cytogen Corporation and
subsidiaries, other than with respect to such adjustments and, accordingly, we
do not express an opinion or any form of assurance on the 2001 and 2000
consolidated financial statements taken a whole.
/s/ KPMG LLP
Princeton, New Jersey
January 31, 2003
F-2
Report of Independent Accountants
To the Board of Directors and Stockholders of PSMA Development Company LLC:
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' (deficit) equity and of cash flows present fairly,
in all material respects, the financial position of PSMA Development Company LLC
(the "Company") (a development stage enterprise) at December 31, 2001 and 2002,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2002 and the cumulative period from June 15,
1999 (inception) to December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audit of these financial statements in accordance with auditing
standards generally accepted in the United States of America which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 14, 2003, except for Notes 1 and 3,
as to which the date is March 28, 2003
F-3
THE FOLLOWING IS A COPY OF A REPORT ISSUED BY ARTHUR ANDERSEN LLP, AND INCLUDED
IN CYTOGEN CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 2001. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN, AND ARTHUR
ANDERSEN HAS NOT CONSENTED TO ITS USE IN THIS ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2002. ALL NUMBERS SET FORTH IN THIS FORM 10-K REFLECT
THE EFFECT OF A ONE-FOR-TEN REVERSE STOCK SPLIT EFFECTIVE OCTOBER 25, 2002.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cytogen Corporation:
We have audited the accompanying consolidated balance sheets of Cytogen
Corporation (a Delaware Corporation) and Subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 Cytogen
Corporation and Subsidiaries as of December 31, 2001 and 2000 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
As explained in Note 1 to the consolidated financial statements, effective
January 1, 2000, the Company changed its method of accounting for revenue
recognition.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 5, 2002
F-4
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share and per share data)
December 31,
-------------------------
2002 2001
---------- ---------
ASSETS:
Current Assets:
Cash and cash equivalents .......................................... $ 14,725 $ 11,309
Marketable securities .............................................. - 1,376
Receivable on income tax benefit sold .............................. - 1,103
Accounts receivable, net ........................................... 1,778 1,621
Inventories ........................................................ 1,262 1,889
Other current assets ............................................... 643 508
--------- ---------
Total current assets ............................................ 18,408 17,806
Property and Equipment, net ........................................... 1,072 1,831
Other Assets .......................................................... 414 1,855
--------- ---------
$ 19,894 $ 21,492
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term liabilities ........................... $ 80 $ 77
Accounts payable and accrued liabilities ........................... 4,427 5,315
Deferred revenue ................................................... 385 534
--------- ---------
Total current liabilities ....................................... 4,892 5,926
--------- ---------
Long-Term Liabilities ................................................. 2,614 2,291
--------- ---------
Deferred Revenue ...................................................... 1,800 2,061
--------- ---------
Commitments and Contingencies (Note 16)
Stockholders' Equity:
Preferred stock, $.01 par value, 5,400,000 shares authorized -
Series C Junior Participating Preferred Stock, $.01 par value,
200,000 shares authorized, none issued and outstanding ....... - -
Common stock, $.01 par value, 25,000,000 shares authorized,
8,758,235 and 7,893,734 shares issued and outstanding
at December 31, 2002 and 2001, respectively ...................... 88 79
Additional paid-in capital ......................................... 366,884 351,577
Deferred compensation .............................................. (4) (621)
Accumulated other comprehensive income ............................. - 860
Accumulated deficit ................................................ (356,380) (340,681)
--------- ---------
Total stockholders' equity ....................................... 10,588 11,214
--------- ---------
$ 19,894 $ 21,492
========= =========
The accompanying notes are an integral part of these statements.
F-5
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
Year Ended December 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
Revenues:
Product related:
ProstaScint ....................................................... $ 7,923 $ 7,640 $ 7,004
BrachySeed ........................................................ 2,507 779 -
Others ............................................................ 196 363 519
-------- -------- --------
Total product sales ............................................. 10,626 8,782 7,523
Quadramet royalties ............................................... 1,842 2,063 2,004
-------- -------- --------
Total product related ........................................... 12,468 10,845 9,527
License and contract ................................................. 463 912 1,024
-------- -------- --------
Total revenues .................................................. 12,931 11,757 10,551
-------- -------- --------
Operating Expenses:
Cost of product related revenues ..................................... 4,748 4,216 4,513
Impairment of intangible assets ...................................... 1,729 - -
Research and development ............................................. 7,605 10,091 6,957
Acquisition of marketing and technology rights ....................... - - 13,241
Equity loss in PSMA LLC .............................................. 2,886 332 -
Selling and marketing ................................................ 5,846 6,314 6,126
General and administrative ........................................... 5,401 4,864 4,934
-------- -------- --------
Total operating expenses ........................................ 28,215 25,817 35,771
-------- -------- --------
Operating loss .................................................. (15,284) (14,060) (25,220)
Insurance reimbursement ............................................... - 402 -
Loss on investment .................................................... (516) - -
Interest income ....................................................... 274 635 774
Interest expense ...................................................... (173) (180) (163)
-------- -------- --------
Loss before income taxes and cumulative effect
of accounting change ........................................... (15,699) (13,203) (24,609)
Income tax benefit .................................................... - (1,103) (1,625)
-------- -------- --------
Loss before cumulative effect of accounting change ......... (15,699) (12,100) (22,984)
Cumulative effect of accounting change (Note 1) ....................... - - (4,314)
-------- -------- --------
Net loss .............................................................. $(15,699) $(12,100) $(27,298)
======== ======== ========
Net loss per share:
Basic and diluted net loss before cumulative
effect of accounting change .............................. $ (1.85) $ (1.56) $ (3.13)
Cumulative effect of accounting change ..................... - - (0.59)
-------- -------- --------
Basic and diluted net loss ................................. $ (1.85) $ (1.56) $ (3.72)
======== ======== ========
Weighted average common shares outstanding ............................ 8,466 7,778 7,334
======== ======== ========
The accompanying notes are an integral part of these statements.
F-6
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(All amounts in thousands, except share data)
Accumulated
Other
Additional Deferred Compre- Accu- Total
Common Paid-in Compen- hensive mulated Stockholders'
Stock Capital sation Income Deficit Equity
------ ----------- ----------- --------- --------- -------------
Balance, December 31, 1999 $ 71 $ 311,843 $ (82) $ - $(301,283) $ 10,549
Sale of 356,777 shares of common stock;
including exercise of stock options ............. 4 10,374 - - - 10,378
Issuance of 150,000 shares of common stock
in connection with the acquisition of
product candidates marketing rights ............. 1 13,078 - - - 13,079
Issuance of options to purchase
shares of common stock ......................... - 261 - - - 261
Deferred compensation related to
stock options .................................. - 1,062 (1,062) - - -
Amortization of deferred compensation ............. - - 249 - - 249
Net loss .......................................... - - - - (27,298) (27,298)
----- --------- -------- ------ --------- ---------
Balance, December 31, 2000 ........................ 76 336,618 (895) - (328,581) 7,218
Sale of 324,149 shares of common stock;
including exercise of stock options ............. 3 14,235 - - - 14,238
Issuance of 10,141 shares of common stock and
stock options related to compensation ........... - 282 - - - 282
Issuance of options and warrants to purchase
shares of common stock .......................... - 201 - - - 201
Deferred compensation related to
stock options ................................... - 241 (241) - - -
Amortization of deferred compensation ............. - - 515 - - 515
Comprehensive loss:
Net loss ........................................ - - - - (12,100) (12,100)
Unrealized gain on marketable
securities ..................................... - - - 860 - 860
---------
Total comprehensive loss ..................... (11,240)
----- --------- -------- ------ --------- ---------
Balance, December 31, 2001 ........................ 79 351,577 (621) 860 (340,681) 11,214
Sale of 716,290 shares of common stock;
including exercise of stock options ............. 7 12,966 - - - 12,973
Issuance of 20,512 shares of common stock and
stock options related to compensation ........... 1 736 - - - 737
Issuance of 127,699 shares of common stock
in connection with Prostagen .................... 1 2,038 - - - 2,039
Reversal of deferred compensation related to
stock options ................................... - (433) 433 - - -
Amortization of deferred compensation ............. - - 184 - - 184
Comprehensive loss:
Net loss ........................................ - - - - (15,699) (15,699)
Unrealized loss on marketable securities ........ - - - (860) - (860)
---------
Total comprehensive loss ..................... (16,559)
----- --------- -------- ------ --------- ---------
Balance, December 31, 2002 ........................ $ 88 $ 366,884 $ (4) $ - $(356,380) $ 10,588
===== ========= ======== ====== ========= =========
The accompanying notes are an integral part of these statements.
F-7
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
Year Ended December 31,
----------------------------------------
2002 2001 2000
-------- --------- -----------
Cash Flows From Operating Activities:
Net loss ................................................ $(15,699) $(12,100) $ (27,298)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................ 779 1,186 1,027
Imputed interest (income) expense .................... - (43) 29
Stock based compensation expenses .................... 655 809 510
Stock based milestone payment ........................ 2,033 - -
Amortization of deferred revenue ..................... (410) (860) (859)
Acquisition of marketing and technology rights ....... - - 13,079
Cumulative effect of accounting change ............... - - 4,314
Asset impairment ..................................... 2,446 - -
Loss on investment ................................... 516 - -
Gain on sale of property and equipment ............... - - (148)
Changes in assets and liabilities:
Receivables, net .................................. 946 263 397
Inventories ....................................... 627 (1,006) (198)
Other assets ...................................... 548 24 (1,631)
Accounts payable and accrued liabilities .......... (692) (1,714) 1,740
-------- -------- --------
Net cash used in operating activities ............. (8,251) (13,441) (9,038)
-------- -------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment ..................... (148) (813) (1,209)
Purchase of product rights .............................. (1,150) (500) (500)
Net proceeds from sale of property and equipment ........ 100 - 148
Decrease in short-term investments ...................... - - 1,593
-------- -------- --------
Net cash provided by (used in) investing activities (1,198) (1,313) 32
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock .................. 12,973 14,238 10,378
Payments of long-term liabilities ....................... (108) (168) (180)
-------- -------- --------
Net cash provided by financing activities ......... 12,865 14,070 10,198
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .... 3,416 (684) 1,192
Cash and cash equivalents, beginning of year ............ 11,309 11,993 10,801
-------- -------- --------
Cash and cash equivalents, end of year .................. $ 14,725 $ 11,309 $ 11,993
======== ======== ========
The accompanying notes are an integral part of these statements.
F-8
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Cytogen Corporation ("Cytogen" or the "Company") of Princeton, New Jersey is a
product-driven, oncology-focused biopharmaceutical company. The Company markets
oncology products through its in-house sales force: ProstaScint(R) (a monoclonal
antibody-based imaging agent used to image the extent and spread of prostate
cancer) and NMP22(R) BladderChek(TM) (a point-of-care test for bladder cancer
detection). The Company has also developed Quadramet(R), a skeletal targeting
therapeutic radiopharmaceutical for the relief of bone pain in prostate and
other types of cancer, for which the Company receives royalties on product sales
through Berlex Laboratories, the United States affiliate of Schering AG Germany,
which markets the product in the United States. The Company's pipeline comprises
product candidates at various stages of clinical development, including fully
human monoclonal antibodies and cancer vaccines based on PSMA (prostate specific
membrane antigen) technology, which the Company exclusively licensed from
Memorial Sloan-Kettering Cancer Center. The Company also conducts research in
cell signaling through its AxCell Biosciences research subsidiary in Newtown,
Pennsylvania.
In August 2000, we expanded our product pipeline by entering into marketing,
license and supply agreements with Advanced Magnetics, Inc. for Combidex(R),
which is an investigational magnetic resonance imaging (MRI) contrast agent that
assists in the differentiation of metastatic from non-metastatic lymph nodes. We
hold exclusive United States marketing rights to Combidex. Advanced Magnetics is
continuing its discussions with the FDA relating to outstanding issues regarding
an approvable letter received from the FDA dated June 2000, in an effort to
bring Combidex to market.
Basis of Consolidation
The consolidated financial statements include the accounts of Cytogen and its
subsidiaries. Intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Statements of Cash Flows
Cash and cash equivalents include cash on hand, cash in banks and all highly
liquid investments with maturities of three months or less at the time of
purchase. Cash paid for interest expense was $169,000, $180,000 and $99,000 in
2002, 2001 and 2000, respectively. During 2002, 2001 and 2000, the Company
purchased $189,000, $11,000 and $49,000, respectively, of equipment under
various capital leases.
Marketable Securities
In connection with the acquisition of Prostagen Inc. in June 1999 (see Note 5),
the Company received 275,350 shares of Northwest Biotherapeutics, Inc.
("Northwest") common stock. The Company had classified this investment as
available-for-sale securities. The fair value of Northwest stock, based on
quoted market prices, had significantly decreased from the Company's original
carrying value of this investment of $516,000. Based on the evaluation of the
financial condition of Northwest and the significant decline in stock price,
management concluded that the carrying amount of this investment would not be
recoverable. Accordingly, the Company recorded a non-cash charge of $516,000
related to the other than temporary decline in the value of this investment
during 2002.
Receivables
At both December 31, 2002 and 2001, accounts receivable were net of an allowance
for doubtful accounts of $30,000. There was no expense charged to the provision
for doubtful accounts during 2002, 2001 and 2000. The Company wrote off $0,
$5,000 and $47,000 of uncollectible accounts in 2002, 2001 and 2000,
respectively.
F-9
At December 31, 2001, the Company had a $1.1 million receivable due from Public
Service Electric and Gas Company relating to the sales of New Jersey State
operating loss carryforwards and research and development credits. The Company
received the proceeds from this receivable in January 2002.
Inventories
The Company's inventories are primarily related to ProstaScint and NMP22
BladderChek. Inventories are stated at the lower of cost or market using the
first-in, first-out method and consisted of the following:
December 31,
------------
2002 2001
- ---- ----
Raw materials............................. $ 506,000 $ 506,000
Work-in process........................... 39,000 1,371,000
Finished goods............................ 717,000 12,000
---------- ----------
$1,262,000 $1,889,000
========== ==========
Property and Equipment
Property and equipment are stated at cost, net of depreciation. Leasehold
improvements are amortized on a straight-line basis over the lease period or the
estimated useful life, whichever is shorter. Equipment and furniture are
depreciated on a straight-line basis over three to five years. Expenditures for
repairs and maintenance are charged to expense as incurred. Property and
equipment consisted of the following:
December 31,
------------
2002 2001
---- ----
Leasehold improvements............................... $ 103,000 $ 3,425,000
Equipment and furniture.............................. 2,420,000 6,224,000
----------- -----------
2,523,000 9,649,000
Less - accumulated depreciation and amortization..... (1,451,000) (7,818,000)
----------- -----------
$ 1,072,000 $ 1,831,000
=========== ===========
In 2002, the Company wrote off approximately $1.7 million of fully depreciated
property and equipment, and sold $5.3 million of its manufacturing property and
equipment which had a net value of $100,000 to Bard BioPharma L.P., a subsidiary
of Purdue Pharma L.P., for proceeds of $100,000. Depreciation expense was
$600,000, $1.2 million, and $1.0 million in 2002, 2001, and 2000, respectively.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, marketable securities, accounts receivable, accounts payable,
accrued expenses and long-term debt. Management believes the carrying value of
these assets and liabilities are considered to be representative of their fair
market value.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," if indicators
of impairment exist, management assesses the recoverability of the affected
long-lived assets by determining whether the carrying value of such assets can
be recovered through undiscounted future operating cash flows and eventual
disposition of the asset. If impairment is indicated, management measures the
amount of such impairment by comparing the carrying value of the assets to the
present value of the expected future cash flows associated with the use of the
F-10
asset. During the fourth quarter of 2002, the Company recorded a charge of $1.7
million for the asset impairment associated with licensing fees paid by the
Company related to BrachySeed I-125 and BrachySeed Pd-103 (See Note 4).
Other Assets
Other assets consisted of the following:
December 31,
------------
2002 2001
---- ----
NMP22 BladderChek license fee, net........................... $145,000 $ -
BrachySeed I-125 license fee, net (Note 4)................... - 903,000
Investment in PSMA Development Co. LLC (Note 6).............. 1,000 588,000
Other ....................................................... 268,000 364,000
--------- ----------
$414,000 $1,855,000
======== ==========
Revenue Recognition
Product related revenues include product sales by Cytogen to its customers and
Quadramet royalties. Product sales are recognized upon shipment of the finished
goods. The Company does not grant price protection to its customers. Royalties
are recognized as revenue when earned.
License and contract revenues include milestone payments and fees under
collaborative agreements with third parties, revenues from contract
manufacturing and research services, and revenues from other miscellaneous
sources. In 2000, the Company discontinued contract manufacturing services,
concurrent with the sale of the manufacturing and laboratory facilities and
therefore has received no revenue from this source since 2000.
Effective January 1, 2000, the Company adopted U.S. Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), which, as applied to the Company, requires up-front,
non-refundable license fees to be deferred and recognized over the performance
period. The cumulative effect of adopting SAB 101 resulted in a one-time,
non-cash charge of $4.3 million or $0.59 per share, which reflects the deferral
of an up-front license fee received from Berlex Laboratories, Inc. ("Berlex"),
net of associated costs, related to the licensing of Quadramet recognized in
October 1998 and a license fee for certain applications of PSMA to a joint
venture formed by Cytogen and Progenics Pharmaceuticals Inc. ("Progenics")
recognized in June 1999 (see Note 6). Previously, the Company had recognized
up-front license fees when the Company had no obligations to return the fees
under any circumstances. Under SAB 101, these payments are recorded as deferred
revenue to be recognized over the remaining term of the related agreements. For
the years ended December 31, 2002, 2001 and 2000, the Company recognized
$410,000, $860,000 and $859,000 in revenues, respectively, that were included in
the cumulative effect adjustment as of January 1, 2000.
Prior year financial statements have not been restated to apply SAB 101
retroactively; however, the following pro forma amounts present the net loss to
common stockholders and net loss per share assuming the Company had
retroactively applied SAB 101.
Year Ended December 31,
2000
----------------------
Net loss, as reported............................ $(27,298,000)
============
Net loss per share, as reported.................. $ (3.72)
============
Pro forma net loss .............................. $(22,984,000)
============
Pro forma net loss per share..................... $ (3.13)
============
In accordance with Emerging Issues Task Force ("EITF") 00-10, the Company
records shipping and handling charges billed to customers as revenue and the
related costs as cost of product sales.
F-11
Research and Development
Research and development expenditures consist of projects conducted by the
Company and payments made to sponsored research programs and consultants. All
research and development costs are charged to expense as incurred. Research and
development expenditures for customer sponsored programs were $53,000, $17,000
and $45,000 in 2002, 2001 and 2000, respectively.
Patent Costs
Patent costs are charged to expense as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Net Loss Per Share
Basic net loss per common share is based upon the weighted average common shares
outstanding during each period. Diluted net loss per common share is the same as
basic net loss per share, as the inclusion of common stock equivalents would be
antidilutive due to the Company's losses (see Note 12).
Reverse Stock Split
On October 25, 2002, upon the receipt of approval of the Company's stockholders,
the Company's Board of Directors authorized and implemented a reverse stock
split (the "Reverse Split") of Cytogen's issued, outstanding and authorized
shares of common stock at a ratio of one-for-ten. All references in the
accompanying consolidated financial statements to the number of shares and per
share amounts have been retroactively restated to reflect the Reverse Split.
Stock-based Compensation
The Company follows the intrinsic value method of accounting for stock-based
employee compensation in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. The Company records
deferred compensation for option grants to employees for the amount, if any, by
which the market price per share exceeds the exercise price per share at the
measurement date, which is generally the grant date. In addition, the Company
applies fair value accounting for option grants to non-employees in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation" and EITF Issue
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
The Company follows the disclosure provisions of SFAS 123, as amended by SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
Had compensation cost for options been recognized in the consolidated statements
of operations using the fair value method of accounting, the Company's net loss
and net loss per share would have been:
F-12
Year Ended December 31,
-------------------------------------------------
2002 2001 2000
------------- ------------ -------------
Net loss, as reported $(15,699,000) $(12,100,000) $(27,298,000)
Add: Stock-based employee compensation
expense included in reported net loss 184,000 515,000 249,000
Deduct: Total stock-based employee
compensation expense determined under fair
value-based method for all awards (4,000,000) (5,838,000) (3,640,000)
------------ ------------ ------------
Pro forma net loss $(19,515,000) $(17,423,000) $(30,689,000)
============ ============ ============
Basic and diluted net loss per share, as reported $(1.85) $(1.56) $(3.72)
Pro forma basic and diluted net loss per share $(2.31) $(2.24) $(4.18)
Other Comprehensive Income
The Company follows SFAS No. 130, "Reporting Comprehensive Income." This
statement requires the classification of items of other comprehensive income by
their nature and disclosure of the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet.
Recent Accounting Pronouncements
In June 2002, the FASB issued Statement of Financial Accounting Standard No.
146, "Accounting for Exit or Disposal Activities." SFAS 146 addresses
significant issues regarding the recognition, measurement and reporting of costs
associated with exit and disposal activities, including restructuring
activities. SFAS 146 also addresses recognition of certain costs related to
terminating a contract that is not a capital lease, costs to consolidate
facilities or relocate employees and termination of benefits provided to
employees that are involuntarily terminated under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement or an individual
deferred compensation contract. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002.
Reclassifications
Certain amounts in prior years consolidated financial statements have been
reclassified to conform the current year presentation.
2. DSM BIOLOGICS COMPANY B.V.
In July 2000, the Company entered into a Development and Manufacturing Agreement
with DSM Biologics Company B.V. ("DSM"), pursuant to which DSM was to conduct
certain development activities with respect to ProstaScint, including the
delivery of a limited number of batches of ProstaScint for testing and
evaluation purposes. During 2002, the parties ceased to operate under the terms
of such agreement. In 2002, 2001 and 2000, the Company recorded $551,000, $3.2
million and $559,000, respectively, of development expenses related to this
agreement.
3. ADVANCED MAGNETICS, INC.
In August 2000, the Company and Advanced Magnetics, Inc., a developer of novel
diagnostic pharmaceuticals for use in magnetic resonance imaging (MRI), entered
into marketing, license and supply agreements ("AVM Agreements"). Under the AVM
Agreements, Cytogen acquired certain United State's rights to Advanced
Magnetics' product candidates: Combidex(R), MRI contrast agent for the detection
of lymph node metastases (for all applications) and imaging agent Code 7228 (for
oncology applications only). Advanced Magnetics will be responsible for all
costs associated with the clinical development, supply and manufacture of
Combidex and Code 7228 and will receive royalties based upon product sales.
In exchange for the future marketing rights to Combidex (for all applications)
and Code 7228 (for oncology applications only), Cytogen issued 150,000 shares of
its Common Stock to Advanced Magnetics at closing and may issue an additional
50,000 shares, which are currently in escrow, subject to the achievement of
F-13
certain milestones. Of such 50,000 shares, 25,000 are being held in escrow
pending the achievement of certain milestones relating to Combidex and 25,000
are being held in escrow pending the achievement of certain milestones relating
to Code 7228. Since the Advanced Magnetics' product candidates have not yet
received FDA approval, the Company recorded a $13.2 million charge in the 2000
consolidated statement of operations for the acquisition of marketing and
technology rights, of which $13.1 million was non-cash and represented the fair
value of the 150,000 shares of Common Stock issued. There can be no assurance
that Advanced Magnetics will receive FDA approval to market Combidex or Code
7228 for oncology applications in the United States. At this time, Advanced
Magnetics does not intend to develop Code 7228 for oncology imaging.
4. DRAXIMAGE INC.
In December 2000, the Company entered into a Product Manufacturing and Supply
Agreement with Draximage, Inc. to market and distribute BrachySeed implants for
prostate cancer therapy in the United States. Under the terms of the agreement,
Draximage supplied radioactive iodine and palladium seeds to Cytogen in exchange
for product transfer payments, royalty payments on sales and certain milestone
payments. Cytogen paid Draximage $500,000 upon execution of the contract in
2000, $500,000 upon the first sale of the Iodine-125 BrachySeeds in 2001 and
$1.0 million related to the first sale of BrachySeed Pd-103 in 2002. These
payments were recorded as other assets in the accompanying consolidated balance
sheet for the respective period (see Note 1) and were being amortized over the
ten year term of the Draximage Agreement. In January 2003, the Company served
notice of termination for each of its License and Distribution Agreement and
Product Manufacturing and Supply Agreement with Draximage with respect to both
the BrachySeed I-125 and BrachySeed Pd-103 products. As a result, effective
January 24, 2003, the Company no longer accepts or fills new orders for the
BrachySeed products. In 2002, the Company recorded a non-cash charge of $1.7
million to write off the carrying values of the licensing fees paid for
BrachySeed I-125 and BrachySeed Pd-103. Prior to the write-off of such licensing
rights, amortization expense was $174,000, $93,000 and $4,000 in 2002, 2001 and
2000, respectively. The Company also recorded $503,000 and $113,000 in royalty
expense for 2002 and 2001, respectively.
5. ACQUISITION OF PROSTAGEN, INC.
Pursuant to a Stock Exchange Agreement ("Prostagen Agreement") related to the
Company's acquisition of Prostagen Inc. ("Prostagen") in June 1999, the Company
agreed to issue up to an additional $4.0 million worth of Cytogen Common Stock
to the shareholders and debtholders of Prostagen (the "Prostagen Partners"), if
certain milestones are achieved in the dendritic cell therapy and PSMA
development programs. During 2002, the Company and the Prostagen Partners agreed
that a milestone was achieved based on the progress of the dendritic cell
prostate cancer clinical trials at Northwest. As a result, the Company recorded
a $2.0 million charge to research and development expense which represented the
fair value of the 122,699 shares of Common Stock issued. In May 2002, the
Company entered into an addendum to the Prostagen Agreement (the "Addendum"),
which clarifies the future milestone payments to be made under the Prostagen
Agreement, as well as the timing of such payments. Pursuant to the Addendum, the
Company may be obligated to pay two additional milestone payments of $1.0
million each, upon the earlier of certain clinical achievements regarding the
PSMA development programs or January 2003 and July 2003, respectively, provided
that the payments shall be due on these dates only if safety has been
established in a completed Phase I clinical trial and the research program on
immunotherapy for prostate cancer is continuing on such dates. Any future
milestone payments are payable in shares of Cytogen Common Stock. In addition,
the Company issued 5,000 shares of Common Stock to the Prostagen Partners in
2002 upon the satisfactory termination of a lease obligation originally assumed
by the Company.
6. PROGENICS PHARMACEUTICALS, INC. JOINT VENTURE
In June 1999, Cytogen entered into a joint venture with Progenics, PSMA
Development Company LLC, (the "Joint Venture"), to develop vaccine and
antibody-based immunotherapeutic products utilizing Cytogen's proprietary PSMA
technology. The Joint Venture is owned equally by Cytogen and Progenics. Through
November 2001, Progenics funded the first $3.0 million of development costs of
the Joint Venture. Beginning in December 2001, the Company and Progenics began
to equally share the future costs of the Joint Venture. Cytogen has the
exclusive North American marketing rights for products developed by the Joint
Venture.
The Company accounts for the Joint Venture using the equity method of
accounting. As discussed above, through November 2001, Progenics was obligated
to fund the initial $3.0 million of the development costs. Beginning in December
2001, Cytogen began to recognize 50% of the Joint Venture's operating results,
expected to be losses, in its consolidated statement of operations. For the year
ended December 31, 2002, Cytogen recognized $2.9 million of these losses
compared to $332,000 during the year ended December 31, 2001. As of December 31,
2002 and 2001, the carrying value of the Company's investment in the Joint
Venture was $1,000 and $588,000, respectively, which represents Cytogen's
F-14
investment to date in the Joint Venture, less its cumulative share of losses,
which net investment is recorded in other assets (see Note 1). Selected
financial statement information of the Joint Venture is as follows:
December 31,
---------------------------------
2002 2001
------------ -----------
Balance Sheet Data:
Cash ........................................... $ 290,000 $ 1,010,000
============ ===========
Accounts payable................................ $ 304,000 $ 351,000
Capital contributions........................... 11,399,000 6,799,000
Contribution receivable from Progenics.......... - (500,000)
Accumulated deficit............................. (11,413,000) (5,640,000)
------------ -----------
$ 290,000 $ 1,010,000
============ ===========
For the Period
For the Year Ended From June 15, 1999
--------------------------------------- (inception) to
2002 2001 2000 December 31, 2002
----------- ----------- ----------- -----------------
Interest income............................. $ 13,000 $ 47,000 $ 96,000 $ 229,000
Total expenses.............................. 5,786,000 2,623,000 1,085,000 11,642,000
----------- ----------- ----------- ------------
Net loss.................................... $(5,773,000) $(2,576,000) $ (989,000) $(11,413,000)
=========== =========== =========== ============
In connection with the licensing of the PSMA technology to the Joint Venture in
June 1999, Cytogen recognized approximately $1.8 million in license fee revenue.
In connection with the adoption of SAB 101, effective January 1, 2000 (see Note
1), the Company deferred approximately $1.5 million of this previously
recognized license fee and recognized $150,000 $599,000 and $599,000 of the
deferred revenue as license and contract revenue in 2002, 2001 and 2000,
respectively. The remaining $125,000 of deferred revenue will be recognized on a
straight-line basis over the estimated remaining performance period of the
development program.
7. THE DOW CHEMICAL COMPANY
In 1993, Cytogen acquired from The Dow Chemical Company an exclusive license for
the treatment of osteoblastic bone metastases in the United States for
Quadramet. This license was amended in 1995 and 1998 to expand the territory to
include Canada, Latin America, Europe and Japan, in 1996 to expand the field to
include all osteoblastic diseases, and in 1998 to include rheumatoid arthritis.
The agreement requires the Company to pay Dow royalties based on a percentage of
net sales of Quadramet, or a guaranteed contractual minimum payments, whichever
is greater, and future payments upon achievement of certain milestones. The
Company recorded $1.0 million, $824,000 and $802,000 in royalty expense for
2002, 2001 and 2000, respectively. Future annual minimum royalties due to Dow
are $1.0 million per year in 2003 through 2012 and $2.0 million in 2013.
8. REVENUES FROM MAJOR CUSTOMERS
Revenues from major customers (greater than 10%) as a percentage of total
revenues were as follows:
Year Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
Berlex Laboratories Inc........................... 16% 20% 22%
Mallinckrodt Medical Inc.......................... 18 20 19
Medi-Physics...................................... 12 12 7
Syncor International Corporation.................. 9 11 11
F-15
Mallinckrodt Medical Inc., Medi-Physics and Syncor International Corporation are
chains of radiopharmacies, which distribute ProstaScint and OncoScint CR/OV
kits.
Revenues from Berlex include the recognition of deferred revenue following the
adoption of SAB 101.
As of December 31, 2002, the receivables from four of the Company's largest
customers accounted for 57% of total accounts receivable.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
December 31,
--------------------------
2002 2001
---- ----
Accounts payable....................................... $1,726,000 $1,166,000
Accrued payroll and related expenses................... 298,000 989,000
Accrued research contracts and materials............... 238,000 831,000
Accrued commission and royalties....................... 720,000 250,000
Accrued professional and legal......................... 519,000 1,061,000
Facility payable and accrued restructuring............. 130,000 462,000
Other accruals......................................... 796,000 556,000
-------- ----------
$4,427,000 $5,315,000
========== ==========
10. LONG-TERM LIABILITIES
December 31,
---------------------------
2002 2001
---------- ----------
Due to Elan Corporation, plc........................ $2,280,000 $2,280,000
Capital lease obligations........................... 162,000 88,000
Lease obligation.................................... 246,000 -
Other............................................... 6,000 -
---------- ----------
2,694,000 2,368,000
Less: Current portion of long-term liabilities.... (80,000) (77,000)
---------- ----------
$2,614,000 $2,291,000
========== ==========
In August 1998, Cytogen received $2.0 million from Elan Corporation, plc
("Elan") in exchange for a convertible promissory note. The note is convertible
into shares of Cytogen Common Stock at $28 per share, subject to adjustments,
and matures in August 2005. The note bears annual interest of 7%, compounded
semi-annually, however, such interest was not payable in cash but was added to
the principal for the first 24 months; thereafter, interest is payable in cash.
In 2002, 2001 and 2000, the Company recorded $160,000, $160,000 and $141,000,
respectively, in interest expense on this note. The note contains certain
non-financial covenants.
The Company leases certain equipment under capital lease obligations, which will
expire on various dates through 2005. Property and equipment leased under
non-cancellable capital leases have a net book value of $159,000 at December 31,
2002. Payments to be made under capital lease obligations (including total
interest of $9,000) are $86,000 in 2003, $79,000 in 2004 and $6,000 in 2005.
In an effort to reduce expenses and position Cytogen for stronger long-term
growth in oncology, the Company restructured AxCell in September 2002 by
reducing 75% of AxCell's workforce. As a result, during 2002, the Company
recorded a charge of $869,000 related to employee severance costs, the
impairment of property and equipment and future rental payments on leased
facilities that will not be used in operations, which has been included in
general and administrative expense in the accompanying consolidated statement of
F-16
operations. As of December 31, 2002, the Company has accrued its obligations for
future lease payments of $322,000, of which $246,000 is long-term and will be
paid through 2006.
11. COMMON STOCK
In 2000, the Company sold 100,000 shares of Cytogen Common Stock to Berlex for
$1.0 million or consideration equal to $10.00 per share upon an exercise of a
warrant and 166,000 additional shares of Cytogen Common Stock for total proceeds
of $3.5 million at an average price of $21.20 per share upon the exercises of
employee stock options and other warrants.
In September 2000, the Company sold to Acqua Wellington North American Equities
Fund, Ltd., ("Acqua Wellington") 90,260 registered shares of Cytogen Common
Stock at an aggregate price of $6.0 million or consideration equal to $66.47 per
share. In October 2000, the Company entered into an equity financing facility
with Acqua Wellington for up to $70 million of Common Stock. Under the terms of
the agreement, Cytogen could, at its discretion, sell shares of its Common Stock
to Acqua Wellington at a small discount to the market price. Pursuant to this
Equity Financing Facility, in February 2001, the Company sold to Acqua
Wellington 127,656 shares of its Common Stock at an aggregate price of $6.5
million or consideration equal to $50.92 per share. The equity financing
facility was terminated in June 2001.
In June 2001, the Company entered into a Share Purchase Agreement with the State
of Wisconsin Investment Board ("SWIB"), pursuant to which the Company sold
182,000 shares of Cytogen Common Stock to SWIB for an aggregate purchase price
of $8.2 million, before transaction costs, or consideration equal to $45.00 per
share. In connection with the Share Purchase Agreement, the Company was required
to discontinue the use of the Acqua Wellington equity financing facility and
such agreement was terminated.
In January 2002, the Company sold 297,067 shares of Cytogen Common Stock to SWIB
for an aggregate purchase price of $8.0 million, or consideration equal to
$26.90 per share pursuant to a January 2002 Share Purchase Agreement between
SWIB and the Company. In connection with our stock issuances to SWIB, the
Company agreed not to enter into equity line arrangements in the future, issue
certain securities at less than fair market value or undertake certain other
securities issuances without requisite stockholder approval. The Company sold an
additional 416,670 shares of its Common Stock to SWIB in June 2002 for an
aggregate purchase price of $5.0 million or consideration equal to $12.00 per
share.
See Note 5 for information regarding Cytogen Common Stock issued to the
Prostagen Partners.
12. STOCK OPTIONS
The Company has various stock option plans that provide for the issuance of
incentive and non-qualified stock options to purchase Cytogen Common Stock
("Cytogen Options") to employees, non-employee directors and outside
consultants, for which an aggregate of 607,889 shares of Common Stock have been
reserved. The persons to whom Cytogen Options may be granted and the number,
type, and terms of the Cytogen Options vary among the plans. Cytogen Options are
granted with an exercise term of 10 years and generally become exercisable in
installments over periods of up to 5 years at an exercise price determined
either by the plan or equal to the fair market value of the Cytogen Common Stock
at the date of grant. Under certain circumstances, vesting may accelerate.
Activity under these plans was as follows:
F-17
Weighted Average Aggregate
Number of Price Range Exercise Price Exercise
Cytogen Options Per Share Per Share Price
--------------- --------------- ---------------- -----------
Balance at December 31, 1999 508,000 $ 7.00 - 166.30 $20.17 $10,248,263
Granted 134,050 24.70 - 169.38 63.64 8,530,540
Exercised (134,344) 8.30 - 166.30 23.90 (3,210,282)
Cancelled (38,077) 9.50 - 169.38 26.91 (1,024,568)
---------------------------------------------------------------
Balance at December 31, 2000 469,629 7.00 - 169.38 30.97 14,543,953
Granted 74,736 25.60 - 61.30 38.08 2,845,773
Exercised (13,090) 7.00 - 28.40 16.61 (217,478)
Cancelled (37,027) 8.30 - 169.38 43.95 (1,627,480)
---------------------------------------------------------------
Balance at December 31, 2001 494,248 7.00 - 169.38 31.45 15,544,768
Granted 102,063 3.48 - 23.30 4.32 440,688
Exercised (905) 8.13 - 20.00 18.87 (17,077)
Cancelled (123,300) 8.28 - 165.00 42.87 (5,285,848)
---------------------------------------------------------------
Balance at December 31, 2002 472,106 $3.48 - 169.38 22.63 $10,682,531
---------------------------------------------------------------
The following table summarizes information about Cytogen stock options at
December 31, 2002:
Outstanding Cytogen Stock Options Exercisable Cytogen Stock Options
-------------------------------------------------------------------- ---------------------------------
Weighted-Average
Remaining Weighted-Average
Range of Outstanding Contractual Weighted-Average Exercisable Exercise
Exercise Prices Shares Life Exercise Price Shares Price
--------------- ----------- --------------- ---------------- ----------- ---------------
$ 3.48 - 18.33 304,751 3.6 $ 8.66 252,538 $ 9.41
18.34 - 36.66 95,669 5.8 27.37 75,939 26.04
36.67 - 54.99 24,220 6.4 47.38 14,796 46.80
55.00 - 73.32 11,383 7.1 58.40 10,558 58.25
73.33 - 91.65 2,550 4.1 78.23 2,430 77.67
91.66 - 109.98 33,333 0.2 101.41 33,333 101.41
164.97 - 169.38 200 7.2 169.38 140 169.38
- ----------------------------------------------------------------- ------------------------
$ 3.48 - 169.38 472,106 4.1 $22.63 389,734 $23.75
================================================================= ========================
At December 31, 2002, Cytogen Options to purchase 389,734 shares of Cytogen
Common Stock were exercisable and 68,510 shares of Cytogen Common Stock were
available for issuance under approved plans of additional options that may be
granted under the plans.
Included in the above tables is an option granted to a key employee in 1998 to
purchase 135,000 shares of Cytogen Common Stock ("Performance Options"), at an
exercise price of $10.94 per share. The vesting of Performance Options were
subject to the completion of certain performance based milestones as determined
by the Board of Directors (the "Board"). The Company recorded approximately $1.1
million of deferred compensation upon the commencement of the vesting of the
Performance Options, which represented the fair market value of Cytogen's Common
Stock in excess of the exercise price of the option on the date which the Board
determined the performance milestones had been met. Deferred compensation was
amortized over the three-year vesting period of the Performance Options. Upon
the resignation of the key employee in December 2002, $354,000 of the deferred
compensation related to unvested options was reversed.
F-18
Not included in the above table are options to purchase 150,000 shares of our
common stock granted in 2002 to our executive officer outside any of the
Company's approved stock option plans, at an exercise price of $3.54 per share.
This option has three separate and equal traunches which will each vest based
upon the achievement of certain milestones that will be established by the
Company's Board of Directors. If the fair market value of the common stock is
greater than the exercise price of the option when such milestones are met, the
Company will record compensation expense to be recognized over the vesting
period of such options, which will be established by the Board of Directors.
AxCell, a subsidiary of Cytogen Corporation, also has a stock option plan that
provides for the issuance of incentive and non-qualified stock options to
purchase AxCell Common Stock ("AxCell Options") to employees, for which
2,000,000 shares of AxCell common stock have been reserved. In 2002, the Company
granted 20,000 shares of AxCell Common Stock to members of AxCell's Scientific
Advisory Board. The Company recorded $93,000 of expense related to these grants,
based upon the estimated fair value of those shares on the date of grant. As of
December 31, 2002, 8,035,000 shares of AxCell Common Stock are outstanding;
8,000,000 of which are held by Cytogen. AxCell options are granted with an
exercise term of 10 years and generally become exercisable in installments over
periods of up to 5 years. The Company granted AxCell Options to purchase
183,035, 438,365 and 0 shares of AxCell Common Stock during 2002, 2001 and 2000,
respectively. The weighted average exercise price per share for all outstanding
options was $3.52 in 2002 and $3.69 in 2001. As of December 31, 2002, options to
purchase 190,531 shares of AxCell Common Stock were outstanding, of which 85,537
shares were exercisable and 1,794,469 shares were available for future grant.
During 2001, in connection with the grant of AxCell Options, the Company
recorded deferred compensation of $241,000, representing the estimated fair
value of AxCell Common Stock in excess of the exercise price of the options on
the date such options were granted. The deferred compensation is being amortized
over the vesting period of the options. Due to employee terminations, primary as
a result of the restructuring at AxCell, $79,000 of deferred compensation
related to unvested options was reversed.
The Company adopted an employee stock purchase plan under which eligible
employees may elect to purchase shares of Cytogen Common Stock at the lower of
85% of fair market value as of the first trading day of each quarterly
participation period, or as of the last trading day of each quarterly
participation period. In 2002, 2001 and 2000, employees purchased 4,911, 1,287
and 3,239 shares, respectively, for aggregate proceeds of $24,000, $28,000 and
$80,000, respectively. The Company has reserved 30,639 shares for future
issuance under its employee stock purchase plan.
The weighted average fair value of the options granted under the Cytogen stock
option plans during 2002, 2001 and 2000 is estimated as $3.70, $30.74 and $54.01
per option, respectively, on the date of grant using the Black-Scholes option
pricing model with the following assumptions for 2002, 2001 and 2000: dividend
yield of zero, volatility of 143.46%, 124.95% and 120.39%, respectively,
risk-free interest rate of 2.94%, 4.55% and 5.98%, respectively, and an expected
life ranging from 4 to 5 years. The average fair value per option ascribed to
the employee stock purchase plan during 2002, 2001 and 2000 is estimated at
$5.72, $14.73 and $13.53, respectively, on the date of grant using the
Black-Scholes option pricing model with the following assumptions for 2002, 2001
and 2000: dividend yield of zero, volatility of 20.83%, 125.41% and 109.83%,
respectively, risk free interest rate of 1.67%, 4.12% and 5.52%, respectively,
and expected life of three months. The weighted average fair value of AxCell
Options granted during 2002 and 2001 is estimated at $4.16 and $4.06,
respectively, on the date of grant using the Black-Scholes pricing model with
the following assumptions for 2002 and 2001: dividend yield of zero, volatility
of 142.07% and 124.91%, respectively, risk-free interest rate of 4.02% and
4.59%, respectively, and an expected life of 5 years.
As of December 31, 2002, the Company has outstanding warrants to purchase 32,363
shares of Common Stock, at exercise prices ranging from $16.25 to $49.80 per
share. The warrants are exercisable through November 2004.
13. RELATED PARTY TRANSACTION
Consulting services have been provided to the Company under an agreement with
the Chairman of the Board of Directors related to time spent in that function on
Company matters. Fees and expenses under this agreement were $52,000, $53,000
and $54,000 in 2002, 2001 and 2000, respectively.
14. RETIREMENT SAVINGS PLAN
The Company maintains a defined contribution plan for its employees. The
contribution is determined by the Board of Directors each year and is based upon
a percentage of gross wages of eligible employees. The plan provides for vesting
over four years, with credit given for prior service. The Company also makes
contributions under a 401(k) plan in amounts which match up to 50% of the salary
deferred by the participants. Matching is capped at 6% of deferred salaries.
Total expense was $98,000, $140,000 and $95,000 for 2002, 2001 and 2000,
respectively.
F-19
15. INCOME TAXES
As of December 31, 2002, Cytogen had federal net operating loss carryforwards of
approximately $264 million. The Company also had federal and state research and
development tax credit carryforwards of approximately $7.1 million. These net
operating loss and credit carryforwards have begun to expire and will continue
to expire through 2022. In addition, certain operating loss and credit
carryforwards began to expire in 1995.
The Tax Reform Act of 1986 contains provisions that limit the utilization of net
operating loss and tax credit carryforwards if there has been an "ownership
change". Such an "ownership change", as described in Section 382 of the Internal
Revenue Code may limit the Company's utilization of its net operating loss and
tax credit carryforwards.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Based on the Company's net
loss before income taxes during 2002, 2001 and 2000, the Company would have
recorded a tax benefit. During 2002, 2001 and 2000, there were increases of
$3,529,000, $6,926,000 and $8,880,000, respectively in the valuation allowance,
due to the Company's loss history, and uncertainty regarding the realization of
deferred tax assets. These increases to the valuation allowance reduced the
actual benefit to zero. Deferred tax assets have been fully reserved as of
December 31, 2002 and 2001.
A portion of the Company's net operating loss carryforward relates to tax
deductions from stock option exercises and disqualifying dispositions that would
be accounted for as capital contributions for financial reporting purposes to
the extent such deductions could be utilized by the Company.
2002 2001
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 89,859,000 $ 81,860,000
Capitalized research and development expenses 7,396,000 11,808,000
Research and development credit 7,075,000 6,800,000
Acquisition of in-process technology 977,000 720,000
Other, net 9,148,000 9,738,000
------------- -------------
Total deferred tax assets 114,455,000 110,926,000
Valuation allowance (114,455,000) (110,926,000)
------------- -------------
Net deferred tax assets $ -- $ --
============= =============
In 1995, Cytogen acquired CytoRad and Cellcor, both of which had net operating
loss carryforwards. Due to Section 382 limitations, approximately $10 million of
CytoRad and $12.0 million of Cellcor carryforwards may be available to offset
future taxable income. A full valuation allowance was established on the
acquisition dates as realization of these tax assets is uncertain.
During 2001 and 2000, the Company sold New Jersey state operating loss
carryforwards and research and development credits, resulting in the recognition
of a $1.1 million and $1.6 million tax benefit, respectively. In addition, in
January 2003, the Company sold additional New Jersey State net operating loss
carryforwards which will result in $584,000 of income tax benefits, which will
be recorded during the first quarter of 2003.
16. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under non-cancellable
operating leases that expire at various times through 2006. Rent expense on
these leases was $832,000, $1.6 million and $1.3 million in 2002, 2001 and 2000,
respectively. Minimum future obligations under the operating leases are $1.8
million as of December 31, 2002 and will be paid as follows: $837,000 in 2003,
$616,000 in 2004, $291,000 in 2005 and $103,000 in 2006. In addition, the
Company has an agreement to receive annual sublease income of $54,000 in 2003,
2004 and 2005 and $36,000 in 2006.
The Company is obligated to make minimum future payments under manufacturing and
research and development contracts that expire at various times. As of December
31, 2002, the minimum future payments under contracts are $1.3 million in 2003,
$197,000 in 2004 and $130,000 each year from 2005 to 2018. In addition, the
Company is obligated to pay milestone payments upon achievement of certain
milestones and royalties on revenues from commercial product sales including
certain guaranteed minimum payments.
F-20
In subsequent periods, we expect to provide funding for the development of the
PSMA technologies through our joint venture with Progenics at even higher levels
than the current year. Such funding amount may vary dependent upon, among other
things, the results of the clinical trials and research and development
activities, competitive and technological developments, and market
opportunities.
On March 17, 2000, Cytogen was served with a complaint filed against the Company
in the United States Federal Court for the District of New Jersey by M. David
Goldenberg ("Goldenberg") and Immunomedics, Inc. (collectively "Plaintiffs").
The litigation claims that ProstaScint infringes a patent purportedly owned by
Goldenberg and licensed to Immunomedics. The Company believes that ProstaScint
does not infringe this patent, and that the patent is invalid and unenforceable.
The patent sought to be enforced in the litigation has now expired; as a result,
the claim even if successful would not result in an injunction barring the
continued sale of ProstaScint or affect any other of Cytogen's products or
technology. In addition, the Company has certain rights to indemnification
against litigation and litigation expenses from the inventor of technology used
in ProstaScint, which may be offset against royalty payments on sales of
ProstaScint. On December 17, 2001, Cytogen filed a motion for summary judgment
of non-infringement of the asserted claims of the patent-in-suit. The Plaintiffs
opposed that motion and filed their own cross-motion for summary judgment of
infringement. On July 3, 2002, the Court denied both parties' summary judgment
motions, with leave to renew those motions after presenting expert testimony and
legal argument based upon that testimony. Subsequently, the Court heard expert
testimony and further argument, and received further briefing, and the parties'
renewed summary judgment motions are pending. The Court has not indicated when
it expects to issue a ruling. However, given the uncertainty associated with
litigation, the Company cannot give any assurance that the litigation could not
result in a material expenditure to the Company.
17. CONSOLIDATED QUARTERLY FINANCIAL DATA - UNAUDITED
The following table provides quarterly data for the years ended December 31,
2002 and 2001.
Three Months Ended
-------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2002 2002 2002 2002
-------- -------- --------- --------
(amounts in thousands except per share data)
Total revenues ............................ $ 3,296 $ 3,167 $ 3,101 $ 3,367
Total operating expenses .................. 8,329 6,404 6,588 6,894
------- ------- ------- -------
Operating loss .................. (5,033) (3,237) (3,487) (3,527)
Other income (loss), net .................. 35 30 (484) 4
------- ------- ------- -------
Net loss .................................. $(4,998) $(3,207) $(3,971) $(3,523)
======= ======= ======= =======
Basic and diluted net loss per share ...... $ (0.62) $ (0.39) $ (0.46) $ (0.40)
======= ======= ======= =======
Weighted average common share outstanding.. 8,122 8,308 8,660 8,758
======= ======= ======= =======
Product related gross margin .............. $ 2,027 $ 1,861 $1,882 $ 1,950
F-21
Three Months Ended
---------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2001 2001 2001 2001
--------- -------- --------- --------
(amounts in thousands except per share data)
Total revenues ................................ $ 3,014 $ 2,856 $ 2,821 $ 3,066
Total operating expenses ...................... 5,840 6,053 6,718 7,206
-------- ------- ------- -------
Operating loss ....................... (2,826) (3,197) (3,897) (4,140)
Other income, net ............................. 172 112 118 455
-------- ------- ------- -------
Loss before income taxes ............. (2,654) (3,085) (3,779) (3,685)
Income tax benefit ............................. - - - (1,103)
-------- ------- ------- -------
Net loss .................................. $ (2,654) $(3,085) $(3,779) $(2,582)
======== ======= ======= =======
Basic and diluted net loss per share ...... $ (0.35) $ (0.40) $ (0.48) $ (0.33)
======== ======= ======= =======
Weighted average common share outstanding.. 7,624 7,744 7,887 7,890
======== ======= ======= =======
Product related gross margin .............. $ 1,624 $ 1,955 $ 1,175 $ 1,875
18. MATRITECH, INC.
In October 2002, the Company entered into a five-year agreement with Matritech
Inc. to be the sole distributor for Matritech's NMP22 BladderChek test to
urologists and oncologists in the United States. Retention of exclusivity rights
depends upon meeting certain minimum annual purchases. NMP22 BladderChek is a
point-of-care antibody-based diagnostic test for bladder cancer detection.
During November 2002, the Company began promoting NMP22 BladderChek to
urologists in the United States using its in-house sales force. The Company paid
Matritech $150,000 upon the execution of the agreement, which was recorded as
other assets in the accompanying consolidated balance sheet and is being
amortized over the five year estimated performance period of the agreement.