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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission file number 333-02015
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.)
600 College Road East, CN5308, Princeton, New Jersey 08540-5308
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (609) 987-8200.
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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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. [ ]
The aggregate market value of the registrant's shares of Common Stock
held by non-affiliates of the registrant on February 27, 1998, based on
$1.4375 per share, the last reported sale price on the NASDAQ National Market
on that date, was $68,786,359. The determination of affiliate status for
this purpose is not necessarily a conclusive determination for other
purposes.
The number of shares of Common Stock outstanding as of February 27, 1998 was
53,831,046 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Form 10-K
Document Part
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Portions of the definitive Proxy III
Statement with respect to the 1998
Annual Meeting of Stockholders
(hereinafter referred to as the "Proxy
Statement"), but specifically excluding
the sections titled "Compensation
Committee Report on Executive
Compensation" and "Performance Graph",
which shall not be deemed to be
incorporated by reference herein.
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PART I
Item 1. Business
General
CYTOGEN Corporation ("CYTOGEN" or the "Company") is a
biopharmaceutical company engaged in the development,
commercialization and marketing of products to improve diagnosis
and treatment of cancer and other diseases. The Company introduced
to the market during 1997 its two principal products, ProstaScint
(kit for the preparation of Indium In111 Capromab Pendetide) and Quadramet
(Samarium Sm153 Lexidronam Injection), each of which have been
approved by the U.S. Food and Drug Administration ("FDA").
ProstaScint has been approved as a diagnostic imaging agent for
prostate cancer, the most frequently diagnosed malignancy and
second leading cause of cancer death in men. Quadramet has been
approved by the FDA for the treatment of bone pain due to cancers
that have spread to the skeleton and that can be visualized on a
bone scan. The Company's OncoScint CR/OV imaging agent is also
approved and marketed as a diagnostic imaging agent for colorectal
and ovarian cancer. The Company believes that its products
represent a significant improvement over existing technologies
because of their ability to provide improved diagnostic information
and/or treatment in a site-specific manner with relatively low
levels of toxicity. The Company also develops other products and
technologies, directly and through its subsidiaries, and in
collaborations with third parties. The Company's current
subsidiaries are AxCell Biosciences Corporation ("AxCell"),
Cellcor, Inc. ("Cellcor"), and Targon Corporation ("Targon").
CYTOGEN was incorporated in Delaware in 1981 and each of its
subsidiaries is a Delaware corporation. Unless the context
otherwise indicates, as used herein, the term "Company" refers to
CYTOGEN and its subsidiaries, taken as a whole.
Historically, the Company has emphasized research and
development of a broad array of potential products, based on
monoclonal antibodies and other technologies. Having identified
and commercialized products which the Company believes enjoy
substantial potential, the Company intends to devote its primary
efforts to the marketing of ProstaScint and Quadramet so as to
increase revenue and achieve profitability. The Company also
intends to conduct or sponsor clinical studies to evaluate existing
products in additional indications, and for expansion of
ProstaScint and other products into foreign markets. In addition,
the Company intends to emphasize development of technology with
near term commercial significance and to review all current
research and development programs to assess the potential of such
research and development activities to enhance the Company's value
for its stockholders.
The Company's strategic plan calls for expanding the current
product portfolio through the continued in-licensing of additional
products and related technologies, such as Quadramet, the
acquisition of other companies with related or complementary
products, technologies and/or services, the development of products
utilizing its Genetic Diversity Library ("GDL") technology, and
strategic alliances. No prediction can be made, however, as to
when or whether CYTOGEN can accomplish these objectives or whether
accomplishment of these objectives will lead to new commercially
viable products or technologies. In addition, the Company's
efforts to develop or acquire new products will depend on its
available resources, the ability to commit resources to potential
products or strategic activities without an undue impact on current
operations or financial results, and whether or not such activities
in the near term would affect the marketing of the Company's
products or the efforts of management to commercialize the Company
successfully.
On March 25, 1998, the Company announced that, based on an
ongoing review and prioritization of its business opportunities, it
will delay submission of a Biologics License Application ("BLA")
for its Autologous Lymphocyte Therapy ("ALT") for metastatic renal
cell carcinoma ("mRCC"). CYTOGEN is currently seeking potential
partners for future funding and development of ALT. The Company
will also consider the sale of Cellcor to another healthcare
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company. The Company anticipates that this action will reduce
operating expenses significantly and permit allocation of
additional resources to other Company priorities. ALT is a
proprietary cellular therapy which has been under development by
Cellcor for the treatment of mRCC, a life threatening kidney
cancer, for which adequate therapies do not exist. Cellcor
completed pivotal Phase III clinical trials of ALT in mRCC patients
in January 1997, and the Company believes the results of the trials
are favorable.
On March 31, 1998, Elan Corporation plc ("Elan") exchanged its
shares of the Company's Series A Convertible Preferred Stock
("Series A") and thereby acquired 50% of CYTOGEN's 99.75% ownership
of Targon, as contemplated by the terms of such Series A. CYTOGEN
is negotiating to divide Targon assets and liabilities between the parties
in keeping with CYTOGEN's continuing review of its business opportunities
and use of funds. See "Targon Corporation".
Product Contribution
The Company's currently marketed products and other sources of
income constitute a single business segment. No significant history
of revenues exists with respect to any of the Company's products.
ProstaScint and Quadramet were introduced to the market during the
first half of 1997 and account for a significant percentage of the
Company's product related revenues and total revenues and are
expected to do so for the foreseeable future. For the year ended
December 31, 1997, revenues related to ProstaScint and Quadramet
accounted for approximately 86% of the Company's product related
revenues. ProstaScint sales have experienced continued growth
since product launch, with sales increases during each successive
quarter. However, there can be no assurance that such growth will
continue indefinitely. Quadramet sales during the period from its
launch have been below levels of minimum royalty payments due from
its commercial partner, the DuPont Merck Pharmaceutical Company
through its radiopharmaceutical division ("DuPont Merck"). Growth
of Quadramet sales were initially slow because of the need for
hospitals to obtain license amendments under federal and state law
to receive and handle this new radioactive product. In addition,
initial marketing efforts by DuPont/Merck have been directed to
nuclear medicine physicians who directly administer the product to
patients. While management believes this sales effort was
necessary to generate product awareness, the Company believes that
marketing to oncologists and urologists, the primary care-givers
for patients who may benefit from Quadramet, is necessary for
adequate penetration into the market. The Company and DuPont Merck
have begun discussions as to such marketing efforts. There can be
no assurance that ProstaScint and Quadramet will achieve market
acceptance on a timely basis, or at all. The Company's success
will be dependent upon the acceptance of ProstaScint and Quadramet
by the medical community, including health care providers, such as
hospitals and physicians, and third-party payors (such as
employers, insurers, and health maintenance organizations), as
safe, effective and cost efficient alternatives to other available
treatment and diagnostic protocols. The failure of ProstaScint or
Quadramet to achieve market acceptance would have a material
adverse effect on the Company's business, financial condition and
results of operations. See Item 7, Results of Operations --
Revenues and Note 7 to the Consolidated Financial Statements.
Cancer Diagnostic Imaging Products
Currently, the Company's cancer diagnostic products,
ProstaScint and OncoScint, consist of monoclonal antibody-based
imaging agents for prostate, colorectal and ovarian cancers. The
Company's imaging products utilize CYTOGEN's proprietary targeted
delivery system, employing whole monoclonal antibodies, to deliver
the diagnostic radioisotope indium-111 to malignant tumor sites.
The imaging products are supplied to hospitals and central
radiopharmacies without the radioisotope. A radioisotope is an
element which, because of nuclear instability, undergoes
radioactive decay, thereby emitting radiation. Prior to patient
administration, the radioisotope is added to the product by the
radiopharmacist using a simple liquid transfer procedure developed
by CYTOGEN, thereby creating the radiolabeled monoclonal antibody
product.
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During an imaging procedure, the radiolabeled monoclonal
antibody product is administered intravenously into the patient.
The antibody travels through the body seeking out and binding to
tumor sites. The radioactivity from the isotope that has been
attached to the antibody can be detected from outside the body by
a gamma camera. The resultant image identifies the existence,
location and extent of disease in the body. Based on clinical
studies conducted to date by physicians on behalf of CYTOGEN, the
imaging agents may provide new and useful information not available
from other diagnostic modalities regarding the existence, location
and extent of the disease throughout the body. CYTOGEN believes
that this information has the potential to affect the way
physicians manage their patients' individual treatments. CYTOGEN
also believes that, because its products use a very low dose of one
milligram or less of antibody conjugate per administration, the
products have the additional advantages of low manufacturing cost
and ease of administration.
ProstaScint. ProstaScint is a diagnostic imaging agent
utilizing a monoclonal antibody which targets prostate specific
membrane antigen ("PSMA"), a protein expressed by prostate cancer
cells and, to a lesser extent, by the normal prostate epithelial
cells. The antibody utilized in ProstaScint is exclusively
licensed to CYTOGEN. In 1996, CYTOGEN received FDA approval to
market ProstaScint in two clinical settings: first, as a
diagnostic imaging agent in newly-diagnosed patients with 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 second, for use in
post-prostatectomy patients in whom there is a high suspicion that
the cancer has recurred. The risk for both newly-diagnosed and
recurrent disease patients is determined by several factors,
including the stage of the disease when initially diagnosed,
microscopic evaluation of the primary tumor, and the prostate
specific antigen ("PSA") level. PSA is a widely used blood test
currently used for detecting and monitoring prostate cancer. In
February 1997, CYTOGEN announced the commercial launch of
ProstaScint which is co-marketed with the urological division of C.
R. Bard, Inc. ("Bard").
According to the American Cancer Society, about 185,000
American men will be diagnosed with prostate cancer in 1998, of
whom approximately 20% will be at high risk for metastatic spread
of their disease. In addition, estimates indicate that in 1998,
40,000 to 60,000 patients previously treated for prostate cancer
will develop symptoms of recurrent cancer which has not yet
progressed to the point of skeletal involvement. Together, the
Company believes that there are approximately 75,000 to 100,000
patients with prostate cancer in the U.S. that are candidates,
based on current indications, to receive a ProstaScint scan each
year.
ProstaScint is prepared by combining the antibody conjugate
specific to PSMA with the radioisotope Indium-111 just prior to
intravenous administration. Due to the selective expression of
PSMA, the ProstaScint imaging procedure can detect the spread of
prostate cancer. In addition, since the patterns of spread of
prostate cancer can vary substantially from one patient to another.
By identifying the unique pattern of metastases in a particular
patient, the ProstaScint scan aids physicians in the selection of
appropriate treatments to meet the special needs of that patient.
The Company believes that ProstaScint has clinical utility in
newly diagnosed patients with prostate cancer who are thought to be
candidates for therapies such as radical prostatectomy, external
beam radiation therapy, or brachytherapy (radioactive seed
implants). Before a physician decides upon a course of therapy, it
is critical to determine whether the prostate cancer has spread to
other parts of the body, thereby dramatically reducing the
likelihood of successful treatment. Studies from The Johns Hopkins
University and Stanford University Medical Center have shown that
almost one-third of the prostate cancer patients treated at these
two institutions who have undergone prostatectomy or radiation
therapy experienced disease recurrence within five years following
treatment, and half of the patients had recurrence of their disease
within ten years. Prior to the availability of ProstaScint,
determining whether newly diagnosed disease was limited to the
prostate or had spread distantly was based upon statistical
estimates derived from conventional imaging studies as well as data
gathered from examination of tumor biopsies and the patient's serum
level of PSA. These conventional imaging methods, such as Computed
Tomography ("CT"), Magnetic Resonance Imaging ("MRI") and
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transrectal ultrasound ("TRUS"), all image on the basis of anatomic
structure (form) and therefore require that the normal structures
(i.e. lymph nodes) become enlarged or altered in shape to indicate
suspicion of malignancy. The ProstaScint scan images disease based
upon function (expression of the PSMA molecule) and therefore can
image low volume disease not detectable with conventional
procedures. A clear understanding of the existence and location of
any prostate cancer metastasis is crucial in selecting the most
appropriate form of treatment to be administered. The Company
believes that ProstaScint provides substantially increased
sensitivity of tumor detection in patients who are candidates for
its use in comparison with alternative means of detection.
In the U.S., following prostatectomy, prostate cancer patients
are monitored to ascertain changes in the level of PSA. In this
setting, a rise in PSA is strong and presumptive evidence of
recurrence of the patient's prostate cancer. Knowledge of the
extent and location of disease is a critical consideration in
choosing the most appropriate form of treatment. Patients whose
disease is confined to the prostatic fossa may have the potential
to be cured by receiving "salvage" radiation therapy; patients with
more widespread disease would not benefit from such an approach and
instead should receive systemic treatment such as hormonal therapy.
The Company believes that the results of a ProstaScint scan
performed prior to radiation therapy to the pelvis may help predict
which recurrent disease patients are likely to benefit from salvage
radiation therapy. This distinction is currently not possible using
any other technique and approximately 75% of recurrent disease
patients currently treated with salvage radiation therapy fail to
achieve long-term control of their disease, since the cancer has
already metastasized to other points in the body. A prospective
study is planned to evaluate ProstaScint in this setting.
ProstaScint Manufacturing, Marketing, Sales and Distribution
ProstaScint is co-marketed with Bard in the U.S. Bard
markets a broad range of urology products exclusively to the
urology community and is responsible for the promotion of
ProstaScint to urologists, the group of physicians most likely to
order or generate referrals for ProstaScint scans. CYTOGEN focuses
its marketing activities on the training of the nuclear medicine
imaging community, which includes those physicians most likely to
perform ProstaScint scans. In addition, CYTOGEN is responsible for
manufacturing and distributing ProstaScint as well as instructing
physicians in its proper use.
The co-marketing agreement between Bard and CYTOGEN provides
that Bard will make payments to CYTOGEN upon the occurrence of
certain milestones and Bard will receive performance-based
compensation for its services. The agreement has an initial term
of ten years and is subject to renewal.
In 1997, CYTOGEN entered into a distribution agreement which
granted Faulding (Canada), Inc. ("Faulding") the exclusive right to
distribute and sell ProstaScint in Canada.
ProstaScint is a "technique-dependent" product that requires
a high degree of proficiency in nuclear imaging, as well as a
thorough appreciation of the information the scan can provide. The
Company believes that this information regarding the existence,
location and extent of disease has the potential to assist a
physician in making appropriate patient management decisions.
CYTOGEN has established a network of accredited nuclear medicine
imaging centers through its Partners in Excellence ("PIE ") program
(each accredited center, a "PIE Site"). Each PIE Site receives
rigorous training, undergoes proficiency testing, and is subject to
ongoing quality assurance protocols. To qualify as a PIE Site,
each center must be certified as proficient in the interpretation
of ProstaScint scans by the American College of Nuclear Physicians.
This program was developed in preparation for the launch of
ProstaScint in February 1997. 75 PIE Sites were established at
time of launch. At year end 1997, 175 PIE Sites were in place,
including a substantial majority of the National Cancer Institute
designated Comprehensive Cancer Centers. ProstaScint may only be
administered by PIE Sites.
The Company plans to add PIE Sites on a selective basis in
order to ensure that new sites are adequately qualified and
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committed to a minimum number of scans for training purposes. By
early 1999, the Company is required by its co-marketing agreement
with Bard to have at least 220 PIE Sites established. The Company
expects that it will be able to comply with this requirement.
Currently, a backlog of six to nine months exists with respect to
facilities requesting certification as PIE Sites because the number
of nuclear imaging centers requesting certification exceeds the
rate at which the Company is establishing new PIE Sites. The
Company believes that some indeterminable level of sales may be
lost as a result of the backlog, however, the Company also believes
that the maintenance of quality of the sites is significant to the
success of the product. At the present time, the Company incurs
the expense of qualification of each site.
The Company currently employs 13 field representatives, each
of whom is a certified or registered nuclear medicine technologist
with experience working in a nuclear medicine department. These
field representatives assist in training of physicians and
qualification of nuclear imaging centers as PIE Sites, and provide
Bard marketing representatives with technical information and
support of the product and its usage.
The Company believes that approximately 80% of patients with
prostate cancer are managed by urologists with the remainder being
managed primarily by medical and radiation oncologists. Through a
Joint Marketing Committee, CYTOGEN and Bard coordinate their
respective educational and promotional activities to ensure that
PIE Sites receive appropriate patient referrals from urologists and
that future PIE Sites are located in medical facilities served by
urologists who are ordering the ProstaScint test. Bard and the
Company work together to reach managed care organizations and other
payor groups to ensure reimbursement and insurance coverage and
patient awareness. Medical and radiation oncologists also order
diagnostic procedures such as ProstaScint for advanced prostate
cancer patients and this segment of the medical community is being
addressed directly by various promotional efforts by CYTOGEN.
OncoScint CR/OV. OncoScint CR/OV received FDA approval in the
U.S. in December 1992. This product was initially approved for
single use with other appropriate, commercially available
diagnostic tests, to locate malignancies outside the liver in
patients with known colorectal or ovarian cancer. In November
1995, FDA approved an expanded indication allowing for repeat
administration of OncoScint CR/OV. OncoScint CR/OV is also
approved for sale in eleven European countries and Canada. To
date, OncoScint has not enjoyed substantial sales. The Company
believes this product is effective in imaging both primary and
metastatic colorectal and ovarian tumors, however, this information
has not yet been widely used by physicians for patients with these
conditions. The Company is currently funding an investigator-initiated
study designed to demonstrate the benefit in performing an OncoScint
study as soon as an initial diagnosis of ovarian cancer is made to
determine which patients would benefit by a more aggressive initial
treatment of their disease. The Company believes a more aggressive
treatment at an earlier date could provide the potential for improved
prognoses for the patients following diagnosis of their malignancy.
Promotion of OncoScint CR/OV involves several different
physician audiences, including those who prescribe imaging
procedures for their patients as well as those who obtain and
interpret the image. Referring physicians are likely to be
surgeons and oncologists. OncoScint CR/OV, like ProstaScint, is
technique dependent, requiring training and expertise in reviewing
and interpreting images. Acceptance by the medical community of
the benefits of OncoScint CR/OV is dependent in part on the degree
to which physicians acquire such skills. Since May 1994, CYTOGEN
has been the sole marketer of OncoScint CR/OV in the U.S.
In 1995, CYTOGEN entered into a distribution agreement (the
"Faulding Agreement") with Faulding granting to Faulding the
exclusive right to distribute and sell OncoScint CR/OV in Canada.
Faulding received regulatory approvals to market the product in
Canada in January 1998. The Faulding Agreement provides for
payments for minimum annual purchases of OncoScint CR/OV by
Faulding, and for certain royalties based upon net sales, if any,
of OncoScint CR/OV by Faulding. The initial term of the Faulding
Agreement is seven years.
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In 1996, CYTOGEN entered into a distribution agreement (the
"CISbio Agreement") with CIS biointernational ("CISbio"), granting
to CISbio the exclusive right to distribute and sell OncoScint in
all the countries of the world, except for the U.S. and Canada.
CISbio has received licenses to market OncoScint CR/OV in eleven
European countries and has established Free Sales Certificates in
13 additional countries. The CISbio Agreement provides for minimum
annual purchases of the components of OncoScint CR/OV by CISbio,
and for certain royalties based upon net sales, if any, of
OncoScint CR/OV by CISbio. The initial term of the CISbio
Agreement is seven years following the first commercial sale of the
product by CISbio.
Cancer Therapeutic Products
Quadramet. Quadramet, a proprietary cancer therapeutic
agent, received marketing approval from the FDA in March 1997 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
("Sm-153"), which delivers cell-killing beta radiation, and a
targeting agent, EDTMP, which guides the drug to sites of new bone
formation. According to American Cancer Society and National
Cancer Institute statistics, approximately 600,000 new cases of
cancer that typically metastasize to bone occurred in the U.S. in
1997. The Company believes that over 200,000 patients each year
will suffer from bone pain that is severe enough to require
palliative intervention.
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 results in a rim of
newly formed bone which encircles the metastatic tumor. The
continued growth from the expanding tumor causes pressure which the
patient perceives as pain at the site of such metastasis. By
targeting these areas of bone formation, Quadramet delivers site-specific
radiation, which may result in significant pain reduction. As such
areas of tumor involvement expand, they weaken the bone and
eventually lead to fracture of the affected bone. The medical
complications associated with bone metastases may also include bone
fractures, spinal cord compression and paralysis.
Current treatments for severe cancer bone pain include
narcotic analgesics, external beam radiation therapy, Metastron ,
a radiopharmaceutical product of Nycomed Amersham plc ("Amersham"),
and Novantrone , a chemotherapeutic product of Immunex Corporation
("Immunex"). External beam radiation therapy, while usually
effective in relieving pain, is most appropriately used to treat
solitary lesions. In addition, retreatment of painful areas is
often not feasible due to unacceptable toxicities to neighboring
organs and tissues. Treatments are generally administered in five
to ten or more sessions over two to three weeks necessitating
frequent visits by the patient and contributing to the high cost of
this procedure.
Patients with severe cancer bone pain, especially those with
multiple bone metastases, are generally treated with narcotic
analgesics. These drugs work by masking the brain's ability to
perceive the pain induced by the tumors as they expand and grow
within the bone. While narcotic analgesics can be effective in
addressing cancer-related bone pain, their prolonged and escalating
use can result in undesirable side effects, including nausea and
vomiting, sedation, confusion and severe constipation.
Novantrone, a chemotherapeutic drug frequently used in the
management of acute non-lymphocytic leukemia, is also marketed by
Immunex for use in combination with steroids for pain related to
hormone refractory prostate cancer. The Company believes that
Quadramet offers significant advantages over Novantrone, including
lower toxicity, fewer side effects, and more rapid onset of pain
relief. However, Novantrone is well known to oncologists because
of its other applications and this may provide some marketing
advantages to Immunex.
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The only other therapeutic radiopharmaceutical approved by the
FDA for the treatment of cancer bone pain, Metastron, contains a
non-imageable radionuclide, Strontium-89. This radionuclide decays
with a very long radioactive half-life (approximately 50 days),
resulting in a delayed onset of pain relief, generally several
weeks after administration. Further, the long half-life causes a
prolonged and variable degree of bone marrow suppression.
Prolonged bone marrow toxicity limits the usage of other potential
therapies such as chemotherapy and radiation therapy, as well as
the ability to administer additional doses of this drug.
Quadramet has numerous characteristics which the Company
believes are advantageous for the treatment of cancer bone pain,
including early onset of pain relief; predictability of recovery
from bone marrow toxicity; ease of administration; and length of
pain relief. 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 high and
very selective uptake in bone with little or no detectable
accumulation in soft tissue. The fraction of the injected dose
that is not taken up in the skeleton is excreted in an unmodified
form in the urine over a period of four to six hours. Further
studies are planned to evaluate the safety and efficacy of repeat
dosing.
CYTOGEN intends to expand the use of Quadramet within the
currently approved indication and extend its use to new indications
by performing additional clinical trials and seeking regulatory
approvals. Clinical trials are either planned or currently
underway to evaluate the use of Quadramet in combination with other
cancer therapies (such as external beam radiation therapy), as a
potential therapeutic agent for treatment of cancer and as a
therapy for children with malignancies which have either arisen in
bone or have spread to bone. Future trials are also planned to
evaluate the extension of the use of Quadramet to patients whose
bone metastases can be visualized on conventional bone scan, but
who are not yet experiencing pain from these metastases. The
Company's continuation of these trials will depend upon their
progress success and on the ability to obtain funding from its
existing or potential marketing partners.
The first non-cancer use of Quadramet under investigation is
the treatment of patients with refractory rheumatoid arthritis.
These patients often demonstrate enhanced uptake of radionuclide in
affected joints on diagnostic bone scans. In such cases, the
Company believes Quadramet can target the diseased joints and
provide a high but localized dose of radiation to the area.
Published studies by foreign investigators have suggested benefits
from Quadramet in the relatively small numbers of rheumatoid
arthritis patients studied. CYTOGEN is currently conducting a
Phase I/II dose escalation study of Quadramet to evaluate the
safety and preliminary efficacy of Quadramet in refractory
rheumatoid arthritis patients.
Quadramet Manufacturing, Marketing, Sales and Distribution
The Company acquired the rights to Quadramet under a license
from The Dow Chemical Company ("Dow") and has entered into an
exclusive agreement (the "DP/Merck Agreement") with the
radiopharmaceutical division of DuPont Merck pursuant to which
DuPont Merck manufactures, markets, sells and distributes Quadramet
in North, South and Central America. DuPont Merck, a privately
held joint venture between Merck & Co., Inc. and E.I. DuPont de
Nemours and Company, is the leading supplier of radiopharmaceutical
products in the U.S. In addition to its own field staff, DuPont
Merck collaborates in the distribution of products with Syncor
International, a large domestic radiopharmacy chain. Quadramet
was launched in May 1997.
In its agreement with DuPont Merck, the Company may co-promote
Quadramet at its own expense to the nuclear imaging community. The
Company maintains direct input into the marketing of Quadramet
through participation in a Joint Marketing Committee ("JMC") which
includes two representatives from the Company and three from DuPont
Merck. The JMC is responsible for developing marketing strategies
and tactics, budgets, and resources allocations and for monitoring
progress in achieving sales and marketing objectives. During the
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first year of launch, Quadramet was marketed principally to the
nuclear medicine community, which administers the treatment to
patients. However, the treatment is more typically prescribed by
the caregiving physicians, including oncologists and urologists.
The Company believes that successful commercialization of Quadramet
will depend upon marketing to these referring physicians and that
efforts to reach these groups will require additional training and
commitment of resources by the Company's marketing partner and
additional marketing partners with sales forces experienced in
marketing products for pain management directly to the referring
physicians. The Company plans, along with DuPont Merck, to expand
the marketing program to address these issues, although no
assurances can be given as to the Company's ability to implement
this strategy successfully or as to the time frame within which
this strategy can be accomplished.
Pursuant to its agreement with DuPont Merck, CYTOGEN is
entitled to receive guaranteed minimum payments from DuPont Merck
over the three year period which began with the launch of Quadramet
in May 1997. The minimum payments are due on an annually
increasing basis through this period, with each annual installment
paid (net of royalties based on actual sales) to CYTOGEN sixty days
following the anniversary date of the product launch. To date,
sales have been substantially below the levels of guaranteed
minimum royalty payments.
The DP/Merck Agreement provides that CYTOGEN receives from
DuPont Merck research funding and milestone payments consisting of:
(i) $4.3 million to fund additional clinical programs to expand the
use and marketing of Quadramet, of which $1.3 million, $1.5 million
and $1.5 million were received in 1995, 1996 and 1997,
respectively; (ii) a $2.0 million milestone payment in 1997 when
Quadramet received FDA approval; and (iii) royalty payments based
on a percentage of Quadramet sales or guaranteed contractual
minimum payments, whichever is greater. During 1997, CYTOGEN
recorded $3.3 million in royalty revenues. The DP/Merck Agreement,
unless earlier terminated, expires on the later of twenty years
from the date of execution of the agreement or on the date of
expiration of the last to expire patent licensed thereunder.
Marketing
The Company has limited sales, marketing and distribution
capabilities. With respect to the sales, marketing and
distribution of Quadramet and the co-promotion of ProstaScint, the
Company is substantially dependent on the efforts of DuPont Merck
and Bard, respectively. See "ProstaScint Manufacturing, Marketing,
Sales and Distribution" and "Quadramet Manufacturing, Marketing,
Sales and Distribution". Failure to establish successfully and
maintain significant sales, marketing and distribution efforts,
either internally or through arrangements with third parties, would
be likely to have a material adverse effect on the Company's
business, financial condition and results of operations. The
Company anticipates that future products would require similar
marketing collaborations and upon which the Company would be
dependent for the success of any such products.
There can be no assurance that the Company will be able to
maintain its existing collaborative arrangements or enter into
collaborative and license arrangements in the future on acceptable
terms, if at all, that such arrangements will be successful, that
the parties with which the Company has or may establish
arrangements will perform their obligations under such
arrangements, or that potential collaborators will not compete with
the Company by seeking alternative means of developing products for
the indications targeted by the Company.
Product Development
AxCell Biosciences. AxCell, a wholly owned subsidiary of
CYTOGEN created in August 1996, utilizes GDL technology to support
advances in combinatorial chemistry, genomics and drug discovery.
AxCell has developed an integrated set of tools to map selective
protein-protein interactions and is using these tools to develop
10
an Inter-Functional Proteomic Database ("IFP-dBase"). The IFP-dBase
includes data relating to protein-protein interaction linked
to a variety of other relevant bioinformatic data. The Company
believes this informational database has potential value in the use
by scientists in the pharmaceutical industry as a means to validate
pharmaceutical targets. The Company believes such information will
be of value to pharmaceutical companies in conducting research on
new drugs.
AxCell is pursuing arrangements with software companies toward
development of a prototype bioinformatics interface for the IFP-dBase,
which could be introduced during 1998. The Company expects
that substantial funding will be required in order to develop the
prototype and to pursue further research to identify protein-protein
interactions which would be useful in and necessary to a
commercially viable bioinformatics database. Funding is being
sought from collaborators in the development of the AxCell program,
from venture capital funds, or from other sources, including
corporate resources if adequate to provide such funding. No
assurance can be provided that the program will be developed or
that CYTOGEN will retain substantially all ownership or even a
majority interest of AxCell.
ALT Treatment for mRCC. ALT treatment for mRCC (kidney cancer
which has spread to other parts of the body) is a proprietary
immunotherapy developed by Cellcor which uses a patient's own white
blood cells to augment his or her immune system and thereby treat
the cancer. In October 1995, patient accrual for the Phase III
pivotal clinical trial was completed and in January 1997, the trial
was completed. The Company believes the results of the clinical
trials are favorable, but it plans to defer the submission of a
BLA unless a corporate partner is obtained. Cellcor is actively
pursuing development and marketing collaborations in the U.S. and
Europe, as well as the possible sale of Cellcor. No assurance can
be given regarding the timing or success in developing such
collaborations or of a sale of this business to another healthcare
company.
Genetic Diversity Library Technology. Long-term research,
much of which is preliminary, is being conducted by CYTOGEN on the
GDL technology. The GDL program consists of research on long
peptides that fold to form three-dimensional structures. These
peptides, which are biologically produced, create vast, highly
diverse compound libraries. CYTOGEN believes that the ability of
these compounds to bind to predetermined sites may mediate certain
therapeutic or diagnostic effects more effectively than other
existing products. Unlike conventional small molecule drugs or
short peptides, long peptides can act more like proteins and can
fold to take on very precise biological functions such as specific
recognition units ("RUs"). Depending upon the application, these
RUs can act as receptors, as targeting agents, or ligands for
biological receptors. In certain applications, it may be more
advantageous to administer the synthetic gene ("SynGene") which
encodes for the RU. Such SynGene programs are at an early stage of
pre-clinical development.
In December 1995, CYTOGEN entered into a Research and
Development and Option Agreement with Elan for purposes of pursuing
the use of GDL peptides as targeting agents. By combining
CYTOGEN's technology with the oral drug delivery expertise of Elan,
the parties are seeking to develop enhanced oral drug delivery
systems. In January 1997, Elan and CYTOGEN announced that the
research program had identified a group of peptides which bind to
certain gastrointestinal receptors, and in animals, permit
transport of particles from the lumen of the small bowel to the
bloodstream. Elan exercised its option, and the parties entered
into a license agreement granting Elan worldwide rights to the GDL
technology for orally administered drugs that are transported
across the gastrointestinal epithelium, as well as rights to other
orally delivered drugs derived from the research program. The
benchmarks set by CYTOGEN and Elan in the research program were
substantially exceeded, indicating potential value of the
technology. Further developmental efforts are being discussed
between the parties.
CYTOGEN is the exclusive licensee of certain patent and patent
applications and technology owned by the University of North
Carolina at Chapel Hill covering the GDL technology. In addition,
CYTOGEN has filed its own patent applications in the U.S. and
certain foreign countries with respect to its GDL technology.
11
While a significant amount of basic research on the GDL
technology has been done by CYTOGEN, this technology is at an
earlier stage of development than the technology underlying the
monoclonal antibody-based products described above. CYTOGEN is
actively pursuing corporate alliances and basic research and
development agreements to support and advance the GDL technology
toward commercialization.
PSMA. In 1993, CYTOGEN and Memorial Sloan-Kettering Cancer
Center ("MSKCC") began a development program involving PSMA and
CYTOGEN's prostate cancer monoclonal antibody, CYT-351. PSMA is a
unique antigen expressed in prostate cancer cells and by the normal
prostate epithelial cells. In July 1996, a patent entitled
"Prostate-Specific Membrane Antigen" was issued to Sloan-Kettering
Institute for Cancer Research, an affiliate of MSKCC. In November
1996, CYTOGEN exercised its option for the exclusive license to
this technology.
In December 1996, CYTOGEN exclusively licensed the use of PSMA
in prostate cancer vaccines for certain immunotherapeutic
treatments of prostate cancer to Prostagen, Inc. ("Prostagen"), a
privately held company in New York. The agreement with Prostagen
provides for an up-front fee, several milestone payments throughout
the development of any potential products, and royalties payable if
and when products come to market. Products are currently under
development by third parties in collaboration with and under
license from Prostagen. Currently, a dendritic cell therapy using
PSMA for treatment of prostate cancer is in Phase II clinical
studies.
In January 1997, CYTOGEN issued a non-exclusive option for the
PSMA technology to Boehringer Mannheim in the area of in vitro
diagnostics, including reverse transcriptase-polymerase chain
reaction assays, a technique used to detect circulating prostate
cancer cells in the blood of patients. This agreement provides
CYTOGEN with an up-front fee and royalties payable if and when
products come to market.
In 1996, Targon was granted exclusive rights to certain other
fields of use for the PSMA technology, including recent
developments in the area of prodrugs for prostate cancer.
Other Applications. While CYTOGEN has retained all rights for
therapeutic and in vivo diagnostic uses of the antibody utilized in
ProstaScint for itself and its affiliates, it has licensed the
antibody for in vitro diagnostic use to the Pacific Northwest
Research Foundation, which in turn, has established a collaboration
with Hybritech Incorporated ("Hybritech") to exploit this antibody
in a serum-based in vitro diagnostic test. CYTOGEN will receive
royalties on product sales by Hybritech, if any.
CYTOGEN believes that certain of its technologies under
development may have medical applications in various other areas,
including autoimmune disorders and infectious diseases. The
Company intends to expand the research and development of these
technologies primarily through strategic alliances with other
entities. No predictions can be made regarding the establishment
or the timing of such alliances. The Company expects to devote
resources to these other areas to the extent funding is available.
No prediction can be made, however, as to when or whether the areas
of research described above will yield new scientific discoveries,
or whether such research will lead to new commercial products.
Reimbursement - Health Care Market
The business, financial condition and results of operations of
biotechnology and pharmaceutical companies, including CYTOGEN, 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 the Company expects that there
will continue to be, federal and state proposals to implement
government control of pricing and profitability of therapeutic and
diagnostic imaging agents. In addition, an increasing emphasis on
12
managed care has and will continue to increase the pressure on
pricing of these products. While the Company cannot predict
whether such legislative or regulatory proposals will be adopted or
the effects such proposals or managed care efforts may have on its
business, the announcement of such proposals and the adoption of
such proposals or efforts could have a material adverse effect on
the Company's business, financial condition and results of
operations. Further, to the extent such proposals or efforts have
a material adverse effect on other companies that are prospective
corporate partners for the Company, the Company's ability to
establish strategic alliances may be materially and adversely
affected. In addition, sales of the Company's products will be
dependent, 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 prices charged for medical products
and services. To the extent the Company succeeds in bringing
products to market, there can be no assurance that these products
will be considered cost-effective and that reimbursement to
consumers will be available or will be sufficient to allow the
Company to sell its products on a competitive basis. Reimbursement
by a third-party payor may depend on a number of factors, including
the payor's determination that the use of the Company's products
are clinically useful and cost-effective, medically necessary and
not experimental or investigational. Since reimbursement approval
is required from each payor individually, seeking such approvals
can be a time consuming and costly process which could require the
Company to provide supporting scientific, clinical and cost-effectiveness
data for the use of the Company's products to each payor separately.
Failure of the Company to secure adequate third party reimbursement
for its products would have a material adverse effect on its business,
financial condition and results of operations.
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. Competition
with the Company's existing therapeutic products is posed by a wide
variety of other firms, including firms which provide products used
in more traditional treatments or therapies, such as external beam
radiation, chemotherapy agents and narcotic analgesics. In
addition, the Company's existing and potential competitors may be
able to develop technologies that are as effective as, or more
effective than those offered by the Company, which would render the
Company's products noncompetitive or obsolete. Moreover, many of
the Company's existing and potential competitors have substantially
greater financial, marketing, sales, manufacturing, distribution
and technological resources than the Company. Such 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 the Company 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. In addition, many of these companies may
have more experience in establishing third-party reimbursement for
their products. Accordingly, there can be no assurance that the
Company will be able to compete effectively against such existing
or potential competitors or that competition will not have a
material adverse effect on the Company's business, financial
condition and results of operations. See "Cancer Diagnostic
Imaging Products -- ProstaScint" and "Cancer Therapeutic Products --
Quadramet".
Research and Development
Research and development expenditures recorded by the Company
include projects conducted by the Company and payments made to
sponsored research programs and consultants. CYTOGEN's expenses
for research and development activities (including customer
sponsored programs) were $25.8 million, $20.9 million and $22.6
million in 1997, 1996 and 1995, respectively. These expenses
principally reflect product development efforts and support for
13
various ongoing clinical trials. Research and development
expenditures for customer sponsored programs were $1.5 million,
$1.1 million and $200,000 in 1997, 1996 and 1995, respectively.
The Company intends to pursue research and development activities
which display commercial potential and to review all of its
programs to determine whether possible market opportunities, near
and longer term, provide an adequate return to the Company to
justify the commitment of human and economic resources to their
continuation or initiation, as the case may be.
Targon Corporation
Targon Corporation, formed in September 1996, is a company
focused on the rapid development, registration, manufacturing and
commercialization of oncology products. Targon was created by
CYTOGEN in collaboration with Elan and, at year end 1997, was a
majority-owned subsidiary of CYTOGEN. On March 31, 1998, Elan
exchanged its shares of the Company's Series A and thereby acquired
50% of CYTOGEN's 99.75% ownership of Targon, as contemplated by the
terms of such Series A. Targon has various products,
including: EL530, EL532, MorphelanTM, ProstatecTM, OncotecTM and
certain PSMA technology. Additional products may be added through
the in-licensing of late stage oncology products.
EL530 and EL532 are agents being developed for the treatment
of solid and hematologic malignancies. These agents are believed
to have the potential to inhibit the growth of cells from a wide
range of cancers. Currently, Phase I and II clinical trials are
being directed by the National Cancer Institute. Prostatec is
similar to CYTOGEN's ProstaScint prostate cancer imaging agent but
it utilizes Technetium-99 as the imaging radioisotope instead of
Indium-111. An Investigational New Drug ("IND") application for
Prostatec was submitted in October 1997. Prostatec is currently
being evaluated in a Phase II study. Oncotec is a second
generation version of CYTOGEN's OncoScint CR/OV diagnostic imaging
agent for colorectal, ovarian and breast cancers. OncoTec is in
the preclinical stage of product development. Targon has exclusive
rights to those fields of use of PSMA technology not already
licensed to third parties, including the area of prodrugs for
prostate cancer. See "Research and Development -- PSMA." Prodrugs
have been designed to have low toxicity in the body except when in
the vicinity of prostate cancer cells.
In July 1997, Targon acquired from Elan an exclusive worldwide
license for Morphelan for an up-front license cash payment of $7.5
million (see Note 9 to the Consolidated Financial Statements). The
related technology will be utilized by Targon in the development
and clinical trial testing of an opioid therapy for treating
moderate to severe pain. Given the development stage status of the
related technology, the $7.5 million license fee payment was
recorded as an in-process research and development charge in the
1997 statement of operations. Additional payments may be due Elan
by Targon if certain milestones are met.
In January 1998, Targon entered into an agreement with Duke
University Medical Center ("Duke") under which Targon will provide
up to $3.75 million to Duke over a three year period to support
research and testing with respect to anti-cancer drugs. In
exchange, Targon will receive an option to license products from
funded programs and a right to first review as to licenses for
certain other inventions in the field of cancer during the three
year term of the agreement. Funding for contributions during 1998
will be made from Targon's restricted cash reserve. The Company
believes that this agreement provides Targon with a potential
source of new products from one of the nation's leading cancer
centers.
In connection with the formation of Targon, CYTOGEN completed
a sale of registered Common Stock to Elan for $5 million and the
Series A for $5 million, which funds are being used to fund Targon.
On March 31, 1998 Elan exchanged the Series A for 50% of CYTOGEN's
interest in Targon. As of December 31, 1997, the significant asset
of Targon is restricted cash. Elan is entitled through March 31, 2003
14
to exercise a warrant to purchase up to 1 million shares of
CYTOGEN common stock, at an exercise price per share which
escalates from $9.00 to $14.00 over the term of the warrant. See
Notes 2 and 11 to the Consolidated Financial Statements.
CYTOGEN is negotiating to divide Targon assets and liabilities
between CYTOGEN and Elan in keeping with CYTOGEN's continuing review of its
business opportunities and use of funds. The Company can provide no
assurance as to its continuing interest in Morphelan, or the Duke University
sponsored research program, or other products in development by Targon.
CytoRad Incorporated
In February 1995, CYTOGEN completed its acquisition of CytoRad
Incorporated (CytoRad") by merging CytoRad with and into a wholly-owned
subsidiary of CYTOGEN. As a result of the acquisition, CYTOGEN
reacquired all rights it had previously licensed to CytoRad. In
addition, as a result of the merger, $11.7 million of CytoRad's cash
and securities, before payment of certain of CYTOGEN's transaction costs,
were acquired by the Company. See Note 4 to the Consolidated Financial
Statements.
Cellcor, Inc.
In October 1995, CYTOGEN completed its acquisition of Cellcor.
As a result of its merger with Cellcor (the "Cellcor Merger"),
CYTOGEN (i) issued 4,713,564 shares of Common Stock to acquire
Cellcor (see Notes 1 and 4 to the Consolidated Financial
Statements), (ii) issued 5,144,388 shares of Common Stock in
connection with a related subscription offering, which raised a
total of $20.0 million and (iii) reserved for issuance up to
606,952 shares of Common Stock issuable upon the exercise of
Cellcor stock options. See Note 4 to the Consolidated Financial
Statements.
Manufacturing
CYTOGEN has established a limited commercial-scale current
good manufacturing practices ("cGMP") manufacturing capacity in
Princeton for the manufacturing of its products. An Establishment
License Application ("ELA") for the facility for the manufacture of
its products was approved by the FDA for the manufacture of
ProstaScint in October 1996 and for manufacture of OncoScint in
December 1992. It is expected that this facility will allow
CYTOGEN to meet its projected production requirements for
ProstaScint and OncoScint for the foreseeable future, although no
assurances can be given to that effect. In November 1997, the
Federal Food, Drug and Cosmetic Act (the "FD&C Act") was amended to
make the approval and review process for biologics more similar to
that for drugs. The new law requires only one license to market a
biological product, a BLA, eliminating the need for separate
license for the facility. Therefore, while CYTOGEN will continue
to maintain compliance with cGMPs, under the new law, it is not
required to obtain separate licenses of its commercial
manufacturing facilities in the future. Moreover, CYTOGEN will
retain the status of having met the FDA's establishment licensing
requirements which it believes is an important competitive
advantage in attracting contract manufacturing business (discussed
below). The annual production capacity of the facility is
approximately 100,000 OncoScint or ProstaScint kits. In 1997 and
1996, the facility was utilized approximately 15% and 20%,
respectively, for manufacture of CYTOGEN's products.
There has been a strong trend toward outsourcing of
manufacturing and development services by companies in the drug and
biotechnology sectors of the pharmaceutical industry in the past
15
few years. CYTOGEN offers excess capacity in its cGMP compliant
manufacturing facility to prospective client companies that are
seeking an outsourcing solution for the manufacture of their
products. With its manufacturing facility, and its cGMP status,
CYTOGEN has been able to attract clients that are seeking a third-party
manufacturing outsourcing option for manufacture of low
volumes of sterile, preservative-free liquid formulations of
biological products. Contract manufacturing activities are
supported by CYTOGEN's quality control groups that perform raw
material and product testing, monitoring of environmental
conditions in the manufacturing facility and review of
manufacturing documentation and quality assurance functions.
CYTOGEN currently provides development and manufacturing services
to eleven customers. For the year ended December 31, 1997and 1996
the Company's contract manufacturing revenues were approximately
$984,000 and $405,000, respectively. The Company plans to utilize
its contract manufacturing revenues to develop this line of
business and to offset fixed costs associated with the operation
and maintenance of its manufacturing facility.
Raw Materials and Suppliers
The active raw materials used in the manufacture of the
Company's products include different antibodies. CYTOGEN has both
exclusive and non-exclusive license agreements which permit the use
of specific monoclonal antibodies in its products. CYTOGEN's first
product, OncoScint CR/OV, uses the same monoclonal antibody which
has been supplied in clinical quantities and is being supplied in
commercial quantities by a single contract manufacturer, Lonza
Biologics (which acquired the Company's former supplier, Celltech,
in 1996), through a shared manufacturing agreement. CYTOGEN
anticipates that the supplier will be able to meet CYTOGEN's needs
for commercial quantities of monoclonal antibody.
CYTOGEN currently has the in-house production capacity
necessary to produce projected commercial quantities of monoclonal
antibody for manufacture of ProstaScint.
The Company's products must be manufactured either internally
or through third-party manufacturers in compliance with regulatory
requirements and at commercially acceptable costs. Quadramet is
manufactured by DuPont Merck pursuant to an agreement with CYTOGEN.
While the Company believes that its manufacturing operations
currently address the Company's needs for its other products, there
can be no assurance that the Company will be able to continue to
manufacture such products on a commercially reasonable basis, that
the Company will have the capacity to manufacture additional
products and product candidates or successfully outsource such
manufacturing needs. The failure of the Company to successfully
manufacture or arrange for the manufacture of its products and
product candidates would have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition, certain components of Quadramet, particularly Sm-153
and EDTMP, are provided to DuPont Merck by sole source suppliers. Due
to its radiochemical properties, Sm-153 must be produced on a weekly
basis by its supplier in order to meet DuPont Merck's manufacturing
requirements. On one occasion, DuPont Merck was unable to manufacture
Quadramet on a timely basis due to the failure of the sole source supplier
to provide an adequate supply of Sm-153. In the event that DuPont Merck
is unable to obtain sufficient quantities of such components on
commercially reasonable terms, or in a timely manner, DuPont Merck
would be unable to manufacture Quadramet on a timely and cost-competitive
basis. In addition, alternative sources for certain of these components may
not be readily available. Thus, the loss by DuPont Merck of its
sources for such components could result in an interruption of
supply and could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company and its third party manufacturers are required to
adhere to FDA regulations setting forth requirements for cGMP and
similar regulations in other countries, which include 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
16
by comparable agencies in other countries. Failure of the Company
and its third-party manufacturers to comply with applicable
regulations could result in sanctions being imposed on the Company,
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.
Patents and Proprietary Rights
Consistent with industry practice, the Company has a policy of
using patent and trade secret protection to preserve its right to
exploit the results of its research and development activities and,
to the extent it may be necessary or advisable, to exclude others
from appropriating the Company's proprietary technology.
The Company's policy is to protect aggressively its
proprietary technology by selectively seeking patent protection in
a worldwide program. In addition to the U.S., CYTOGEN files patent
applications in Canada, major European countries, Japan and
additional foreign countries on a selective basis to protect
inventions important to the development of its business. CYTOGEN
believes that the countries in which it has obtained and is seeking
patent coverage for its proprietary technology represent the major
focus of the pharmaceutical industry in which CYTOGEN and certain
of its licensees will market its and their respective products.
CYTOGEN holds 31 current U.S. patents and 66 current foreign
patents. CYTOGEN has filed and currently has pending a number of
additional U.S. and foreign patent applications, covering certain
aspects of its technology for diagnostic and therapeutic products,
and the methods for their production and use. CYTOGEN intends to
file patent applications with respect to subsequent developments
and improvements when it believes such protection is in the best
interest of CYTOGEN.
CYTOGEN is the exclusive licensee of certain patents and
patent applications held by the University of North Carolina at
Chapel Hill covering GDL technology. CYTOGEN holds an exclusive
license under certain patent and patent applications held by MSKCC
covering PSMA. CYTOGEN is the exclusive licensee of certain U.S.
patents and applications held by Dow covering Quadramet.
Targon is the exclusive licensee of certain patents and patent
applications held by CYTOGEN and Elan. Negotiations between
CYTOGEN and Elan with respect to a sale of Targon and division of
its assets may cause the transfer or termination of certain of
these licenses. See "Targon Corporation".
CYTOGEN may be entitled under certain circumstances to seek
extension of the terms of its patents. See "Government Regulation
and Product Testing--FDA Approval".
The Company also relies upon, and intends to continue to rely
upon, trade secrets, unpatented proprietary know-how and continuing
technological innovation to develop and maintain its competitive
position. The Company typically enters into confidentiality
agreements with its licensees and any scientific consultants, and
each of CYTOGEN's employees have entered into agreements with the
companies requiring that they forbear from disclosing confidential
information of the companies, and assign to the companies all
rights in any inventions made while in their employ. The Company
believes that its valuable proprietary information is protected to
the fullest extent practicable; however, there can be no assurance
that (i) any additional patents will be issued to the Company in
any or all appropriate jurisdictions, (ii) litigation will not be
commenced seeking to challenge the patent protection or such
challenges will not be successful, (iii) the Company's processes or
products do not or will not infringe upon the patents of third
parties, or (iv) the scope of patents issued will successfully
prevent third parties from developing similar and competitive
products. It is not possible to predict how any patent litigation
will affect the Company's efforts to develop, manufacture or market
its products.
17
The technology applicable to the Company's 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 competitive with those of the Company. In
addition, others may have filed patent applications and may have
been issued patents to products and to technologies potentially
useful to the Company or necessary to commercialize its products or
achieve its business goals. There can be no assurance that the
Company will be able to obtain licenses of such patents on terms
acceptable to the Company. See "Competition."
ProstaScint and OncoScint are registered trademarks of
CYTOGEN. PIE and SynGene are trademarks of CYTOGEN, pending
registration. Quadramet is a trademark of Dow, licensed to
CYTOGEN.
Government Regulation and Product Testing
The development, manufacture and sale of medical products
utilizing the Company's technology are governed by a variety of
statutes and regulations in the U.S. and by comparable laws and
agency regulations in most foreign countries.
The FD&C Act requires that the Company's 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 the Company
and its manufacturing partners with respect to manufacturing and
quality control activities. 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 premarket clearance or premarket
approval for drugs, withdrawal of marketing approvals and criminal
prosecution. Any failure by the Company or its manufacturing
partners to comply with the requirements of cGMP could have a
material adverse effect on the Company's business, financial
condition and results of operations.
FDA Approval. The major regulatory impact on the diagnostic
and therapeutic products in the U.S. derives from the FD&C Act and
the Public Health Service Act, and from FDA rules and regulations
promulgated thereunder. These laws and regulations require
carefully controlled research and testing of products, government
notification, review and/or approval prior to marketing the
products, inspection and/or licensing of manufacturing and
production facilities, adherence to good manufacturing practices,
compliance with product specifications, labeling, and other
applicable regulations.
The medical products which the Company applies its technology
are subject to substantial governmental regulation and may be
classified as new drugs or biologics under the FD&C Act. FDA and
similar health authorities in most other countries must approve or
license the diagnostic and therapeutic products before they can be
commercially marketed. In order to obtain FDA approval, an
applicant must submit, as relevant for the particular product,
proof of safety, purity, potency and efficacy. In most cases such
proof entails extensive pre-clinical, clinical and laboratory
studies. The studies and the preparation and prosecution of those
applications by FDA is expensive and time consuming, and may take
several years to complete. Difficulties or unanticipated costs may
be encountered by the Company or its licensees in their respective
efforts to secure necessary governmental approval or licenses,
which could delay or preclude the Company or its licensees from
marketing their products. Limited indications for use or other
conditions could also be placed on any such approvals that could
restrict the commercial applications of such products. With
respect to patented products or technologies, delays imposed by the
government approval process may materially reduce the period during
which the Company 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 U.S. 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 U.S. after June 6, 1995, and applications filed in the
18
European Economic Community. The Company intends to seek to
maximize the useful life of its patents under the Patent Term
Restoration Act of 1984 in the U.S. and under similar laws if
available in other countries.
The majority of the Company's diagnostic and therapeutic
products will likely be classified as new drugs or biologics and
will be evaluated in a series of in vitro, non-clinical and human
clinical testing. Typically, clinical testing is performed in
three phases to further evaluate the safety and efficacy of the
drug. In Phase I, a product is tested in a small number of
patients primarily for safety at one or more dosages. In Phase II,
in addition to safety, the efficacy of the product against
particular diseases is evaluated in a patient population generally
somewhat larger than Phase I. Clinical trials of certain
diagnostic and cancer therapeutic agents frequently 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 FD&C Act. Permission by the FDA must be obtained
before clinical testing can be initiated within the U.S. This
permission is obtained by submission of an IND application which
typically includes the results of in vitro and non-clinical testing
and any previous human testing done elsewhere. FDA has 30 days to
review the information submitted and makes a final decision whether
to permit clinical testing with the drug or biologic. A similar
procedure applies to medical device and diagnostic products.
After completion of in vitro, non-clinical and clinical
testing authorization to market a drug or biologic must be granted
by FDA. FDA grants permission to market through the review and
approval of either an NDA (New Drug Application) for drugs or a BLA
(Biologic License Application) for biologics. These applications
provide detailed information on the results of the safety and
efficacy of the drug conducted both in animals and humans.
Additionally, information is submitted describing the facilities
and procedures for manufacturing the drug or biologic.
The Prescription Drug User Fee Act and subsequently, the Food
and Drug Administration Modernization Act of 1997 have established
application review times for both NDAs and BLAs. For new drugs and
biologics, FDA is to review and make a recommendation for approval
within 12 months. For drugs and biologics designated as
"priority," the review time is six months.
Once a drug or biologic is approved, the Company is required
to maintain approval status of the products by providing certain
safety and efficacy information at specified intervals.
Additionally, the Company is required to meet other requirements
specified by the FD&C Act including but not limited to the
manufacture of products, labeling and promotional materials and the
maintenance of other records and reports. 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 recall, 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 are likely to be marketed.
Orphan Drug Act. The Orphan Drug Act is intended to provide
incentives to manufacturers to develop and market drugs for rare
diseases or conditions affecting fewer than 200,000 persons in the
U.S. 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, a seven-year exclusive marketing
period in the U.S. for that indication. Clinical testing
requirements for orphan drugs are the same as those for products
that have not received orphan drug designation. OncoScint CR/OV
has received an orphan drug designation for the detection of
ovarian carcinoma. 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 (i) such
party has a license from the holder of orphan drug status, or (ii)
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 barred from sale
in the U.S. during such seven-year exclusive marketing period even
19
if it receives marketing approval for the same product claim.
Targon received orphan drug designation for EL530 in March 1998 for
the treatment of primariy or recurrent malignant glioma.
Other Regulations. In addition to regulations enforced by
FDA, the Company is also subject to regulation under the state and
local authorities and other federal agencies including Occupational
Safety and Health Act, the Environmental Protection Act, the Toxic
Substances Control Act, the Resource Conservation and Recovery Act
and Nuclear Regulatory Commission.
Foreign Regulatory Approval. Prior to marketing its products
in Western Europe and certain other countries, the Company will be
required to receive the favorable recommendation of the Committee
for Proprietary Medicinal Products, or CPMP, followed by the
appropriate government agencies of the respective countries.
Substantial requirements, comparable in many respects to those
imposed under the FD&C 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.
Customers
In 1997, the Company received 62% of its total product
related, license and contract revenues from three (3) customers:
DuPont Merck; Elan; and Medi-Physics, Inc., a chain of
radiopharmacies (see Note 7 to the Consolidated Financial
Statements).
Employees
As of December 31, 1997, the Company employed 167 persons
full-time, of whom 18 were engaged in research and development
activities, 41 in operations and manufacturing, 29 in clinical and
regulatory activities, 24 in administration and management, 23 in
marketing, 28 in Cellcor's operations and 4 in Targon's operations.
The Company believes that it has been successful in attracting
skilled and experienced employees; however, competition for such
personnel is intense.
Dr. John E. Bagalay, a member of the Board of Directors of the
Company, has been elected to serve as President and Chief Executive
Officer on an interim basis pending recruitment of a candidate for
the Chief Executive Officer position. Dr. Thomas J. McKearn, the
Company's previous Chairman, President and Chief Executive Officer
resigned from those positions and returned to a scientific role in
the Company. Mr. William C. Mills III was elected Chairman of the
Board of Directors, a role he previously occupied from January 1995
to May 1996. The Board of Directors is currently engaged in a
search for a Chief Executive Officer. Dr. Bagalay is also serving
as Chief Financial Officer on an interim basis, pending recruitment
of a candidate for that position. No assurance can be given as to
the Company's ability to locate or secure the employment of a
suitably qualified candidate, on a timely basis, or at all.
None of the Company's employees is covered by a collective
bargaining agreement. All of the Company's employees have executed
confidentiality agreements. The Company considers relations with
its employees to be excellent.
Important Factors Regarding Forward Looking Statements
Certain discussions set forth above regarding the Company's
development and commercialization of its products and technologies
20
are forward looking statements that are subject to risks and
uncertainties. The statements under this caption are intended to
serve as cautionary statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The following
information is not intended to limit the characterization of other
statements contained elsewhere in this Report as cautionary
statements for such purpose.
The Company's FDA-approved products are "technique dependent",
requiring a high degree of proficiency in nuclear imaging. In
particular, the Company has determined that ProstaScint provides
best results when used at specially trained and experienced imaging
sites. Accordingly, ProstaScint images will be administered and
interpreted only at PIE Sites where the technologists and the
physicians have received specific ProstaScint imaging training.
There can be no assurance that PIE Sites and ProstaScint will
achieve market acceptance, that this marketing strategy for
ProstaScint will be successful or will result in increased product
related revenues resulting from sales of ProstaScint.
The Company has entered into arrangements with third parties
to promote, market and distribute OncoScint CR/OV and ProstaScint,
and Quadramet. The Company will be dependent upon the expertise
and dedication of sufficient resources by these distributors in
marketing these products. There can be no assurance regarding the
success of the Company's distributors in obtaining marketing
approvals in additional foreign jurisdictions, in achieving
milestones and achieving sales of products resulting in royalty and
other payments to the Company.
The Company's current research products are at an early stage
of development and will require significant additional research and
development efforts and a commitment of substantial funds prior to
any possible commercialization, including extensive preclinical and
clinical testing as well as lengthy regulatory clearance. Any
delays, difficulties or failure to obtain regulatory approval for
the Company's products, would impact the Company's results of
operations. There can be no assurance that the Company's research
and development efforts will be successful, that any of its
potential products will prove to be safe and efficacious in
clinical trials or that such efforts will result in commercially
successful products.
In addition, the Company's current research products are
subject to, or the Company is seeking possible, research and
development and licensing arrangements with third party
collaborators. Therefore, the Company is and may be dependent upon
the expertise and dedication of sufficient resources by third
parties to develop and commercialize products based on the
Company's technologies. Should a collaborative partner fail to
develop or commercialize a product, the Company may not receive any
future revenues from that product. There can be no assurance that
any such development or commercialization would be successful.
Moreover, there can be no assurance that the Company will be
able to establish additional collaborative or licensing
arrangements, that any such arrangements or licenses will be timely
and on terms favorable to the Company, or that current or future
collaborative or licensing arrangements will ultimately be
successful. No assurance can be given regarding FDA approval of
products currently under development or future products.
The Company's success will also be influenced by certain
issues arising in connection with the Company's patent and
proprietary technology and certain competitive factors. See
"Patents and Proprietary Information" and "Competition".
Item 2. Properties
The Company's corporate headquarters is located in Princeton,
New Jersey. CYTOGEN currently leases approximately 104,100 square
feet of administrative, laboratory and manufacturing space in three
locations in Princeton. The lease for its 56,900 square foot
laboratory and manufacturing facility in Princeton will expire on
21
February 28, 2003 and provides two 5-year renewal options. The
lease for CYTOGEN's 22,700 square foot office space in Princeton
will expire on August 31, 2002. In February 1998, CYTOGEN
subleased an additional 5,100 square foot office space in Princeton
which will expire on March 31, 2000, with a non-exclusive option to
extend to September 30, 2000. CYTOGEN also leases 19,400 square
feet at a third location in Princeton, under a lease which will
expire in December 1999. This third location is used for
laboratories and support for production of commercial product.
CYTOGEN expects to remain in the Princeton area for the foreseeable
future. As of December 31, 1997, the Company had invested
approximately $10 million for improvements in these buildings it
occupies.
Cellcor leases 21,500 square feet in Newton, Massachusetts,
which houses all of Cellcor's administrative staff and research and
operations groups. The lease for this facility will expire on
February 29, 2000. The Company has not determined what disposition
will be made of this facility pending resolution of plans with
respect to Cellcor operations. See "Item 1. Business -- General".
The Company believes its facilities are in good operating
condition and that all real property and equipment are adequate for
all present and proposed uses thereof.
Item 3. Legal Proceedings
During March 1998, a lawsuit was instituted against the
Company in the Federal District Court for the Eastern District of
Pennsylvania by Quaker Capital Group ("Quaker"), claiming rights to
fees in connection with a financing concluded by the Company in
December 1997, based on an financing engagement entered with Quaker
during 1997. The Company believes it has substantial defenses to
the claims and intends to defend against the lawsuit aggressively.
In the opinion of management, based upon advice of counsel, the
Company does not believe that the claim is likely to have a
materially adverse effect on the Company's financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None
22
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their respective
ages and positions with the Company as of March 1, 1998 are as
follows:
Name Age Position
---- --- --------
William C. Mills III 42 Chairman of the Board of Directors
John E. Bagalay, Jr. 64 President, Chief Executive Officer and
Chief Financial Officer
Robert J. Broeze 45 Vice President, Operations
Donald F. Crane 47 Vice President, General Counsel and Secretary
Jane M. Maida 42 Chief Accounting Officer, Corporate Controller and
Assistant Secretary
Graham S. May 49 Vice President, Medical Affairs and
Business Development
Thomas J. McKearn 49 President, Cellcor, Inc.
Frederick M. Miesowicz 49 Vice President and Vice President and General
Manager of Cellcor, Inc.
John D. Rodwell 51 Sr. Vice President and Chief Scientific Officer
Michael A. Trapani 43 Vice President, Regulatory Affairs and
Quality Assurance
All executive officers are elected annually by the Board of
Directors. There is no family relationship among any of the
executive officers or directors.
Business Experience
William C. Mills III has been Chairman of the Board since
January 1998, has been a director of the Company since July 1983
and served as Chairman of the Board of the Company from January
1995 through May 1996. He is currently a director of Transcend
Therapeutics and from April 1994 through May 1996, he served as
Chairman of the Board of Transcend Therapeutics. Since April 1,
1988, he has been a General Partner of The Venture Capital Fund of
New England, Boston, Massachusetts, a series of private venture
capital partnerships. Prior to that, Mr. Mills was a General
Partner of PaineWebber Ventures, and certain of its predecessor
partnerships since April 1981. He is also a director of several
private companies. Mr. Mills holds an A.B. degree from Princeton
University, an S.M. degree in Chemistry from The Massachusetts
Institute of Technology, and an S.M. degree in Management from
M.I.T.'s Sloan School of Management.
23
John E. Bagalay, Jr. has been a director of the Company since
October 1995 and was appointed interim Chief Financial Officer in
October 1997 and interim President and Chief Executive Officer in
January 1998. Dr. Bagalay was a director of Cellcor prior to the
Company's acquisition of Cellcor in October 1995. He has served as
the Managing Director of Community Technology Fund, the venture
capital affiliate of Boston University, since September 1989. Dr.
Bagalay has also served as General Counsel for Texas Commerce
Bancshares, for Houston First Financial Group, and for Lower
Colorado River Authority, a regulated electric utility. Dr.
Bagalay currently also serves on the boards of directors of Wave
Systems Corporation and several privately-held companies in the
biotechnology industry. Dr. Bagalay holds a B.A. in Politics,
Philosophy and Economics and a Ph.D. in Political Philosophy from
Yale University, and a J.D. from the University of Texas. Dr.
Bagalay is serving in these capacities pending recruitment of
candidates for these positions on a permanent basis.
Robert J. Broeze joined CYTOGEN in May 1990 as Director,
Pharmaceutical Development. He served as CYTOGEN's Director,
Manufacturing, Senior Director, Manufacturing & Technical
Operations and as Executive Director, Manufacturing & Technical
Operations until February 1997, when he was promoted to Vice
President, Operations. Prior to joining CYTOGEN, Dr. Broeze held
the position of Director, Process Development at Collaborative
Research, Inc., a development stage biotechnology company engaged
in the development and manufacture of biomedical products for
research, diagnostic and clinical use, from 1989 to 1990. Dr.
Broeze holds B.S. and Ph.D. degrees in Biology from Rensselaer
Polytechnic Institute.
Donald F. Crane, Jr. joined CYTOGEN in June 1997 as Vice
President, General Counsel and Corporate Secretary. Most recently,
Mr. Crane was Senior SEC Counsel for U.S. Surgical Corporation
since 1993. Previously, Mr. Crane was Assistant Secretary and
Corporate Counsel at BellSouth Corporation in Atlanta, Georgia.
Mr. Crane holds a Bachelors degree in Communications from the
University of Georgia and a J.D. degree from the University of
Georgia School of Law.
Jane M. Maida joined CYTOGEN in March 1997 as Chief Accounting
Officer, Corporate Controller and Assistant Secretary. Before
joining CYTOGEN, Ms. Maida served as Chief Financial and
Information Officer for Mustard Seed, Inc., a behavioral health
care company, from 1995. Prior to that position, she was Chief
Financial Officer of Morphogenesis, Inc., a biotechnology company
focused on cellular immunology. From 1986 to 1994, Ms. Maida was
Corporate Controller and Assistant Secretary for The Liposome
Company, Inc., a biotechnology company. Ms. Maida holds a B.S. in
Education from the University of Pennsylvania and a M.S. in
Accounting from the State University of New York at Albany. She is
also a Certified Public Accountant.
Graham S. May joined CYTOGEN in January 1997 as Vice
President, Medical Affairs. In February 1998, he assumed
additional responsibilities for corporate business development.
Most recently, he was a Principal in the Global Health Care
Practice of Gemini Consulting Inc., an international management
consultant company, from 1995 to 1996. Prior to that, Dr. May was
with Pharmacia, U.S., for almost 10 years, first as Medical
Director of the Hospital Products division, and finally as
Executive Medical Director of Kabi Pharmacia, Inc. Dr. May has
been a visiting scientist at the Clinical Trials Branch, National
Heart, Lung, and Blood Institute at the National Institutes of
Health. He has also worked with AKZO and Ciba-Geigy in Europe, as
well as Hoechst-Roussel Pharmaceuticals in the U.S. Dr. May holds
undergraduate and medical degrees from Cambridge University,
England, and is a member of the Faculty of Pharmaceutical Medicine.
Thomas J. McKearn joined CYTOGEN in July 1981 as Vice
President, Research and Development. He assumed a full-time role
as President of Cellcor, Inc. in January 1998 and is expected to
return to CYTOGEN in a scientific role. He served as CYTOGEN's
Chairman from May 1996 through January 1998, Chief Executive
Officer from January 1994 through January 1998 and as President of
CYTOGEN from September 1991 through January 1998. Dr. McKearn
previously served as Executive Vice President of CYTOGEN from June
1990 to August 1991 and Senior Vice President, Scientific Affairs
of CYTOGEN through June 1990. He has been a director of CYTOGEN
since 1981. Dr. McKearn has also served as a director of Targon
since 1996 and as President and a director of Cellcor since 1995.
From 1978 until he joined CYTOGEN, Dr. McKearn was an Assistant
24
Professor in the Department of Pathology at the University of
Pennsylvania and Head of the Immunoprotein Laboratory at the
Hospital of the University of Pennsylvania. He retains a position
as Adjunct Associate Professor in the Department of Pathology at
the University of Pennsylvania. Dr. McKearn is a member of the
Scientific Advisory Board for Rider College. Dr. McKearn holds a
B.A. degree from Indiana University, a Ph.D. degree in Immunology
from the University of Chicago and an M.D. degree from the Pritzker
School of Medicine at the University of Chicago.
Frederick M. Miesowicz joined CYTOGEN in October 1995 as Vice
President. He also serves as Vice President and General Manager of
Cellcor. Prior to joining CYTOGEN, Dr. Miesowicz served as
Cellcor's Senior Vice President of Scientific Affairs since October
1992. Dr. Miesowicz has an extensive background in cellular
therapies. Prior to joining Cellcor, he managed the U.S. and
European SteriCell Division of Terumo Medical Corp. and was with
E.I. DuPont de Nemours & Company for over 14 years. In 1986, he
assumed development responsibility for DuPont's cellular therapy
business, working with the National Cancer Institute and others on
ex vivo immunotherapies (lymphokine activated killer cells and
tumor infiltrating lymphocytes for cancer). He holds a B.S. in
Chemistry from Siena College and a Ph.D. in Chemistry from Harvard
University.
John D. Rodwell joined CYTOGEN in September 1981. He served
as Director, Chemical Research, then as Vice President, Discovery
Research from 1984 to 1989, and as Vice President, Research and
Development from 1989 to July 1996, at which time he assumed his
present responsibilities as Sr. Vice President and Chief Scientific
Officer. Dr. Rodwell has also served as Chief Executive Officer
and a director of AxCell since 1996. From 1980 to 1981, Dr.
Rodwell was a Research Assistant Professor and, from 1976 to 1980,
he was a postdoctoral fellow, both in the Department of
Microbiology at the University of Pennsylvania School of Medicine,
where he currently is an Adjunct Associate Professor in the
Department of Microbiology. He holds a B.A. degree from the
University of Massachusetts, an M.S. degree in Organic Chemistry
from Lowell Technological Institute and a Ph.D. degree in
Biochemistry from the University of California at Los Angeles.
Michael A. Trapani joined CYTOGEN in January 1996 as Director,
Regulatory Affairs & Quality Assurance and held that position until
his promotion in March 1998 to Vice President, Regulatory Affairs
& Quality Assurance. In his current position, he is responsible
for regulatory and quality activities world-wide. Mr. Trapani has
approximately 20 years experience in the pharmaceutical industry
with the majority of his experience in the drug approval area.
Most recently, he was Senior Director, Regulatory Affairs for
Pharmacia Adria in Columbus, OH. Prior to that position, he held
the position of Executive Director, Regulatory Affairs at Kabi
Pharmacia in Piscataway, NJ. Mr. Trapani started his career with
FDA. Mr. Trapani holds a BS degree in Biology from Brooklyn
College and an MBA degree from Seton Hall Graduate School of
Business.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
CYTOGEN Common Stock is traded on the NASDAQ National Market
tier of The NASDAQ Stock Market under the trading symbol "CYTO."
The table below sets forth the high and low sale prices for
CYTOGEN Common Stock for each of the calendar quarters indicated,
as reported by the NASDAQ National Market.
1996 High Low
- ---- ---- ---
First Quarter . . . . . . . . . . . . . . . . . 10 5 1/8
Second Quarter. . . . . . . . . . . . . . . . . 9 1/2 5 13/16
Third Quarter . . . . . . . . . . . . . . . . . 9 5 3/16
Fourth Quarter. . . . . . . . . . . . . . . . . 7 7/8 4 7/16
1997
- ----
First Quarter . . . . . . . . . . . . . . . . . 6 1/2 4 3/4
Second Quarter. . . . . . . . . . . . . . . . . 6 5/16 4 11/16
Third Quarter . . . . . . . . . . . . . . . . . 5 1/16 3 5/8
Fourth Quarter. . . . . . . . . . . . . . . . . 4 3/4 1 7/16
As of February 27, 1998 there were approximately 5,283 holders
of record of the Common Stock.
CYTOGEN has not paid any cash dividends on its Common Stock
since its inception and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future.
Declaration of dividends on the Common Stock will depend, among
other things, upon future earnings, the operating and financial
condition of the Company, its capital requirements, and general
business conditions.
For information concerning the issuance of the shares of
CYTOGEN's Series A and Series B Convertible Preferred Stock issued
under Section 4(2) of the Securities Act, see "Business -- Targon
Corporation" and Note 11 to the Consolidated Financial Statements,
respectively.
26
Item 6. Selected Financial Data
The following selected financial information has been
derived from the consolidated financial statements of the Company
for each of the five fiscal years in the period ended December 31,
1997, which have been audited by Arthur Andersen LLP, the Company's
independent public accountants. The consolidated financial
summaries set forth below should be read in conjuction 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.
1997 1996(1) 1995 1994 1993
----------------------------------------------------------
(All amounts in thousands, except per share data)
Consolidated Statements of Operations Data:
Product related . . . . . . . . . . . . . $ 8,534 $ 1,507 $ 1,377 $ 1,411 $ 1,591
License and contract . . . . . . . . . . 5,886 4,223 3,608 1,047 8,763
------- ------- ------- ------- -------
Total Revenues . . . . . . . . . . . . 14,420 5,730 4,985 2,458 10,354
------- ------- ------- ------- -------
Research and development . . . . . . . . 25,758 20,915 22,594 20,321 24,844
Acquisition of in-process technology. . . 7,500 - 45,878 4,647 -
Selling and marketing . . . . . . . . . . 5,492 4,143 4,493 5,536 9,399
General and administrative. . . . . . . . 6,948 5,534 4,804 3,962 7,016
-------- ------- ------- ------ -------
Total Operating Expenses . . . . . . . 45,698 30,592 77,769 34,466 41,259
-------- ------- ------- ------ -------
Operating Loss. . . . . . . . . . . . . (31,278) (24,862) (72,784) (32,008) (30,905)
Non-operating income (expense). . . . . . 566 1,096 264 (798) 1,676
-------- -------- -------- -------- --------
Net loss. . . . . . . . . . . . . . . . . (30,712) (23,766) (72,520) (32,806) (29,229)
Dividends including deemed dividends on
Preferred Stock. . . . . . . . . . . . (1,352) (4,571) - - -
-------- -------- -------- -------- --------
Net loss to common stockholders . . . . . $(32,064) $(28,337) $(72,520) $(32,806) $(29,229)
========= ========= ========= ========= =========
Basic and diluted net loss
per common share. . . . . . . . . . . . $ (0.63) $ (0.59) $ (2.11) $ (1.38) $ (1.38)
========= ========= ========= ========= =========
Basic and diluted weighted average
common shares outstanding. . . . . . . 51,134 48,401 34,333 23,822 21,121
========= ========= ========= ========= =========
Consolidated Balance Sheets Data:
Cash and short term investments . . . . . $ 7,401 $24,765 $28,752 $ 7,700 $23,764
Restricted cash . . . . . . . . . . . . . 10,486 9,916 383 - -
Total assets. . . . . . . . . . . . . . . 27,769 41,944 37,149 19,690 34,635
Long term liabilities . . . . . . . . . . 7,615 1,855 3,275 4,310 192
Redeemable common stock . . . . . . . . . - - - 2,000 2,000
Stockholders' equity. . . . . . . . . . . 9,983 32,927 25,276 4,368 21,731
(1) Restated to give retroactive effect to the change in accounting for its
convertible security having a beneficial conversion feature. See Note 11
to the Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
From time to time, as used herein, the term "Company" may
include CYTOGEN Corporation ("CYTOGEN") and its subsidiaries AxCell
Biosciences Corporation ("AxCell"), Cellcor Inc. ("Cellcor") and
27
Targon Corporation ("Targon"), taken as a whole, where appropriate.
Results of Operations
Background. To date, the Company's revenues have resulted
primarily from (i) sales of ProstaScint and OncoScint, (ii)
royalties earned on Quadramet sales by The DuPont Merck
Pharmaceutical Company ("DuPont Merck"), (iii) the cost recovery
related to the treatment of patients receiving autolymphocyte
therapy ("ALT") for metastatic renal cell carcinoma ("mRCC") under
a Treatment Investigational New Drug ("Treatment IND") program and
compassionate protocol which permits patients who do not qualify
for or have completed treatment under an ongoing study approved by
U.S. Food and Drug Administration ("FDA") to receive treatment,
(iv) payments received from contract manufacturing and research
services pursuant to agreements, and (v) fees generated from the
licensing of its technology and marketing rights to its products.
In February 1997, CYTOGEN launched its second FDA-approved
product, ProstaScint, a monoclonal antibody-based imaging agent
developed to detect the presence and extent of metastatic prostate
cancer. In connection with the launch, CYTOGEN has developed its
PIE (Partners in Excellence) accreditation program by establishing
a network of qualified nuclear medicine sites and physicians. Each
site is trained and certified in acquiring, processing and
interpreting the antibody-derived images. As of December 31, 1997
there were 175 PIE Sites in operation. ProstaScint is available
for use only at qualified PIE Sites, thus providing quality
control and support. C.R. Bard, Inc. ("Bard") is currently
marketing ProstaScint to urologists while CYTOGEN markets
ProstaScint to the medical imaging community and oncologists
through its PIE Program. Both companies market ProstaScint to
managed care organizations ("MCOs"). CYTOGEN's focus is to
increase the MCOs' awareness of and to obtain coverage for
ProstaScint while Bard is working with the MCOs to incorporate
ProstaScint in the MCOs' patient practice guidelines. CYTOGEN's
costs of its efforts related to marketing to MCOs are immaterial
and primarily attributable to its own marketing personnel.
In June 1997, DuPont Merck launched CYTOGEN's third FDA-approved
product, Quadramet, a treatment for bone pain arising from cancers
which have spread to the skeleton and that can be visualized on
standard bone scans. DuPont Merck manufactures, markets and
distributes Quadramet through its radiopharmaceuticals operations
in the U.S. CYTOGEN records royalty revenues from Quadramet
sales by DuPont Merck as they are earned. Royalties are based on
a percentage of sales of Quadramet or guaranteed contractual
minimum royalty payments, whichever is greater.
On March 25, 1998, the Company announced that, based on an
ongoing review and prioritization of its business opportunities, it
will delay submission of a BLA for its ALT for mRCC. CYTOGEN is
currently seeking potential partners for future funding and
development of ALT. The Company will also consider the sale of
Cellcor to another healthcare company that has an interest and
resources to actively pursue FDA approval of ALT for mRCC and other
indications. The Company anticipates that this action will reduce
operating expenses significantly and permit allocation of
additional resources to other Company priorities. ALT is a
proprietary cellular therapy which has been under development by
Cellcor for the treatment of mRCC, a life threatening kidney
cancer, for which adequate therapies do not exist. Cellcor
completed pivotal Phase III clinical trials of ALT in mRCC patients
in January 1997, and the Company believes the results of the trials
are favorable.
On March 31, 1998, Elan exchanged its shares of the Company's
Series A and thereby acquired 50% of CYTOGEN's 99.75% ownership of
Targon, as contemplated by the terms of such Series A (see Notes 2
and 11 to the Consolidated Financial Statements). CYTOGEN is
negotiating to divide Targon assets and liabilities between the parties
in keeping with CYTOGEN's continuing review of its business opportunities
and use of funds.
28
Revenues. Total revenues were $14.4 million in 1997, $5.7
million in 1996 and $5.0 million in 1995. Product related revenues
accounted for 59%, 26% and 28% of revenues in 1997, 1996 and 1995,
respectively. The 1997 growth was due to the launch and revenues
generated from ProstaScint and Quadramet. License and contract
revenues accounted for the remainder of revenues with 41%, 74% and
72% of the revenues in 1997, 1996 and 1995, respectively.
Product related revenues were $8.5 million, $1.5 million and
$1.4 million in 1997, 1996 and 1995, respectively. ProstaScint and
Quadramet accounted for 48% and 38% of the revenues in 1997,
respectively, while OncoScint accounted for 11%, 85% and 99% of the
revenues in 1997, 1996 and 1995, respectively. Sales from
ProstaScint were $4.1 million and $55,000, in 1997 and 1996,
respectively. Revenue from royalties earned on Quadramet was $3.3
million. To date, royalties based on a percentage of sales have
been less than the guaranteed contractual minimum royalties. Sales
from OncoScint CR/OV were $950,000, $1.3 million and $1.4 million
in 1997, 1996 and 1995, respectively. Revenues from ALT treatments
for mRRC were $245,000 in 1997, $178,000 in 1996 and $16,000 in
1995. The Company can not provide any assurance that ALT revenues
will continue. No significant history of revenues exists with
respect to the Company's products, ProstaScint and Quadramet. The
Company's future product related revenues will be dependent upon
the market place acceptance of its products.
License and contract revenues for 1997, 1996 and 1995 were $5.9
million, $4.2 million and $3.6 million, respectively, and included
up-front and milestone payments, contract manufacturing and
research revenues. License and contract revenues have fluctuated
in the past and may fluctuate in the future. Revenues from up-front
and milestone payments were $2.1 million, $845,000 and $2.1
million in 1997, 1996 and 1995, respectively. In 1997, CYTOGEN
received a $2.0 million milestone payment from DuPont Merck upon
FDA approval of Quadramet. In 1996, the payments were derived
primarily from Bard and CIS biointernational ("CISbio"), the
Company's marketing partners, and in 1995, the payments consisted
primarily of $2.0 million from The Dow Chemical Company ("Dow"),
which was received upon the Company's filing of the New Drug
Application ("NDA") for Quadramet with FDA (see Note 6 to the
Consolidated Financial Statements).
Revenues from contract manufacturing and research revenues
were $3.9 million, $3.4 million and $1.5 million in 1997, 1996, and
1995, respectively. The 1997 revenues included $1.5 million from
DuPont Merck for the continued clinical development of Quadramet
(see Note 5 to the Consolidated Financial Statements), $924,000
from Elan Corporation, plc and affiliated corporations
(collectively, "Elan") for a combined research program between
CYTOGEN and Elan to collaboratively develop orally administered
products (see Note 3 to the Consolidated Financial Statements), and
$984,000 from eleven contract manufacturing customers. The 1996
revenues included $1.5 million from DuPont Merck, $1.3 million
from Elan, and $405,000 from three customers for contract
manufacturing servives. In 1995, CYTOGEN recorded $1.3 million of
research revenue from DuPont Merck.
Operating Expenses. Total operating expenses were $45.7 million
in 1997, $30.6 million in 1996, and $77.8 million in 1995. The
operating expenses in 1997 reflect the Company's efforts in
acquiring, developing and marketing of new products. Operating
expenses included a one-time license fee of $7.5 million for the
acquisition of Morphelan (see Note 2 to the Consolidated Financial
Statements) and a milestone payment of $4.0 million to Dow upon FDA
approval of Quadramet. The 1995 operating expenses included one-time
non-cash charges of $45.9 million for acquisition of in-process
technology from CytoRad Incorporated ("CytoRad") and
Cellcor (see Note 4 to the Consolidated Financial Statements).
Even excluding the aforementioned one-time charges, the operating
expenses in 1997 were higher than prior year periods due to product
development efforts by Targon and AxCell, two new strategic
business units established during the second half of 1996, higher
administrative costs and increased selling and marketing efforts to
promote ProstaScint and to establish and maintain PIE Sites. The
operating expenses are composed of research and development
29
expenses, acquisiton of in-process technology expenses, selling
and marketing expenses, and general and administrative expenses.
The Company continues to incur significant R&D and other costs. In
addition, selling and marketing expenses are expected to increase
as the Company continues to generate increased revenues from its
products.
Research and development expenses were $25.8 million in 1997,
$20.9 million in 1996 and $22.6 million in 1995. These expenses
principally reflect product development efforts and support for
various ongoing clinical trials. The 1997 research and development
expenses included a one-time milestone payment of $4.0 million to
Dow and increased expenses associated with the Targon and AxCell
subsidiaries. In 1995 the Company charged $2.9 million to research
and deveopment expenses for inventory writedowns of commercial
inventory relating to OncoScint CR/OV. Excluding the
aforementioned charges, the 1997 expenses were relatively
consistent with those recorded in the prior years.
Acquisition of in-process technology expenses were $7.5 million
in 1997, $0 in 1996 and $45.9 million in 1995. The 1997 expense
represented the one-time license fee for the exclusive worldwide
rights to Morphelan purchased by Targon from Elan. Additional
payments may be due to Elan by Targon if certain milestones are
met. The 1995 expense included $19.7 million and $26.2 million of
one-time non-cash charges representing the amounts by which the
purchase prices exceeded the fair value of net assets acquired in
connection with the CytoRad and Cellcor mergers, respectively.
These acquisitions were recorded as in-process technology given the
development stage nature of the related technology.
Selling and marketing expenses were $5.5 million in 1997, $4.1
million in 1996 and $4.5 million in 1995. The 1997 increase from
the prior year periods is primarily attributable to expenses
associated with the launch of ProstaScint, including expenses to
establish the PIE Program. The 1996 decrease compared to 1995 is
primarily attributable to the reduction of promotional expenses
associated with OncoScint CR/OV.
General and administrative expenses were $6.9 million in 1997,
$5.5 million in 1996 and $4.8 million in 1995. The increase over
prior year periods is attributable to the expansion of the
Company's insurance program, the addition of consultants to
support the Company's investor relations efforts, and increased
legal costs for general corporate purposes.
Other Income/Expense. Net gains on investments for 1997, 1996
and 1995 were $1.2 million, $1.5 million and $857,000,
respectively. The changes from the prior year periods is due
primarily to changes in the average cash and short term investment
balances for the periods.
Interest expense was $601,000 in 1997, $451,000 in 1996 and
$593,000 in 1995. In addition to the imputed interest on
liabilities associated with CYTOGEN's termination agreements with
Knoll Pharmaceuticals Company ("Knoll") and Chiron B.V. ("Chiron"),
in 1997, the Company recorded $310,000 of interest expense in
connection to the $10.0 million note due to Elan.
Net Loss. Net losses to common stockholders were $32.1 million,
$28.3 million and $72.5 million in 1997, 1996 and 1995,
respectively. Losses per common share were $0.63, $0.59 and $2.11
in 1997, 1996, and 1995, respectively, on 51.1 million, 48.4
million and 34.3 million average common shares outstanding in each
year, respectively. The 1997 loss was increased by the $1.4
million deemed and accrued dividends on the Series B Preferred
Stock and the 1996 loss was increased by a $4.6 million deemed
dividend on the Series A Preferred Stock (see Note 11 to the
Consolidated Financial Statements). The net loss for 1996
decreased in comparison to 1995 primarily due to the 1995 charges
to the statement of operations for the acquisition of in-process
technology.
30
Liquidity and Capital Resources
The Company's cash and short term investments were $7.4 million
as of December 31, 1997, compared to $24.8 million as of December
31, 1996. The Company's restricted cash was $10.5 million and $9.9
million as of December 31, 1997 and 1996, respectively, and is used
solely to fund the operations of Targon. The cash used for
operating activities and purchases of property and equipment for
1997 was $31.8 million and $654,000, respectively, compared to
$22.7 million and $886,000 used in 1996. The increase in cash
usage for operating activities from the prior year period was
primarily due to the $7.5 million license fee for Morphelan, the
$4.0 million milestone payment for Dow, and increased expenses
associated with Targon and AxCell. This increase is partially
offset by receipts from revenues generated from ProstaScint and
Quadramet in 1997.
Historically, the Company's primary sources of cash have been
proceeds from the issuance and sale of its stock through public
offerings and private placements, product related revenues,
revenues from contract manufacturing and research services, fees
paid under its license agreements and interest earned on its cash
and short term investments.
In December 1997, the Company completed $7.5 million of a $20.0
million financing commitment with a group of private investors. The
financing is in the form of a 6% convertible preferred stock which
is convertible by the investors at any time and convertible or
redeemable by the Company, at its option, in three years. The
dividend is payable in cash or common stock of CYTOGEN at the
Company's option at the earlier of the conversion date or when and
as declared by the Board of Directors. The Company, on
satisfaction of certain conditions, has the option to draw down the
balance of the commitment, $12.5 million, with the same investors
over the course of the next year. See Note 11 to the Consolidated
Financial Statements. Currently, the Company does not meet all of
the conditions to draw down additional funds.
Quadramet. Upon FDA clearance of Quadramet in the first quarter
of 1997, the product was launched by DuPont Merck in June 1997.
An agreement between CYTOGEN and DuPont Merck provides for CYTOGEN
to receive from DuPont Merck royalty revenues based on a percentage
of sales of Quadramet or guaranteed contractual minimum royalty
payments, whichever is greater, and additional payments upon
achievement of certain other milestone payments. During 1997,
CYTOGEN recorded $1.5 million in license and contract revenues,
$2.0 million milestone payment upon FDA approval of Quadramet and
$3.3 million in royalty revenues from Quadramet sales. See Note
5 to the Consolidated Financial Statements.
CYTOGEN acquired an exclusive license in the U.S. from Dow for
Quadramet in 1993. This license was later amended in 1995 and 1996
to include additional territories and indicators. See Note 6 to
the Consolidated Financial Statements. In 1997, the Company paid
Dow $4.0 million in connection with FDA approval of Quadramet.
The agreement also requires the Company to pay Dow royalties
based on a percentage of net sales of Quadramet, or guaranteed
contractual minimum payments, whichever is greater, and future
payments upon achievement of certain milestones. During 1997, the
Company recorded $375,000 for Dow royalty expense.
ProstaScint. ProstaScint was approved for marketing by FDA in
October 1996 and was officially launched in February of 1997.
Product related revenues now include sales from ProstaScint.
Significant cash will be required to support the Company's
marketing program and expansion and maintenance of the PIE
Program.
In August 1996, CYTOGEN entered into an agreement with Bard (the
"Co-Promotion Agreement") to market and promote ProstaScint,
pursuant to which Bard will make payments upon the occurrence of
certain milestones, which include expansion of co-marketing rights
in selected countries outside the U.S. During the term of the
Co-Promotion Agreement, Bard will receive performance-based
compensation for its services. In 1997, the Company recorded
$586,000 for Bard commission.
31
OncoScint CR/OV. To date, sales of OncoScint CR/OV have not
been material and are not expected to become a significant source
of cash flow in the future. In 1994, the Company reacquired all
U.S. marketing rights to OncoScint from Knoll and in 1997, paid
Knoll $1.6 million and is required to pay $1.7 million to Knoll in
1998. The Company will fund this payment from revenues from
product sales and other sources. In 1994, the Company also
reacquired the exclusive marketing and distribution rights in
Europe from Chiron and in 1997 made its last payment of $377,000 to
Chiron for these rights. See Note 9 to the Consolidated Financial
Statements.
In December 1995 and January 1996, CYTOGEN entered into
agreements with Faulding (Canada) Inc. and CISbio, respectively, to
market and distribute OncoScint CR/OV outside the U.S. Faulding
and CISbio will be required to make payments for the purchase of
products and royalties on net sales, if any.
In December 1995, the Company and Elan entered into an agreement
(the "Elan Agreement"), under which Elan provided funding necessary
for the Company to fulfill its obligations under a research
program. During 1997, CYTOGEN recorded $924,000 in contract
revenues from Elan. The Company can give no assurance that such
contract revenues will continue. See Note 3 to the Consolidated
Financial Statements.
In July 1997, the Company obtained a $10.0 million loan from
Elan. The loan is payable in full at the end of year three and
bears interest which is payable quarterly at the six month LIBOR
rate plus 1% and is adjusted on a semi-annual basis. The funds
were used by CYTOGEN to provide funding to Targon, including
funding for the $7.5 million license fee paid by Targon to Elan
(see "Results of Operation"). During 1997, the Company recorded
$310,000 of interest expense in connection with the note. See
Note 9 to the Consolidated Financial Statements.
The Company is currently in the process of evaluating its
information technology infrastructure for Year 2000 compliance.
The Company does not expect that the cost to modify its information
technology infrastructure to be Year 2000 compliant will be
material to its financial condition or results of operations. The
Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be in
compliance, and will include disclosure to this effect in its
filings.
The Company's capital and operating requirements may change
depending upon several factors, including: (i) the success of the
Company and its strategic partners in manufacturing, marketing and
commercialization of its products; (ii) the amount of resources
which the Company devotes to clinical evaluations and the expansion
of marketing and sales capabilities; (iii) results of preclinical
testing, clinical trials and research and development activities;
and (iv) competitive and technological developments.
The Company's financial objectives are to meet its capital and
operating requirements through revenues from existing products,
subcontract manufacturing, license and research contracts, and
control of spending. To achieve its strategic objectives, the
Company 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 the
Company in either cash or stock in addition to the costs associated
with developing and marketing a product or technology. The Company
currently has no commitments or specific plans for acquisitions or
strategic alliances. However, the Company believes 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 related revenues are sufficient to cover operating
expenses. To fund these strategic and operating activities, the
Company may sell equity and debt securities as market conditions
permit or enter into credit facilities.
32
The Company has incurred negative cash flows from operations
since its inception, and has expended, and expects to continue to
expend in the future, substantial funds to complete its planned
product development efforts, including acquisition of products and
complementary technologies, research and development, clinical
studies and regulatory activities, and to further expand its
marketing, sales, manufacturing and distribution activities. The
Company expects that its existing capital resources and other
available sources of financing will be adequate to fund the
Company's operations into 1999. No assurance can be given that the
Company will not consume a significant amount of its available
resources before that time. In addition, the Company expects that
it will have additional requirements for debt or equity capital,
irrespective of whether and when it reaches profitability, for
further development of products, product and technology acquisition
costs, and working capital. The Company's future capital
requirements and the adequacy of available funds will depend on
numerous factors, including the successful commercialization of its
products, the costs associated with the acquisition of
complementary products and technologies, progress in its product
development efforts, the magnitude and scope of such efforts,
progress with preclinical studies and clinical trials, progress
with regulatory affairs activities, the cost of filing,
prosecuting, defending and enforcing patent claims and other
intellectual property rights, competing technological and market
developments, and the expansion of strategic alliances for the
sales, marketing, manufacturing and distribution of its products.
To the extent that funds generated from the Company's product-related
sales and license and contract revenues, together with its
existing capital resources are insufficient to meet current or
planned operating requirements, the Company will be required to
obtain additional funds through equity or debt financing, strategic
alliances with corporate partners and others, or through other
sources. The Company has a commitment pursuant to which it may
issue up to $12.5 million in additional series of convertible
preferred stock, under certain conditions, however, there can be no
assurance that such conditions will be met. Based on the Company's
historical ability to raise capital and current market conditions,
the Company believes other financing alternatives are available.
If adequate funds are not available, the Company may be required to
delay, scale back or eliminate certain aspects of its operations or
attempt to obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, products
or potential markets. If adequate funds are not available, the
Company's business, financial condition and results of operations
will be materially and adversely affected. However, the Company
believes that it has the ability to reduce its operating expenses
so that it will have adequate cash flow to sustain operations into
1999 and beyond.
=========================
Cautionary Statement
The foregoing discussion contains historical information as well
as forward looking statements that involve a number of risks and
uncertainties. In addition to the risks discussed above, among
other factors that could cause actual results to differ materially
from expected results are the following: (i) the timing and
results of clinical studies; (ii) market acceptance of the
Company's products, including programs designed to facilitate use
of the products, such as the PIE Program; (iii) the decision by the
majority of public and private insurance carriers on whether to
reimburse patients for the Company's products; (iv) the
profitability of its products; (v) the ability to attract, and the
ultimate success of strategic partnering arrangements,
collaborations, and acquisition candidates; (vi) the ability to
attract additional contract manufacturing customers; (vii) the
ability of the Company and its partners to identify new products as
a result of those collaborations that are capable of achieving FDA
approval, that are cost-effective alternatives to existing products
and that are ultimately accepted by the key users of the product;
(viii) the success of the Company's marketing partners in obtaining
marketing approvals in Canada and in European countries, in
achieving milestones and achieving sales of products resulting in
royalties; and (ix) the Company's ability to access the capital
markets in the near term and in the future for continued funding of
existing projects and for the pursuit of new projects.
33
Item 8. Financial Statements and Supplementary Data
The response to Item 8 is submitted as a separate section of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
34
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the Company's Directors is incorporated
by reference to the information contained under the captions
"Nominees for Directors" and "Section 16(a) Benefical Ownership
Reporting Compliance" in the Company's Proxy Statement.
Information regarding the Company's Executive Officers is set forth
in Part I of this Form 10-K.
Item 11. Executive Compensation
Incorporated by reference to the information contained under
the caption "Executive Compensation" in the Company's Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the information contained under
the caption "Security Ownership of Management and Principal
Stockholders" in the Company's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
None.
35
PART IV
Item 14. 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 14 is submitted as a separate section
of this Form 10-K.
(3) Exhibits --
--------
Exhibit No.
-----------
2.1 - Agreement and Plan of Merger, dated November
15, 1994 among the registrant, CytoRad Acquisition
Corp., a wholly-owned subsidiary of the
registrant, and CytoRad Incorporated. Filed as an
exhibit to Form 8-K dated November 15, 1994
(Commission File No. 0-14879) and incorporated
herein by reference.
2.2.1 - Agreement and Plan of Merger, dated June 15,
1995 among the registrant, Cellcor Acquisition
Corp. (formerly known as Small-C Acquisition
Corp.), a wholly-owned subsidiary of the
registrant, and Cellcor, Inc. Filed as an exhibit
to Form 8-K dated June 15, 1995 (Commission File
No. 0-14879) and incorporated herein by reference.
2.2.2 - First Amendment to Agreement and Plan of
Merger, dated September 7, 1995 by and among the
registrant, Cellcor Acquisition Corp. and Cellcor,
Inc. Filed as Annex A to the Joint Proxy
Statement/Prospectus constituting part of the
Registration Statement on Form S-4 (No. 33-62617)
and incorporated herein by reference.
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 (Commission File
No. 0-14879) and incorporated herein by
reference.
3.2 - By-Laws of CYTOGEN Corporation, as amended.
Filed as an exhibit to Form S-4 Registration
Statement (No. 33-88612) and incorporated herein
by reference.
4.1 - Specimen of Common Stock Certificate. Filed
as an exhibit to Amendment No. 1 to Form S-1
Registration Statement (No. 33-5533) and
incorporated herein by reference.
4.2 - Certificate of Designations, Powers,
Preferences and Rights of the Series A Convertible
and Exchangeable Preferred Stock of CYTOGEN
Corporation. Filed as an exhibit to Form 10-Q
Quarterly Report for the quarter ended September
30, 1996 (Commission File No. 0-14879) and
incorporated herein by reference.
4.3 - Certificate of Designation of 6% Convertible
Preferred Stock, Series B. Filed as an
exhibit to Form 8-K dated December 9, 1997
(Commission File No. 0-14879) and incorporated
herein by reference.
36
10.1 - Voting and Subscription Agreement, dated June
15, 1995 among the registrant, Cellcor Acquisition
Corp. and the entities listed on Schedule I
thereto. Filed as Annex B to the Joint Proxy
Statement/Prospectus dated July 17, 1995 and
incorporated herein by reference.
10.2 - Form of Registration Rights Agreement for Common
Stock between CYTOGEN Corporation and certain
persons listed on Schedule A thereto. Filed as an
exhibit to Form S-4 Registration Statement (No.
33-62617) and incorporated herein by reference.
10.3.1 - 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 (Commission File No. 0-14879)
and incorporated herein by reference.
10.3.2 - 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.
10.4 - Lease Agreement, dated as of February 20, 1986,
between College Road Associates and CYTOGEN
Corporation, as amended on June 27, 1986. Filed
as an exhibit to Pre-Effective Amendment No. 1 to
Form S-1 Registration Statement (No. 33-35430) and
incorporated herein by reference.
10.5 - Lease Agreement, dated as of November 26, 1991,
between College Road Associates, Limited
Partnership and CYTOGEN Corporation. Filed as an
exhibit to Form 10-K Annual Report for the Year
Ended December 28, 1991 (Commission File No. 0-14879)
and incorporated herein by reference.
10.6.1 - 1989 Employee Stock Option Plan. Filed as an
exhibit to Form S-8 Registration Statement (No.
33-30595) and incorporated herein by reference.#
10.6.2 - CYTOGEN Corporation Standard Form Employee
Executive Officer Incentive Stock Option
Agreement. Filed as an exhibit to Form 10-K
Annual Report for the Year Ended December 29, 1990
(Commission File No. 0-14879) and incorporated
herein by reference.#
10.6.3 - CYTOGEN Corporation Standard Form Employee
Executive Officer Non-Qualified Stock Option
Agreement Filed as an exhibit to Form 10-K Annual
Report for the Year Ended December 29, 1990
(Commission File No. 0-14879) and incorporated
herein by reference.#
10.7.1 - 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.#
10.7.2 - 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 (Commission File No. 0-14879) and
incorporated herein by reference.#
37
10.7.3 - CYTOGEN Corporation Standard Form Non-Employee
Director Non-Qualified Stock Option Agreement.
Filed as an exhibit to Form 10-K Annual Report for
the Year Ended December 29, 1990 (Commission File
No. 0-14879) and incorporated herein by
reference.#
10.7.4 - CYTOGEN Corporation Standard Form 1992
Employee Non-Qualified Stock Option Agreement.
Filed as an exhibit to Form 10-K Annual Report for
the Year Ended January 2, 1993 (Commission File
No. 0-14879) and incorporated herein by
reference.#
10.8 - 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.#
10.9 - 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.#
10.10 - Agreement, dated as of December 31, 1992, by and
among CYTOGEN Corporation, Unilever N.V., Unilever
PLC, Unilever UK Central Resources Ltd. and
Unipath Ltd. Filed as an exhibit to Form 10-K
Annual Report for the Year Ended January 2, 1993
(Commission File No. 0-14879) and incorporated
herein by reference.*
10.11.1 - 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 (Commission File No. 0-14879)
and incorporated herein by reference.*
10.11.2 - 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 (Commission File No. 0-14879) and
incorporated herein by reference.*
10.11.3 - 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 (Commission File No.
0-14879) and incorporated herein by reference.*
10.12 - Investment Agreement dated as of February 24,
1994 between CYTOGEN Corporation and Fletcher
Capital Markets, Inc. Filed as an exhibit to Form
10-K Annual Report for the year ended January 1,
1994 (Commission File No. 0-14879) and
incorporated herein by reference.
10.13.1 - Amended and Restated Investment Agreement,
dated as of May 6, 1994, between CYTOGEN
Corporation and Fletcher Capital Markets, Inc.
Filed as an exhibit to Form 10-Q Quarterly Report
for the quarter ended March 31, 1994 (Commission
File No. 0-14879), as amended, and incorporated
herein by reference.
38
10.13.2 - Amendment to the Option Agreement between
CYTOGEN Corporation and Fletcher Capital Markets,
Inc. dated August 10, 1995. Filed as an exhibit
to Form S-4 Registration Statement (No. 33-62617)
and incorporated herein by reference.
10.13.3 - Second Amendment to the Option Agreement
between CYTOGEN Corporation and Fletcher Capital
Markets, Inc. dated November 15, 1995. Filed as
an exhibit to Form 10-K Annual Report for the year
ended December 31, 1995 (Commission File No. 0-14879)
and incorporated herein by reference.
10.14.1 - License Agreement by and between CYTOGEN
Corporation and The DuPont Merck Pharmaceutical
Company. Filed as an exhibit to Form S-4
Registration Statement (No. 33-88612) and
incorporated herein by reference.*
10.14.2 - Amendment to the License Agreement between
CYTOGEN Corporation and The DuPont Merck
Pharmaceutical Company dated March 29, 1996.
Filed as an exhibit to Form 10-Q Quarterly Report
for the quarter ended March 31, 1996 (Commission
File No. 0-14879) and incorporated herein by
reference.*
10.15 - Agreement to Terminate License, Supply and
Marketing Agreement, dated as of November 1, 1994,
between CYTOGEN Corporation and Knoll
Pharmaceutical Company. Filed as an exhibit to
Form S-4 Registration Statement (No. 33-88612) and
incorporated herein by reference.
10.16 - Letter Agreement, dated November 1, 1994,
between CYTOGEN Corporation and Knoll
Pharmaceutical Company. Filed as an exhibit to
Form S-4 Registration Statement (No. 33-88612) and
incorporated herein by reference.
10.17 - Disengagement Agreement, dated December 30,
1994, between CYTOGEN Corporation and Chiron B.V.
Filed as an exhibit to Form S-4 Registration
Statement (No. 33-88612) and incorporated herein
by reference.*
10.18 - 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.#
10.19 - Stock Compensation and Performance Option
Agreement, dated December 8, 1994, between CYTOGEN
Corporation and Dr. Thomas J. McKearn. Filed as an
exhibit to Form S-4 Registration Statement (No.
33-88612) and incorporated herein by reference.#
10.20 - 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 (Commission File No. 0-14879)
and incorporated herein by reference.*
10.21 - 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
(Commission File No. 0-14879) and incorporated herein
by reference.*
39
10.22.1 - Investment Agreement between CYTOGEN
Corporation and Fletcher Fund L.P. dated September
8, 1995. Filed as an exhibit to Form S-4
Registration Statement (No. 33-62617) and
incorporated herein by reference.
10.22.2 - First Amendment to Investment Agreement
between CYTOGEN Corporation and Fletcher Fund,
L.P. dated April 26, 1996. Filed as an exhibit to
Form 10-Q Quarterly Report for the quarter ended
March 31, 1996 (Commission File No. 0-14879) and
incorporated herein by reference.
10.23 - Lease Agreement between Cellcor, Inc. and Leon
H. Cohen, Trustee of 200 Wells Avenue Realty
Trust, dated January 31, 1990, as amended. Filed
as Exhibit 10.09 to Cellcor, Inc.'s Form S-1
Registration Statement (No. 33-45448) and
incorporated herein by reference.
10.24.1 - CYTOGEN Corporation 1995 Stock Option Plan.
Filed as an exhibit to Form 10-K Annual Report for
the year ended December 31, 1995 (Commission File
No. 0-14879) and incorporated herein by reference.
10.24.2 - Amendment No. 1 to the CYTOGEN Corporation
1995 Stock Option Plan dated May 22, 1996. Filed
as an exhibit to Form 10-Q Quarterly Report for
the quarter ended June 30, 1996 (Commission File
No. 0-14879) and incorporated herein by
reference.#
10.25 - Research and Development and Option Agreement,
dated December 14, 1995, between CYTOGEN
Corporation and Elan Corporation, plc. Filed as
an exhibit to Form 10-K Annual Report for the year
ended December 31, 1995 (Commission File No. 0-14879)
and incorporated herein by reference.*
10.26 - Severance Agreement effective as of January 1,
1994 between CYTOGEN Corporation and Thomas J.
McKearn, M.D., Ph.D. Filed as an exhibit to Form
10-K Annual Report for the year ended December 31,
1995 (Commission File No. 0-14879) and incorporated
herein by reference.#
10.27 - 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 (Commission File No. 0-14879)
and incorporated herein by reference.*
10.28 - Securities Purchase Agreement between CYTOGEN
Corporation and Elan International Services, Ltd.,
dated as of September 26, 1996. Filed as an
exhibit to Form 10-Q Quarterly Report for the
quarter ended September 30, 1996 (Commission File
No. 0-14879) and incorporated herein by reference.
10.29 - Warrant to purchase CYTOGEN common stock, issued
to Elan International Services, Ltd., dated
September 26, 1996. Filed as an exhibit to Form
10-Q Quarterly Report for the quarter ended
September 30, 1996 (Commission File No. 0-14879)
and incorporated herein by reference.
40
10.30 - Joint Development and Operating Agreement among
CYTOGEN Corporation, Elan Corporation, plc. and
Targon Corporation dated September 26, 1996.
Filed as an exhibit to Form 10-Q Quarterly Report
for the quarter ended September 30, 1996
(Commission File No. 0-14879) and incorporated
herein by reference.*
10.31 - 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 (Commission File No. 0-14879) and
incorporated herein by reference.*
10.32 - Severance Agreement effective as of March 26,
1996 between CYTOGEN Corporation and John D.
Rodwell, Ph.D. Files as an exhibit to Form 10-K
Annual Report for the year ended December 31, 1996
(Commission File No. 0-14879) and incorporated
herein by reference.#
10.33 - CYTOGEN Corporation Employee Stock Purchase
Plan. Filed as an exhibit to Form S-8
Registration Statement (No. 333-27673) and
incorporated herein by reference.#
10.34 - License Agreement between Targon Corporation and
Elan Corporation, plc dated July 21, 1997.
Filed as an exhibit to Form 10Q Quarterly Report
for the quarter ended June 30, 1997 (Commission
File No. 0-14879) and incorporated herein by
reference.*
10.3 - Note Purchase Agreement between CYTOGEN
Corporation and Elan International Services,
Ltd. Dated July 21, 1997. Filed as an exhibit
to Form 10Q Quarterly Report for the quarter
ended June 30, 1997 (Commission File No. 0-14879)
and incorporated herein by reference.
10.36 - Note Purchase Agreement between CYTOGEN
Corporation and Targon Corporation dated July 21, 1997.
Filed as an exhibit to Form 10Q Quarterly Report for
the quarter ended June 30, 1997 (Commission File No. 0-14879)
and incorporated herein by reference.
10.37 - Form of Convertible Preferred Stock Purchase
Agreement by and between CYTOGEN Corporation and
the purchasers of Series B Preferred Stock.
Filed as an exhibit to Form 8-K dated December
9, 1997 (Commission File No. 0-14879) and
incorporated herein by reference.
10.38 - Form of Registration Rights Agreement by and
between CYTOGEN Corporation and the purchasers
of Series B Preferred Stock. Filed as an
exhibit to Form 8-K dated December 9, 1997
(Commission File No. 0-14879) and incorporated
herein by reference.
10.39 - Employment Agreement effective as of December
23, 1996 between CYTOGEN Corporation and Dr.
Graham S. May.#
10.40 - Employment Agreement effective as of October 3,
1992 between Cellcor, Inc. And Frederick M.
Miesowicz.#
21 - Subsidiaries of CYTOGEN Corporation.
41
23 - Consent of Arthur Andersen LLP.
27 - Financial Data Schedule (submitted to SEC only
in electronic format).
# Management contract or compensatory plan or arrangement.
* CYTOGEN Corporation has 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.
(b) Reports on Form 8-K:
The Company filed two Reports on Form 8-K during 1997 and the
dates of such reports were July 8, 1997 and December 9, 1997.
The Form 8-K dated July 8, 1997 reported on "Item 5. Other
Events" with respect to the amendment of CYTOGEN's request for
confidential treatment for information contained in certain
exhibits filed with its Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996. The Form 8-K dated December
9, 1997 reported on "Item 5. Other Events" with respect to a
press release announcing that CYTOGEN had obtained from
private investors a financing commitment, subject to
satisfaction of certain conditions, to purchase shares of its
Convertible Preferred Stock for up to $20 million and that it
had completed the first tranche of the financing by issuing
shares of its 6% Series B Convertible Preferred Stock for $7.5
million.
(c) Exhibits:
The Exhibits filed with this Form 10-K are listed above in
response to Item 14(a)(3).
(d) Financial Statement Schedules:
None
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 31st day of March 1998.
CYTOGEN CORPORATION
By: /s/ John E. Bagalay, Jr.
------------------------
John E. Bagalay, Jr.
President and Chief Executive Officer
43
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ John E. Bagalay, Jr. Chief Executive Officer and President March 31, 1998
-------------------------- (Principal Executive Officer), Chief
John E. Bagalay, Jr. Financial Officer (Principal Financial
Officer) and Director
/s/ Jane M. Maida Chief Accounting Officer (Principal March 31, 1998
-------------------------- Accounting Officer)
Jane M. Maida
/s/ Charles E. Austin* Director March 31, 1998
--------------------------
Charles E. Austin
/s/ Ronald J. Brenner* Director March 31, 1998
--------------------------
Ronald J. Brenner
/s/ James A. Grigsby* Director March 31, 1998
--------------------------
James A. Grigsby
/s/ Robert F. Hendrickson* Director March 31, 1998
--------------------------
Robert F. Hendrickson
/s/ Thomas J. McKearn* Director March 31, 1998
--------------------------
Thomas J. McKearn
/s/ William C. Mills III* Director and Chairman of the Board March 31, 1998
--------------------------
William C. Mills III
/s/ Donald E. O'Neill* Director March 31, 1998
--------------------------
Donald E. O'Neill
* By Power of Attorney
44
Annual Report on Form 10-K
Year Ended December 31, 1997
Item 8, Item 14(a)(1) and (2) and Item 14(d)
CYTOGEN CORPORATION
Princeton, New Jersey
45
Form 10-K Item 14(a)(1) and (2) and Item 14(d)
CYTOGEN CORPORATION AND SUBSIDIARIES
(1) Consolidated Financial Statements
The following consolidated financial statements of CYTOGEN Corporation
and Subsidiaries together with the related notes and report of Arthur
Andersen LLP, independent public accountants, are included in Item 8:
Page in
Form 10-K
---------
Report of Independent Public Accountants . . . . . . . . . . . . . . . . 47
Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . . . 48
Consolidated Statements of Operations--Years Ended December 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Consolidated Statements of Stockholders' Equity--Years Ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . 50
Consolidated Statements of Cash Flows--Years Ended December 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 52
46
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, 1997
and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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 generally accepted auditing
standards. 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 financial position of CYTOGEN Corporation and
Subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company will require additional
funding to continue operations which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
As explained in Note 11 to the Consolidated Financial Statements, the
Company has given retroactive effect to the change in accounting for its
convertible security having a beneficial conversion feature.
ARTHUR ANDERSEN LLP
Philadelphia, PA
March 31, 1998
47
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(all amounts in thousands, except share data)
December 31,
-----------------------
Assets: 1997 1996
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 7,401 $ 20,296
Short-term investments. . . . . . . . . . . . . . . . . . . . . . - 4,469
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . 4,064 439
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 443 258
Other current assets. . . . . . . . . . . . . . . . . . . . . . . 289 241
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . . . . 12,197 25,703
--------- ---------
Property and Equipment:
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . 10,126 10,023
Equipment and furniture . . . . . . . . . . . . . . . . . . . . . 7,743 7,248
--------- ---------
17,869 17,271
Less-- Accumulated depreciation and amortization. . . . . . . . . (13,917) (12,455)
--------- ---------
Net property and equipment . . . . . . . . . . . . . . . . . . 3,952 4,816
--------- ---------
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,486 9,916
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,134 1,509
--------- ---------
$ 27,769 $ 41,944
========= =========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable and accrued liabilities. . . . . . . . . . . . . $ 5,876 $ 5,338
Current portion of long-term liabilities. . . . . . . . . . . . . 1,739 1,824
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . 7,615 7,162
--------- ---------
Long-Term Liabilities. . . . . . . . . . . . . . . . . . . . . . . . 10,171 1,855
Commitments and Contingencies (Note 15)
Stockholders' Equity:
Preferred stock, $.01 par value, 5,400,000 shares authorized-
Series A Convertible and Exchangeable Preferred Stock, $.01 par
value, 1,000 shares authorized, issued and outstanding in
1997 and 1996 (liquidation value of $5,000) . . . . . . . . . - -
Series B Convertible Preferred Stock, $.01 par value, 750 shares
authorized, issued and outstanding in 1997 (liquidation value
of $7,500). . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock, $.01 par value, 89,600,000 shares authorized,
51,170,000 and 51,079,000 shares issued and outstanding in 1997
and 1996, respectively. . . . . . . . . . . . . . . . . . . . . . 512 511
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 298,212 289,098
Unrealized (loss) on short-term investments. . . . . . . . . . . . . - (5)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . (288,741) (256,677)
---------- ----------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . 9,983 32,927
---------- ----------
$ 27,769 $ 41,944
========== ==========
The accompanying notes are an integral part of these statements.
48
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(all amounts in thousands except per share data)
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------------------------------------
Revenues:
Product related . . . . . . . . . . . . . . . . . . . . $ 8,534 $ 1,507 $ 1,377
License and contract . . . . . . . . . . . . . . . . . . 5,886 4,223 3,608
--------- ---------- ---------
Total Revenues. . . . . . . . . . . . . . . . . . . . 14,420 5,730 4,985
--------- ---------- ---------
Operating Expenses:
Research and development . . . . . . . . . . . . . . . . 25,758 20,915 22,594
Acquisition of in-process technology . . . . . . . . . . 7,500 - 45,878
Selling and marketing. . . . . . . . . . . . . . . . . . 5,492 4,143 4,493
General and administrative . . . . . . . . . . . . . . . 6,948 5,534 4,804
--------- ---------- ----------
Total Operating Expenses. . . . . . . . . . . . . . . 45,698 30,592 77,769
Operating Loss . . . . . . . . . . . . . . . . . . . (31,278) (24,862) (72,784)
Gain on Investments, net . . . . . . . . . . . . . . . . . 1,167 1,547 857
Interest Expense . . . . . . . . . . . . . . . . . . . . . (601) (451) (593)
---------- --------- ----------
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . (30,712) (23,766) (72,520)
Dividends Including Deemed Dividends on Preferred Stock . . (1,352) (4,571) -
---------- ---------- ----------
Net Loss to Common Stockholders . . . . . . . . . . . . . . $(32,064) $(28,337) $(72,520)
========== ========== ==========
Basic and Diluted Net Loss per Common Share . . . . . . . . $ (0.63) $ (0.59) $ (2.11)
========== ========== ==========
Basic and Diluted Weighted Average Common
Shares Outstanding. . . . . . . . . . . . . . . . . . . . 51,134 48,401 34,333
========== ========== ==========
The accompanying notes are an integral part of these statements.
49
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(All amounts in thousands, except share data)
Unrealized
Gain (Loss)
Additional on Accu- Total
Preferred Common Paid-in Short-Term mulated Stockholders'
Stock Stock Capital Investments Deficit Equity
---------- ------- ----------- ----------- ------- ------------
Balance, December 31, 1994 $ - $247 $159,941 $ - $(155,820) $ 4,368
Issued 5,223,182 shares of common
stock . . . . . . . . . . . . . . . - 52 21,477 - - 21,529
Conversion of redemable common
stock into common stock. . . . . . . - 3 1,372 - - 1,375
Issued 10,748,800 shares of common
stock in connection with the
acquisitions of CytoRad Inc. and
Cellcor Inc. . . . . . . . . . . . . - 107 50,802 - - 50,909
Issued 5,144,388 shares of common
stock in connection with a
subscription offering. . . . . . . . - 51 19,480 - - 19,531
Granted 15,000 shares of common
stock . . . . . . . . . . . . . . . - - 50 - - 50
Unrealized gain on investments. . . . . - - - 34 - 34
Net loss. . . . . . . . . . . . . . . . - - - - (72,520) (72,520)
---------- -------- -------- ------ ----------- --------
Balance, December 31, 1995 - 460 253,122 34 (228,340) 25,276
Issued 1,000 shares of series A
preferred stock . . . . . . . . . . - - 4,854 - - 4,854
Series A preferred stock conversion
discount deemed dividends. . . . . . - - 4,571 - (4,571) -
Issued 5,029,402 shares of common
stock. . . . . . . . . . . . . . . . - 51 26,525 - - 26,576
Granted 10,000 shares of common
stock. . . . . . . . . . . . . . . . - - 26 - - 26
Unrealized loss on investments. . . . . - - - (39) - (39)
Net loss. . . . . . . . . . . . . . . . - - - - (23,766) (23,766)
---------- -------- --------- ------ -----------
Balance, December 31, 1996 - 511 289,098 (5) (256,677) 32,927
Issued 750 shares of series B
preferred stock . . . . . . . . . . - - 7,455 - - 7,455
Issued 100,282 shares of common
stock. . . . . . . . . . . . . . . . - 1 335 - - 336
Series B preferred stock conversion
discount deemed dividends. . . . . . - - 1,324 - (1,324) -
Accrued dividends on series B
preferred stock. . . . . . . . . . . - - - - (28) (28)
Unrealized gain on investments. . . . . - - - 5 - 5
Net loss . . . . . . . . . . . . . . . - - - - (30,712) (30,712)
---------- ------- --------- ------ ----------- ---------
Balance, December 31, 1997 $ - $512 $298,212 $ - $(288,741) $ 9,983
========== ======== ========= ====== =========== =========
The accompanying notes are an integral part of these statements.
50
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . $(30,712) $(23,766) $(72,520)
--------- --------- ---------
Adjustments to Reconcile Net Loss to Cash Used for
Operating Activities:
Depreciation and Amortization. . . . . . . . . . . . . . 1,518 1,515 1,529
Write Down of Land . . . . . . . . . . . . . . . . . . . 384 - -
Imputed Interest . . . . . . . . . . . . . . . . . . . . 261 451 593
Stock and Stock Option Grants. . . . . . . . . . . . . . 45 70 78
Acquisition of In-Process Technology For
Stock Consideration. . . . . . . . . . . . . . . . . . - - 45,878
Inventory Writedown. . . . . . . . . . . . . . . . . . . - - 2,926
Changes in Assets and Liabilities, Net of Effect
from Acquisitions:
Accounts Receivable, net. . . . . . . . . . . . . . . (3,625) (155) (255)
Inventories . . . . . . . . . . . . . . . . . . . . . (185) 98 (82)
Other Assets. . . . . . . . . . . . . . . . . . . . . (57) 162 760
Accounts Payable and Accrued Liabilities. . . . . . . 540 (1,091) (2,170)
--------- --------- ---------
Total Adjustments . . . . . . . . . . . . . . . (1,119) 1,050 49,257
--------- --------- ---------
Net Cash Used For Operating Activities. . . . . . . . (31,831) (22,716) (23,263)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) Decrease in Short-Term Investments. . . . . . . . 4,474 (3,307) (1,167)
(Increase) in Restricted Cash. . . . . . . . . . . . . . . . (570) (9,533) (383)
Purchases of Property and Equipment. . . . . . . . . . . . . (654) (886) (595)
Net Cash Acquired in CytoRad Acquisition . . . . . . . . . . - - 10,455
Net Cash Used to Acquire Cellcor Inc . . . . . . . . . . . . - - (3,463)
--------- --------- ---------
Net Cash Provided By (Used In) Investing Activities . 3,250 (13,726) 4,847
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Note Payable . . . . . . . . . . . . . . . . . 10,000 - -
Payments of Long-Term Debt . . . . . . . . . . . . . . . . . (2,030) (2,243) (2,461)
Net Proceeds from Issuance of Common Stock . . . . . . . . . 261 26,576 41,060
Net Proceeds from Issuance of Series A Preferred Stock . . . - 4,854 -
Net Proceeds from Issuance of Series B Preferred Stock . . . 7,455 - -
Redemption of Common Stock . . . . . . . . . . . . . . . . . - - (332)
--------- --------- ---------
Net Cash Provided By Financing Activities . . . . . . 15,686 29,187 38,267
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents . . . . (12,895) (7,255) 19,851
Cash and Cash Equivalents, Beginning of Year . . . . . . . . 20,296 27,551 7,700
--------- ---------- ---------
Cash and Cash Equivalents, End of Year . . . . . . . . . . . $ 7,401 $ 20,296 $ 27,551
========= ========== =========
The accompanying notes are an integral part of these statements.
51
CYTOGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business
CYTOGEN Corporation ("CYTOGEN" or the "Company") is a
biopharmaceutical company engaged in the development,
commercialization and marketing of products to improve diagnosis
and treatment of cancer and other disease. In March 1997, CYTOGEN
received clearance from the U.S. Food and Drug Administration
("FDA") to market Quadramet , CYTOGEN's product for the relief of
pain due to cancers that have spread to the skeleton and that can
be visualized on a bone scan. In October 1996, CYTOGEN
received marketing approval from FDA for the ProstaScint imaging
agent, CYTOGEN's prostate cancer diagnostic imaging product. In
December 1992, FDA approved OncoScint CR/OV imaging agent,
CYTOGEN's colorectal and ovarian cancer specific diagnostic imaging
product, for single administration per patient. In November 1995,
FDA approved an expanded indication allowing for repeat
administration of OncoScint CR/OV. All three products are
currently available in the market place.
Operations of the Company are subject to certain risks and
uncertainties including, but not limited to uncertainties related
to access to capital, product market acceptance, product efficacy
and clinical trials, technological uncertainty, uncertainties of
future profitability,dependence on collaborative relationships and
key personnel. The Company has incurred losses since its inception
and expects to incur significant operating losses in the future.
There can be no assurance that the Company will ever be able to
commercialize successfully its products or that profitability will
ever be achieved.
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. Management
believes the Company's existing capital resources and other available
sources of financing will be adequate to fund the Company's operations
into 1999. Additional financings are available under certain conditions
through the sale of Preferred Stock under the financing commitment described
in Note 11. Currently, the Company does not meet all of the conditions to
draw down additional funds. Based on the Company's historical
ability to raise capital and current market conditions, the Company
believes other financing alternatives (including arrangements with
collaborative partners) are available. There can be no assurance
that the financing commitment described in Note 11 or other
financial alternatives will be available when needed or at terms
commercially acceptable to the Company. If necessary, management
believes it has the ability to reduce its operating expenses so the
Company will have adequate cash flow to sustain operations into
1999 and beyond. If an operating expense reduction plan was
implemented, it would require the Company to delay, scale back or
eliminate significant aspects of the Company's operations.
Basis of Consolidation
The consolidated financial statements include the accounts of
CYTOGEN and its subsidiaries, AxCell Biosciences Corporation
("AxCell"), Cellcor Inc. ("Cellcor") and Targon Corporation
("Targon"). Intercompany balances and transactions have been
eliminated in consolidation. Unless the context otherwise
indicates, as used herein, the term "Company" refers to CYTOGEN and
its subsidiaries, taken as a whole.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
52
CYTOGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Restatement and Reclassifications
Reference is made to Note 11 regarding the 1996 financial
statements restatement. Also, certain reclassifications have been
reflected in the 1995 and 1996 financial statements to conform with
the 1997 presentation.
Statement of Cash Flow
Cash and cash equivalents include cash on hand, cash in banks
and all highly-liquid investments with a maturity of three months
or less at the time of purchase. Cash paid for interest expense
was $524,000, $307,000 and $399,000 in 1997, 1996 and 1995,
respectively. See Note 4 for discussion of Cellcor and CytoRad
Incorporated ("CytoRad') acquisitions.
Restricted Cash
Restricted cash consists of cash restricted to use for the
operations of Targon (see Note 2).
Accounts Receivable
As of December 31, 1997 and 1996, accounts receivable were net
of an allowance for doubtful accounts of $576,000 and $546,000,
respectively. The Company charged to expense $30,000 and $10,000
as a provision for doubtful accounts in 1997 and 1996,
respectively.
Inventory
The Company's inventory is primarily related to ProstaScint and
OncoScint CR/OV. Inventory is stated at the lower of cost or
market using the first-in, first-out method and consisted of :
1997 1996
----------- -----------
Raw Materials . . . . . . . . . . . . $ 145,000 $ 74,000
Work-in-process. . . . . . . . . . . . 158,000 -
Finished Goods . . . . . . . . . . . . 140,000 184,000
----------- -----------
$ 443,000 $ 258,000
=========== ===========
Property and Depreciation
Equipment and furniture are stated at cost net of depreciation
and a $215,000 reserve for idle equipment. 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 five years.
Expenditures for repairs and maintenance are charged to expense as
incurred. For 1997, 1996 and 1995, repairs and maintenance
expenses were $350,000, $394,000 and $274,000, respectively.
53
CYTOGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other Assets
Other assets consist primarily of undeveloped real property with
a net book value of $900,000, which is valued at the lower of cost
or market. During 1997, the Company charged to expense $384,000 to
write down the property to estimated market value.
Revenue Recognition
Product related revenues include product sales by CYTOGEN to its
customers and royalties earned on Quadramet sales by The DuPont
Merck Pharmaceutical Company ("DuPont Merck"). Product sales are
recognized upon shipment of finished goods. Royalties are based on
a percentage of sales of Quadramet or guaranteed contractual
minimum royalty payments, whichever is greater.
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. The Company's contract
manufacturing services include filling, testing, validation, and
process development of monoclonal antibodies; process development
and clinical development of biopharmaceutical products; and the
preclinical manufacturing of an antibody product. Revenues from
milestone payments are recognized when all parties concur that the
events stipulated in the agreement have been achieved. Revenues
from cost-plus contracts are recognized when the costs are
incurred. Revenues from up-front payments are recognized when the
Company has no obligation to return the fee under any
circumstances.
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
expensed as incurred. Research and development expenditures for
customer sponsored programs were $1.5 million, $1.1 million and
$200,000 in 1997, 1996 and 1995, respectively.
Patent Costs
Patent costs are expensed as incurred.
Common Stock Outstanding
As a result of the Cellcor merger, the issued and outstanding
shares of Cellcor common stock and preferred stock ("Cellcor
Shares") were converted into the right to receive shares of CYTOGEN
common stock. As of December 31, 1997, certain holders of Cellcor
Shares had not yet exchanged their Cellcor Shares for shares of
CYTOGEN common stock. For accounting purposes, all Cellcor Shares
54
CYTOGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
were deemed exchanged for issued and outstanding shares of CYTOGEN
common stock as of the date of the Cellcor merger (see Note 4).
Net Loss Per Share
Effective for the year ended December 31, 1997, the Company
adopted Statement of Financial Accounting Standards ("SFAS"), No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires the
presentation of basic earnings (loss) per share and diluted
earnings (loss) per share. Basic loss per share is based on the
average numbers of common shares outstanding during the year.
Diluted loss per share is the same as basic loss per share, as the
inclusion of common stock equivalents would be antidilutive since
the Company incurred losses in prior years. This pronouncement had
no effect on the Company's previously reported net loss per share,
since the Company incurred losses in prior years.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, which establishes standards for reporting and
disclosure of comprehensive income is effective for interim and
annual periods beginning after December 15, 1997. Reclassification
of financial information for earlier periods presented for
comparative purposes is required under SFAS No. 130. Although this
statement requires additional disclosures in the Company's
consolidated financial statements, its adoption will not have any
impact on the Company's financial position or consolidated results
of operations. The Company will adopt SFAS No. 130 in 1998.
In June 1997, the FASB issued SFAS No. 131, which establishes
standards for reporting of information about operating segments and
requires the reporting of selected information about operating
segments in interim financial statements, is effective for fiscal
years beginning after December 15, 1997. Adoption of the statement
will have no effect on the Company's financial position or
consolidated results of operations. The Company is presently
studying the future effects of SFAS No. 131 on the presentation of
its segment information and based on current circumstances, does
not believe the effect of the adoption will be material.
In July 1997, the Emerging Issues Task Force (EITF) issued EITF
96-16 which establishes standards for an investee when the investor
has a majority of the voting interest but the minority stockholders
have certain approval or veto rights. EITF 96-16 is effective
after July 24, 1997 for all new investment agreements and is
effective in the fourth quarter of 1998 on agreements in effect
prior to July 24, 1997. The Company intended to adopt EITF 96-16
in the fourth quarter of 1998 for its 99.75% investment in Targon (see
Note 2) since that agreement was entered into in September 1996
and adopt the equity method of accounting for this investment.
As discussed in Note 2, on March 31, 1998, the Company's ownership
interest in Targon was reduced to 49.875%. As a result, beginning
in the first quarter of 1998, the Company will account for Targon
on the equity method and retroactively adopt 96-16. The use of the
equity method would have had no effect in the Company's previously
reported net loss, stockholders' equity or cash flows. Using the
equity method, $7.5 million of charges to in-process technology and
approximately $1.9 million of research and development expense in
the 1997 statement of operations, will be reclassified to "Equity in
loss in research and development subsidiary". The effect on the 1996
statement of operations will be immaterial. The primary effect on
the December 31, 1997 balance sheet is the reclassification of restricted
cash to "Investment in Subsidiary". All other changes will be immaterial.
55
CYTOGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. TARGON CORPORATION:
Targon was established in September 1996 pursuant to agreements
between CYTOGEN and Elan. Targon is a majority-owned (99.75%)
subsidiary of CYTOGEN. Elan purchased 932,535 shares of CYTOGEN
common stock for $5 million and 1,000 shares of CYTOGEN's newly
created Series A Convertible Preferred Stock ("Series A") for $5
million, which proceeds are being used to fund Targon. The Series
A has a liquidation value of $5 million or $5,000 per share. On
March 31, 1998 Elan exchanged the Series A for 50% of CYTOGEN's
interest in Targon. Elan is entitled through March 31, 2003 to
exercise a warrant to purchase up to 1 million shares of CYTOGEN
common stock, at an exercise price per share which escalates from
$9.00 to $14.00 over the term of the warrant. Prior to the
exchange of the Series A into CYTOGEN's interest in Targon, Elan
had a right to convert the Series A into shares of common stock
(see Note 11). As a result of the exchange, all rights to
conversion into common stock were terminated.
In July 1997, Targon acquired from Elan, an exclusive worldwide
license for Morphelan for an up-front license cash payment of $7.5
million (see Note 9). The related technology will be utilized by
Targon in the development and clinical trial testing of an
analgesic therapy for moderate and severe pain. Given the
development stage status of the related technology, the $7.5
million license fee payment was recorded as an in-process research
and development charge in the 1997 statement of operations.
Additional payments may be due Elan by Targon if certain milestones
are met.
3. ELAN CORPORATION:
In 1995, CYTOGEN entered into an agreement with Elan under which
both parties initiated a research program to combine CYTOGEN's
Genetic Diversity Library technology with Elan's drug delivery
system technology to collaboratively develop orally administered
products. In January 1997, Elan was granted the worldwide rights
to certain oral drug delivery and other products derived from the
collaboration. Elan provided the funding necessary for the Company
to fulfill its obligations under the research program. During 1997
and 1996, CYTOGEN recorded $924,000 and $1.3 million, respectively,
in contract revenues from Elan. CYTOGEN has charged to expense all
costs incurred in fulfilling its obligation under this arrangement.
4. CELLCOR, INC. AND CYTORAD INCORPORATED:
In October 1995, CYTOGEN completed its acquisition of Cellcor
and the related subscription offering (the "Subscription
Offering"). As a result, CYTOGEN issued (i) 4,713,564 shares of
CYTOGEN common stock to acquire Cellcor and (ii) 5,144,388 shares
of CYTOGEN common stock in connection with the Subscription
Offering raising a total of $20 million, and reserved for issuance
up to 606,952 shares of CYTOGEN common stock issuable upon the
exercise of the options that were outstanding under the Cellcor
employee stock option plans at the time of the merger. The
transaction was accounted for by using the purchase method of
accounting, whereby the Company recorded a one-time, non-cash
charge of approximately $26.2 million for the acquisition of
technology rights in the 1995 statement of operations, representing
the amount by which the purchase price exceeded the fair value of
net assets acquired from Cellcor.
In February 1995, CYTOGEN completed its acquisition of CytoRad,
under which CYTOGEN exchanged for each outstanding CytoRad unit (i)
1.5 shares of CYTOGEN common stock, (ii) a warrant to acquire one
share of CYTOGEN common stock (which expired on January 31, 1997)
56
CYTOGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and (iii) a contingent value right ("CVR") to receive, under
certain circumstances and at no additional cost, up to one-half
share of CYTOGEN common stock. On February 29, 1996, the Company
announced that the CVRs expired by their terms and were of no
further value. Accordingly, the Company no longer had an
obligation to issue shares of its common stock to holders of CVRs
on January 31, 1997. As a result of the merger, the Company
acquired $11.7 million of CytoRad's cash and securities, before
payment of certain transaction costs. In addition, CYTOGEN
recorded a charge of approximately $19.7 million for acquisition of
technology and marketing rights, representing the amount by which
the purchase price exceeded the fair value of the net assets
acquired from CytoRad.
The acquisition of technology and marketing rights of Cellcor
and CytoRad was charged to the statement of operations as an in-process
research and development charge given the development stage
nature of the related technology.
5. DUPONT MERCK:
Pursuant to the terms of the DP/Merck Agreement between CYTOGEN
and DuPont Merck, CYTOGEN received from DuPont Merck (i) $1.3
million, $1.5 million and $1.5 million in 1995, 1996 and 1997,
respectively, to fund the clinical programs to expand the use and
marketing of Quadramet; and (ii) $2.0 million milestone payment in
1997 upon the FDA approval of Quadramet. The DP/Merck Agreement
further provides for the Company to receive royalty revenues based
on a percentage of sales of Quadramet or a guaranteed contractual
minimum royalty payments, whichever is greater, and additional
payments upon achievement of certain other milestones. During
1997, the Company recorded $3.3 million in royalty revenues.
6. THE DOW CHEMICAL COMPANY:
In 1993, CYTOGEN acquired from Dow an exclusive license for the
treatment of osteoblastic bone metastases in the U.S. for
Quadramet. This license was amended in 1995 to expand the territory
to include Canada and Latin America, and in 1996 to expand the
field to include all osteoblastic diseases. In 1995, upon the
filing of the NDA for Quadramet with FDA, the Company received a
one-time licensing fee of $2.0 million from Dow for their use of
Quadramet's NDA filing package. At the same time, the Company was
required to pay to Dow $1.0 million. In 1997, the Company recorded
a $4.0 million milestone payment to Dow upon FDA approval of
Quadramet. The agreement also 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. During
1997, the Company recorded $375,000 in royalty expense.
57
CYTOGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. REVENUES FROM MAJOR CUSTOMERS:
Significant revenue concentrations of the Company's total
product related, license and contract revenues were as follows:
Customer 1997 1996 1995
-------- ---- ---- ----
DuPont Merck (Note 5) 47% 27% 27%
Elan (Note 3) 6 23 -
Medi-Physics, Inc. 9 10 12
Dow (Note 6) - - 39
Medi-Physics, Inc. is a chain of radiopharmacies which distributes
ProstaScint and OncoScint kits.
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
1997 1996
------------ ------------
Payroll and related expenses $ 1,754,000 $ 1,974,000
Accounts payable 1,162,000 1,301,000
Research contracts and materials 745,000 1,039,000
Commission and royalties 647,000 -
Professional and legal 840,000 376,000
Other accruals 728,000 648,000
------------ ------------
$ 5,876,000 $ 5,338,000
9. LONG TERM LIABILITIES:
1997 1996
------------ ------------
Due to Knoll $ 1,619,000 $ 2,993,000
Due to Chiron - 343,000
Due to Elan (Note 2) 10,000,000 -
Capital lease obligations 291,000 343,000
------------ ------------
11,910,000 3,679,000
Less: Current portion (1,739,000) (1,824,000)
------------ ------------
$10,171,000 $ 1,855,000
============ ============
CYTOGEN and Knoll entered into an agreement for the co-promotion
of OncoScint CR/OV in the U.S., which was terminated in 1994 (the
"Termination Agreement"). Pursuant to the Termination Agreement,
the Company has reacquired all the U.S. marketing rights to
OncoScint CR/OV, which were previously granted to Knoll , and was
to required to pay Knoll $8.0 million over a four-year period and
without interest. In each of 1996 and 1997, the Company made
payments to Knoll for $1.6 million and is expected to make its last
payment in July 1998 for $1.7 million. Imputed interest of
$227,000, $355,000 and $521,000 relating to the obligation, which
was discounted based upon a 10% interest rate, was recorded in
1997, 1996 and 1995, respectively. The Company has the option to
delay any of its scheduled payments and pay interest on the
outstanding liability at the prevailing prime rate.
58
CYTOGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In 1994, the Company entered into a disengagement agreement
with Chiron to reacquire the exclusive marketing and distribution
rights to OncoScint CR/OV in Europe (the "European Rights"), which
were previously granted to Chiron, and purchase certain business
assets relating to the European Rights. The resulting liability of
CYTOGEN to Chiron was paid over three years and without interest,
as follows: $200,000 in 1995, $300,000 in 1996 and $377,000 in
1997. Imputed interest of $34,000, $58,000 and $71,000 relating
to the obligation, which was discounted based upon a 10% interest
rate, was recorded in 1997, 1996 and 1995, respectively.
In July 1997, the Company obtained a $10.0 million loan from
Elan. The loan is payable in full at the end of year three and
bears interest at the six month LIBOR rate plus 1% and is adjusted
on a semi-annual basis. The funds were used by CYTOGEN to provide
funding to Targon, including funding for the $7.5 million license
fee paid by Targon to Elan. In 1997, the Company recorded $310,000
in interest expense for this note.
The Company leases certain equipment under capital leases which
will expire on various dates through 2002. Property and equipment
leased under non-cancelable capital leases have a net book value of
$291,000 at December 31, 1997. Payments to be made under capital
lease obligations (including interest of $42,000) are as follows:
$142,000 in 1998, $135,000 in 1999, $30,000 in 2000, $15,000 in
2001 and $11,000 in 2002.
10. COMMON STOCK:
In January 1996, the Company sold to Fletcher Capital Markets,
Inc. an aggregate of 1.0 million shares of CYTOGEN common stock
at an aggregate price of $4.7 million, or $4.70 per share.
The Company also sold to a European institutional investor (i )
729,394 shares of CYTOGEN common stock in April 1996 for an
aggregate price of $5.0 million, (ii) 913,909 shares of CYTOGEN
common stock in October 1996 for an aggregate price of $5.0 million
and (iii) 776,791 shares of CYTOGEN common stock in November 1996
for an aggregate price of $4.0 million.
In September 1996, the Company sold to Fletcher Fund, L.P.
225,000 shares of CYTOGEN common stock for an aggregate price of
$1.5 million, or $6.529 per share.
11. CONVERTIBLE PREFERRED STOCK:
In September 1996, CYTOGEN issued 1,000 shares of Series A
Convertible and Exchangeable Preferred Stock ("Series A") in
connection with the formation of Targon (see Note 2). The 1996
results of operations have been restated to give effect to the
accounting treatment announced by the staff of the Securities and
Exchange Commission (SEC) at the March 13, 1997 meeting of the
Emerging Issues Task Force relative to the 1996 Series A issuance.
Since the Series A shares were immediately convertible into common
stock, under this accounting treatment, the most beneficial
conversion discount was recorded analogous to a deemed dividend in
the restated 1996 financial statements. The effect of this
restatement was to increase the net loss applicable to common
stockholders by $4.6 million and to increase the loss per common
share from $0.49 to $0.59. This restatement had no effect on the
stockholders' equity or cash flows of the Company.
59
CYTOGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In December 1997, CYTOGEN obtained a financing commitment from
private investors for the purchase of up to $20.0 million of its
Convertible Preferred Stock subject to satisfaction of certain
conditions. CYTOGEN completed the first tranche of the financing
in December 1997 by issuing 750 shares of Series B Preferred Stock
("Series B") for an aggregate price of $7.5 million. The Series B
carries a dividend rate of 6% which is payable in cash or common
stock of CYTOGEN at the Company's option at the earlier of
conversion date or when and as declared by the Board of Directors.
The Company has accrued the pro rata portion of the dividend in
1997.
The Company may at its option issue additional securities under
the commitment in up to two additional series, subject to certain
conditions. The purchasers are not obligated to purchase
additional securities if the average closing bid price of the
Company's common stock is less than $2.00 per share for a thirty
day period, and the maximum funding for each series is determined
by the price of the stock as follows: (i) between $2.01 to $2.49
per share, $4.0 million; (ii) between $2.50 to $2.99 per share,
$5.5 million; (iii) between $3.00 to $3.74 per share, $7.0 million;
(iv) between $3.75 to $4.49 per share, $10.0 million; or (v) $4.50
per share or greater, $12.5 million. The obligations of the
purchasers to purchase additional securities are subject to
additional conditions related to the effectiveness during certain
periods of a secondary registration statement permitting resale of
shares of common stock issued on conversion of the Series B; and to
certain other events.
The conversion of the Series B to common stock is based on the
price of CYTOGEN common stock at the time of conversion. Holders
may convert, at their option, at either $3.4575 per share or at a
stated discount to the price of CYTOGEN common stock at the time of
conversion ranging from 5% to 15%, depending on when the conversion
occurs. Consequently, the Company has recorded a deemed dividend
of $1.3 million on the first tranche in December 1997, which
represented the maximum 15% conversion discount given to the
holders of the Series B. The conversion price may be adjusted
under certain circumstances.
12. STOCK OPTIONS AND GRANTS:
The Company has various stock option plans that provide for the
issuance of incentive and non-qualified stock options to employees,
non-employee directors and outside consultants, for which an
aggregate of 6,233,357 shares of common stock have been reserved.
The persons to whom options may be granted and the number, type,
and terms of the options vary among the plans. 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 common stock at the date of grant. Under certain
circumstances, vesting may accelerate. Activity under these plans
was as follows:
60
CYTOGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Number of Price Range
Shares Per Share
---------- ----------------
Balance at December 31, 1994 2,127,940 $ 1.00 - 17.00
Granted 1,425,607 2.69 - 5.47
Exercised (91,400) 1.00 - 3.88
Cancelled (509,290) 2.69 - 17.00
----------
Balance at December 31, 1995 2,952,857 $ 2.69 - 17.00
Granted 1,073,770 5.00 - 9.28
Exercised (254,907) 2.69 - 7.50
Cancelled (248,780) 2.69 - 7.50
----------
Balance at December 31, 1996 3,522,940 $ 2.69 - 17.00
Granted 822,400 2.06 - 6.13
Excersised (60,350) 1.77 - 5.47
Cancelled (459,530) 2.69 - 8.88
----------
Balance at December 31, 1997 3,825,460 $ 2.06 - 17.00
At December 31, 1997, options to purchase 1,424,704 shares of
common stock were exercisable and 1,611,995 shares of common stock
were available for issuance of additional options that may be
granted under the plans.
In connection with the Cellcor merger (see Note 4), CYTOGEN
reserved for issuance 606,952 shares of common stock that will
become issuable upon the exercise of the Cellcor stock options. At
December 31, 1997, 324,289 Cellcor stock options were outstanding
at exercise prices ranging from $0.83 to $14.58 and 324,269 Cellcor
stock options were exercisable.
In January 1998 the Company cancelled approximately 1,800,000
unexercised stock option grants ranging in price from $3.88 to
$16.50 per share and issued approximately 1,540,000 stock option
grants at $1.95 per share which equaled the fair market per share
price. This repricing was not available to officers, directors,
executives and consultants of the Company.
In 1997, the Company adopted an employee stock purchase plan
under which eligible employees may elect to purchase shares of
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
1997, employees purchased 16,017 shares for aggregate proceeds of
$34,692. The Company has reserved 483,983 shares for future
issuance under its employee stock purchase plan.
The Company applies Accounting Principle Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and the related
interpretations in accounting for its stock option plans. The
disclosure requirement of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," was adopted by the Company in 1996. Had
compensation cost of the Company's common stock option plan been
determined under SFAS No. 123, the Company's net loss would have
been increased to the following pro forma amounts:
61
CYTOGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Year Ended December 31,
-----------------------
1997 1996 1995
-------- ------- -------
Net loss to common stockholders, as reported $(32,064,000) $(28,337,000) $(72,520,000)
Pro forma net loss to common stockholders $(34,946,000) $(30,594,000) $(72,967,000)
Net loss per common share, as reported $(0.63) $(0.59) $(2.11)
Pro forma net loss per common share $(0.68) $(0.63) $(2.13)
The average fair value per option of the options granted under
the stock option plans during 1997, 1996 and 1995 is estimated as
$2.10, $3.35 and $3.20, respectively, on the date of grant using
the Black-Scholes option pricing model with the following
assumptions for 1997, 1996 and 1995: dividend yield of zero,
volatility of 69.87%, 70.72% and 69.57%, respectively, risk-free
interest rate 6.07%, 5.90% and 6.04%, respectively, and an expected
life of 5 years. The average fair value per option ascribed to the
employee stock purchase plan during 1997 is estimated at $2.17 per
share on the date of grant using the Black-Scholes option pricing
model with the following assumptions; divided yield of zero,
volatility of 50.20%, risk free interest rate of 5.13% and expected
life of 3 months. Because the SFAS No. 123 method of accounting is
not required to be applied to options granted prior to January 1,
1995, the resulting pro forma compensation charge may not be
representative of that to be expected in future years.
13. PENSION PLANS:
The Company maintains a defined contribution pension plan. 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 five 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 pension expense was $405,000, $328,000 and
$311,000 for 1997, 1996 and 1995, respectively.
14. INCOME TAXES:
As of December 31, 1997, CYTOGEN had federal net operating loss
carryforwards of approximately $155 million. The Company also had
federal and state research and development tax credit carryforwards
of approximately $5 million. The net operating loss and credit
carryforwards began to expire in 1998.
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 upon the Company's loss history, a valuation
allowance for deferred tax assets has been provided:
62
CYTOGEN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1997 1996
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 52,700,000 $ 48,200,000
Capitalized research and development expenses 20,500,000 18,200,000
Research and development credit 5,000,000 5,000,000
Acquisition of in-process technology 2,500,000 -
Other, net 140,000 140,000
Total deferred tax assets 80,840,000 71,540,000
------------- -------------
Valuation allowance for deferred tax assets (80,840,000) (71,540,000)
------------- -------------
Net deferred tax assets $ - $ -
In 1995, CYTOGEN acquired CytoRad and Cellcor (see Note 4), both
of which had net operating loss carryforwards. Due to Section 382
limitation, approximately $10 million of CytoRad and $12.0 million
of Cellcor carryforwards may be available to offset future taxable
income. A 100% valuation allowance was established on the
acquisition dates as realization of these tax assets is uncertain.
15. COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities and certain equipment under
non-cancelable operating leases that expire at various times
through 2003. Rent expense incurred on these leases was $1.8
million, $1.8 million and $1.2 million in 1997, 1996 and 1995,
respectively. Minimum future obligations under the operating
leases total $7.4 million as of December 31, 1997 and will be paid
as follows: $1.9 million in 1998, $1.9 million in 1999, $1.4
million in 2000, $1.2 million in 2001, $984,000 in 2002 and
$108,000 in 2003.
The Company is obligated to make minimum future payments under
research and development contracts that expire at various times.
As of December 31, 1997, the minimum future payments under
contracts with fixed terms totalled $3.8 million and will be paid
as follows: $1.3 million in 1998, $1.3 million in 1999, and $1.2
million in 2000. Under contracts whose expirations are not fixed,
the annual minimum payments are $105,000 in 1998, $115,000 in 1999
and $125,000 in 2000 and thereafter. In addition, the Company is
obligated to pay performance-based compensation to its marketing
partner and royalties on revenues from commercial products
developed from the research, including certain guaranteed minimum
payments.
During March 1998, a lawsuit was instituted against the Company in
the Federal District Court for the Eastern District of Pennsylvania by
Quaker Capital Group ("Quaker"), claiming rights to fees in connection with
a financing concluded by the Company in December 1997, based on a financing
engagement entered with Quaker during 1997. The Company believes it has
substantial defenses to the claims and intends to defend against the lawsuit
aggressively. In the opinion of management, based upon advice of counsel,
the Company does not believe that the claim is likely to have a materially
adverse effect on the Company's financial position.
63
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
10.39 Employment Agreement effective as of December 23,
1996 between CYTOGEN Corporation and Dr. Graham S. May. 65
10.40 Employment Agreement effective as of October 3, 1992
between Cellcor, Inc. and Frederick M. Miesowicz. 67
21 Subsidiaries of CYTOGEN Corporation 69
23 Consent of Arthur Andersen LLP 70
27 Financial Data Schedule (Submitted to SEC only in
electronic format)
64