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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark one)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to _____________
Commission File Number 0-16132
CELGENE CORPORATION
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2711928
- -------------------------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
7 Powder Horn Drive, Warren, NJ 07059
- -------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 732-271-1001.
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No
--- ---
At November 5, 2004, 164,629,579 shares of Common Stock par value $.01 per
share, were outstanding.
CELGENE CORPORATION
INDEX TO FORM 10-Q
Page No.
PART I FINANCIAL INFORMATION
Item I Unaudited Consolidated Financial Statements
Consolidated Statements of Operations -
Three- and Nine-Month Periods Ended September 30,
2004 and 2003 3
Consolidated Balance Sheets -
As of September 30, 2004 and December 31, 2003 4
Consolidated Statements of Cash Flows -
Nine-Month Periods Ended September 30, 2004 and 2003 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 31
Item 4 Controls and Procedures 33
PART II OTHER INFORMATION
Item 6 Exhibits 34
Signatures 35
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Thousands of dollars, except per share amounts)
Three Month Period Ended Nine Month Period Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Revenue:
Net product sales $ 83,803 $ 65,445 $ 238,933 $ 173,746
Collaborative agreements and other revenue 10,392 6,208 15,420 9,595
Royalty revenue 7,273 2,679 17,741 7,366
------------- ------------- ------------- -------------
Total revenue 101,468 74,332 272,094 190,707
------------- ------------- ------------- -------------
Expenses:
Cost of goods sold 15,166 15,932 43,655 36,359
Research and development 40,154 32,804 116,520 88,042
Selling, general and administrative 27,750 24,690 79,408 69,832
------------- ------------- ------------- -------------
Total expenses 83,070 73,426 239,583 194,233
------------- ------------- ------------- -------------
Operating income (loss) 18,398 906 32,511 (3,526)
Other income and expense:
Interest and other income 7,219 6,439 20,902 15,654
Interest expense 2,388 2,674 7,164 3,266
------------- ------------- ------------- -------------
Income before taxes 23,229 4,671 46,249 8,862
Income tax provision 1,974 378 3,931 723
------------- ------------- ------------- -------------
Net income $ 21,255 $ 4,293 $ 42,318 $ 8,139
============= ============= ============= =============
Net income per common share:
Basic $ 0.13 $ 0.03 $ 0.26 $ 0.05
============= ============= ============= =============
Diluted $ 0.12 $ 0.02 $ 0.24 $ 0.05
============= ============= ============= =============
Weighted average number of shares of
common stock utilized to calculate net
income per common share:
Basic 164,091,000 162,094,000 163,574,000 161,520,000
============= ============= ============= =============
Diluted 177,064,000 172,657,000 176,273,000 170,427,000
============= ============= ============= =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except share and per share amounts)
September 30, 2004 December 31, 2003
------------------ -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 268,997 $ 267,453
Marketable securities available for sale 529,834 399,514
Accounts receivable, net of allowance of $2,093 and $1,530
at September 30, 2004 and December 31, 2003, respectively 44,476 35,495
Inventory 21,566 9,696
Other current assets 20,961 17,941
--------- ---------
Total current assets 885,834 730,099
Plant and equipment, net 22,668 22,546
Intangible assets, net 2,461 2,695
Goodwill 3,268 3,490
Other assets 27,317 32,506
--------- ---------
Total assets $ 941,548 $ 791,336
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,644 $ 15,340
Accrued expenses 56,410 55,276
Current portion of deferred revenue 717 589
Current portion of capital leases and note obligation 8 30
Other current liabilities 3,531 559
--------- ---------
Total current liabilities 83,310 71,794
Long term convertible notes 400,000 400,000
Deferred revenue, net of current portion 1,272 1,122
Capitalized leases and note obligation, net of current portion 6 16
Other non-current liabilities 13,341 8,350
--------- ---------
Total liabilities 497,929 481,282
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value per share,
5,000,000 authorized; none outstanding at
September 30, 2004 and December 31, 2003 -- --
Common stock, $.01 par value per share
275,000,000 shares authorized;
issued and outstanding 82,158,518 and 81,411,055 shares
at September 30, 2004 and December 31, 2003, respectively 822 814
Common stock in treasury, at cost; 5,282 shares at
September 30, 2004 and none at December 31, 2003 (306) --
Additional paid-in capital 623,032 607,484
Accumulated deficit (266,537) (308,856)
Accumulated other comprehensive income 86,608 10,612
--------- ---------
Total stockholders' equity 443,619 310,054
--------- ---------
Total liabilities and stockholders' equity $ 941,548 $ 791,336
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of dollars)
Nine Month Period Ended
September 30,
2004 2003
--------- ---------
Cash flows from operating activities:
Net income $ 42,318 $ 8,139
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of long-term assets 6,260 6,142
Provision (recovery) for accounts receivable allowances 396 (34)
Realized gain on marketable securities available
for sale (1,599) (6,096)
Non-cash stock-based expense 296 593
Amortization of premium/discount on marketable
securities available for sale, net 1,521 312
Amortization of debt issuance cost 1,832 812
Shares issued for employee benefit plans 4,267 2,775
Change in current assets and liabilities:
Increase in accounts receivable (9,377) (12,231)
Increase in inventory (11,869) (3,620)
Increase in other operating assets (1,745) (5,115)
Increase in accounts payable and
accrued expenses 13,603 22,002
Increase in deferred revenue 278 193
--------- ---------
Net cash provided by operating activities 46,181 13,872
--------- ---------
Cash flows from investing activities:
Capital expenditures (6,702) (7,783)
Investment in convertible notes -- (12,000)
Proceeds from sales and maturities of marketable
securities available for sale 231,363 91,702
Purchases of marketable securities
available for sale (272,953) (255,831)
Purchase of long-term investment (7,000) --
--------- ---------
Net cash used in investing activities (55,292) (183,912)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of common stock
options and warrants 10,687 10,018
Proceeds from issuance of convertible notes -- 400,000
Debt issuance costs -- (12,212)
Proceeds from notes receivable from stockholders -- 42
Repayment of capital lease and note obligations (32) (88)
--------- ---------
Net cash provided by financing activities 10,655 397,760
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,544 227,720
Cash and cash equivalents at beginning of period 267,453 85,475
--------- ---------
Cash and cash equivalents at end of period $ 268,997 $ 313,195
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(Thousands of dollars)
Nine Month Period Ended
September 30,
2004 2003
------- ------
Supplemental schedule of non-cash investing and
financing activity:
Change in net unrealized gain on
marketable securities available for sale $75,996 $2,061
======= ======
Conversion of convertible notes and accrued interest thereon $12,656 $ --
======= ======
Equipment acquisition on capital leases $ -- $ 110
======= ======
Supplemental disclosure of cash flow information:
Interest paid $ 7,000 $ 123
======= ======
Cash received related to tax benefit, net $ 337 $ --
======= ======
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
Notes to Unaudited Consolidated Financial Statements
September 30, 2004
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
1. ORGANIZATION AND BASIS OF PRESENTATION
Celgene Corporation and subsidiaries ("Celgene" or the "Company") is an
integrated biopharmaceutical company primarily engaged in the discovery,
development and commercialization of innovative therapies designed to treat
cancer and immunological diseases through regulation of cellular, genomic and
proteomic targets.
On September 9, 2004, the Company announced that its Board of Directors approved
a two-for-one stock split payable in the form of a 100 percent stock dividend.
Stockholders received one additional share for every share they owned as of the
close of business on October 15, 2004. The additional shares were distributed on
October 22, 2004 and reporting of the Company's share price on a split-adjusted
basis commenced on October 25,2004. As a result, the Company's shares
outstanding increased from approximately 82,244,554 shares to 164,489,107
shares. All share and per share amounts in the Consolidated Statements of
Operations and share amounts disclosed in the accompanying notes thereto have
been restated to reflect the two-for-one stock split. Shares issued and
outstanding at September 30, 2004 and December 31, 2003 in the Consolidated
Balance Sheets have not been restated to reflect the stock split.
The unaudited consolidated financial statements included herein have been
prepared from the books and records of the Company pursuant to the rules and
regulations of the Securities and Exchange Commission for reporting on Form
10-Q. Certain information and footnote disclosures normally included in complete
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. Certain
reclassifications have been made to the prior period's consolidated financial
statements in order to conform to the current period's presentation. The interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
latest annual report on Form 10K.
Interim results may not be indicative of the results that may be expected for
the year. In the opinion of management, all adjustments considered necessary for
a fair presentation of these interim statements have been included and are of a
normal and recurring nature.
2. NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB issued an Exposure Draft, "Share-Based Payment," that
addresses the accounting for share-based payment transactions in which employee
services are received in exchange for either equity instruments of the Company,
liabilities that are based on the fair value of the Company's equity instruments
or that may be settled by the issuance of such equity instruments. The proposed
standard would eliminate the ability to account for share-based compensation
transactions using the intrinsic value method as prescribed in APB Opinion No.
25, "Accounting for Stock Issued to Employees". Instead, the proposed standard
would generally require that such transactions be accounted for using a
fair-value-based method and that compensation expense be recognized in the
consolidated statement of
7
Notes to Unaudited Consolidated Financial Statements
September 30, 2004
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
operations. The currently proposed effective date of the proposed standard is
for periods beginning after June 15, 2005. It is expected that the final
standard will be issued before December 31, 2004. If the FASB adopts this
Exposure Draft, as currently drafted, the Company will have to recognize the
fair value of the stock based compensation in the consolidated statement of
operations rather than disclosing the pro forma impact of the stock based
compensation as the Company currently discloses in Note 7.
In September 2004, the Emerging Issues Task Force ("EITF") delayed the effective
date for the recognition and measurement guidance previously discussed under
EITF Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." The proposed statement will clarify the
meaning of other-than-temporary impairment and its application to investments in
debt and equity securities, in particular investments within the scope of FASB
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and investments accounted for under the cost method. The Company is
currently evaluating the effect of this proposed statement on its consolidated
financial position and results of operations.
3. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per common share is computed by dividing net
income available to common stockholders by the weighted-average number of common
shares outstanding during the period increased to include all additional common
shares that would have been outstanding assuming potentially dilutive common
shares had been issued and any proceeds thereof used to repurchase common stock
at the average market price during the period. The proceeds used to repurchase
common stock are assumed to be the sum of the amount to be paid to the Company
upon exercise of options, the amount of compensation cost attributed to future
services and not yet recognized and, if applicable, the amount of income taxes
that would be credited to or deducted from capital upon exercise. The potential
common shares related to the June 2003 convertible note issuance was
anti-dilutive and were excluded from the diluted earnings per share computation
for the three and nine month periods ended September 30, 2004 and 2003.
The total number of potential common shares excluded from the diluted earnings
per share computation because their inclusion would have had an anti-dilutive
was 19,581,000 and 22,264,000 for the three month periods ended September 30,
2004 and 2003, respectively, and 20,843,000 and 22,414,000 for the nine month
periods ended September 30, 2004 and 2003, respectively.
8
Notes to Unaudited Consolidated Financial Statements
September 30, 2004
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
The following represents the reconciliation of the basic and diluted earnings
per share computations for the three and nine month periods ended September 30,
2004 and 2003:
- --------------------------------------------------------------------------------
Three month period ended
September 30,
2004 2003
- --------------------------------------------------------------------------------
Net income $21,255 $ 4,293
Weighted average number of common
shares outstanding:
Basic 164,091,000 162,094,000
Effect of dilutive securities:
Options 12,519,000 10,285,000
Warrants 210,000 212,000
Restricted shares and other
long-term incentives 244,000 66,000
----------- -----------
Diluted 177,064,000 172,657,000
Earnings per share:
Basic $0.13 $0.03
Diluted $0.12 $0.02
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Nine month period ended
September 30,
2004 2003
- --------------------------------------------------------------------------------
Net income $42,318 $ 8,139
Weighted average number of common
shares outstanding:
Basic 163,574,000 161,520,000
Effect of dilutive securities:
Options 12,238,000 8,663,000
Warrants 207,000 187,000
Restricted shares and other
long-term incentives 254,000 57,000
----------- -----------
Diluted 176,273,000 170,427,000
Earnings per share:
Basic $0.26 $0.05
Diluted $0.24 $0.05
- --------------------------------------------------------------------------------
4. CONVERTIBLE NOTES
In June 2003, the Company issued $400 million of unsecured convertible notes to
qualified institutional investors. The convertible notes have a five-year term
and a coupon rate of 1.75% payable semi-annually commencing December 1, 2003.
The convertible notes have a conversion rate of $24.225 per share, which
represented a 50% premium to the closing price of the Company's common stock on
May 28, 2003. The debt issuance costs related to these convertible notes, which
totaled approximately $12.2 million, are
9
Notes to Unaudited Consolidated Financial Statements
September 30, 2004
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
classified under "Other Assets" on the Consolidated Balance Sheet and are being
amortized over five years, assuming no conversion. Under the terms of the
Purchase Agreement, the noteholders can convert the notes at any time into
16,511,840 shares of common stock at the conversion price, and also have the
right to require the Company to redeem the notes in cash at a price equal to
100% of the principal amount to be redeemed, plus accrued interest, prior to
maturity in the event of a change of control and certain other transactions
defined as a "fundamental change" within the Agreement. The Company has
registered the notes and common stock issuable upon conversion with the
Securities and Exchange Commission, and is required to use reasonable best
efforts to keep the related registration statement effective for the defined
period. Pursuant to the indenture governing the notes, the Company may not merge
or transfer substantially all assets, as defined, unless certain conditions are
met.
5. MARKETABLE SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value of marketable securities available for sale by class of
security at September 30, 2004 and December 31, 2003 were as follows:
- ------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30, 2004 Cost Gain Loss Value
- ------------------------------------------------------------------------------------------------------------------------
Government agency
mortgage obligations $171,877 $ 1,131 $ (724) $ 172,284
Government agency
bonds and notes 1,051 -- (7) 1,045
Corporate debt
securities 250,085 7,213 (1,069) 256,228
Equity securities 20,212 80,065 -- 100,277
----------------------------------------------------------------------------------
Total $443,225 $88,409 $(1,800) $ 529,834
----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2003 Cost Gain Loss Value
- ------------------------------------------------------------------------------------------------------------------------
Government agency
mortgage obligations $188,319 $ 1,053 $(186) $ 189,186
Government agency
bonds and notes 650 1 (5) 646
Corporate debt
securities 199,933 9,977 (228) 209,682
----------------------------------------------------------------------------------
Total $388,902 $11,031 $(419) $ 399,514
----------------------------------------------------------------------------------
10
Notes to Unaudited Consolidated Financial Statements
September 30, 2004
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
As of September 30, 2004, the duration of the Company's debt securities
classified as marketable securities available for sale were as follows:
---------------------------------------------------------------
Amortized Fair
Cost Value
---------------------------------------------------------------
Due within one year $ 64,457 $ 65,059
Due after one year through
three years 157,777 160,906
Due after three years
through five years 50,261 50,100
Due after five years
through eight years 107,710 109,101
Due after eight years 42,808 44,391
----------------------
$423,013 $429,557
----------------------
6. INVENTORY
Inventory at September 30, 2004 and December 31, 2003 consisted of the
following:
------------------------------------------------------------------
September 30, December 31,
2004 2003
------------------------------------------------------------------
Raw materials $3,322 $3,009
Work in process 1,742 2,537
Finished goods 16,502 4,150
----------------------------
Total $21,566 $9,696
----------------------------
7. STOCK BASED COMPENSATION
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting For Stock Issued
To Employees," and related interpretations, in accounting for its fixed stock
option plans. As such, compensation expense for grants to employees or members
of the Board of Directors would be recorded on the date of grant only if the
current market price of the Company's stock exceeded the exercise price.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting For
Stock-Based Compensation" ("SFAS 123") as amended, establishes accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As permitted under SFAS 123, the
Company has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements of SFAS
123, as amended.
Options or stock awards issued to non-employees and consultants are recorded at
fair value as determined in accordance with SFAS 123 and Emerging Issues Task
Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services," and expensed over the related vesting period.
11
Notes to Unaudited Consolidated Financial Statements
September 30, 2004
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
The following table illustrates the effect on net income and net income per
share as if the fair-value-based method under SFAS 123 had been applied:
- --------------------------------------------------------------------------------
Three Month Period Ended
September 30,
2004 2003
- --------------------------------------------------------------------------------
Net income applicable to common stockholders:
As reported $ 21,255 $ 4,293
Add: stock-based employee compensation
expense included in reported net income 63 63
Deduct: stock-based employee compensation
expense determined under fair-value-based
method (7,702) (4,873)
--------- ---------
Pro forma $ 13,616 $ (517)
--------- ---------
Net income (loss) per common share:
Basic, as reported $ 0.13 $ 0.03
Basic, pro forma $ 0.08 $ 0.00
Diluted, as reported $ 0.12 $ 0.02
Diluted, pro forma $ 0.08 $ 0.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Nine Month Period Ended
September 30,
2004 2003
- --------------------------------------------------------------------------------
Net income applicable to common stockholders:
As reported $ 42,318 $ 8,139
Add: stock-based employee compensation
expense included in reported net income 187 187
Deduct: stock-based employee compensation
expense determined under fair-value-based
method (22,218) (13,812)
--------- ----------
Pro forma $ 20,287 $ (5,486)
--------- ----------
Net income (loss) per common share:
Basic, as reported $ 0.26 $ 0.05
Basic, pro forma $ 0.12 $ (0.03)
Diluted, as reported $ 0.24 $ 0.05
Diluted, pro forma $ 0.12 $ (0.03)
- --------------------------------------------------------------------------------
12
Notes to Unaudited Consolidated Financial Statements
September 30, 2004
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
The pro forma effects on net income applicable to common stockholders and net
income per common share for the three and nine month periods ended September 30,
2004 and 2003 may not be representative of the pro forma effects in future
years.
The weighted-average fair value per share was $10.68 and $5.20 for stock options
granted in the nine-month periods ended September 30, 2004 and 2003,
respectively. The company estimated the fair values of options granted using a
Black-Scholes option pricing model with the following assumptions:
- --------------------------------------------------------------------------------
Three Month Period Ended
September 30,
2004 2003
- --------------------------------------------------------------------------------
Risk-free interest rate 2.89% 2.10%
Expected stock price volatility 48% 42%
Expected term until exercise (years) 3.6 3.1
Expected dividend yield 0% 0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Nine Month Period Ended
September 30,
2004 2003
- --------------------------------------------------------------------------------
Risk-free interest rate 2.88% 2.00%
Expected stock price volatility 50% 45%
Expected term until exercise (years) 3.5 2.8
Expected dividend yield 0% 0%
- --------------------------------------------------------------------------------
Restricted Stock Awards: During 2001, the Company issued to certain employees an
aggregate of 105,000 restricted stock awards. Such restricted stock awards will
vest on September 19, 2006, unless certain conditions that would trigger
accelerated vesting are otherwise met prior to such date. The fair value of
these restricted stock awards at the grant date was $1.4 million, which is being
amortized as compensation expense over the contractual vesting period and
classified in selling, general and administrative expenses. Compensation expense
relating to these restricted stock awards was approximately $0.1 million for
each of the three month periods ended September 30, 2004 and 2003 and
approximately $0.2 million for each of the nine month periods ended September
30, 2004 and 2003.
Non-Employee Share Based Payments: Expense relating to stock, stock options and
warrants issued to consultants, advisors or financial institutions was
immaterial for the three month period ended September 30, 2004 and approximately
$0.1 million for the three month period ended September 30, 2003. For the nine
month periods ended September 30, 2004 and 2003, expense relating to these
issuances was approximately $0.1 million and $0.4 million, respectively.
13
Notes to Unaudited Consolidated Financial Statements
September 30, 2004
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
8. INTANGIBLE ASSETS
The Company's recorded intangible assets, which are being amortized over their
estimated useful lives, relate to the Company's December 31, 2002 acquisition of
Anthrogenesis Corporation. At September 30, 2004 and December 31, 2003, the
gross carrying amount and accumulated amortization, by major intangible asset
class were as follows:
- --------------------------------------------------------------------------------
Gross Intangible
carrying Accumulated assets,
September 30, 2004 value amortization net
- --------------------------------------------------------------------------------
Supplier relationships $ 710 $249 $ 461
Customer lists 1,700 198 1,502
Technology 604 106 498
------------------------------------------
Total $3,014 $553 $2,461
------------------------------------------
- --------------------------------------------------------------------------------
Gross Intangible
carrying Accumulated assets,
December 31, 2003 value amortization net
- --------------------------------------------------------------------------------
Supplier relationships $ 710 $142 $ 568
Customer lists 1,700 113 1,587
Technology 600 60 540
------------------------------------------
Total $3,010 $315 $2,695
------------------------------------------
Amortization of acquired intangible assets was approximately $0.1 million for
the three month periods ended September 30, 2004 and 2003, respectively, and
approximately $0.2 million for the nine month periods ended September 30, 2004
and 2003, respectively. Assuming no changes in the gross carrying amount of
intangible assets, the amortization of intangible assets for the next five
fiscal years is estimated to be approximately $0.3 million for the years 2004
through 2007 and $0.2 million for 2008.
The Company's recorded goodwill, which represents the excess of the purchase
price over the fair value of the assets acquired and liabilities assumed in
connection with the Company's December 31, 2002 acquisition of Anthrogenesis
Corporation and, which has been allocated to the Company's Stem Cell Therapies
segment, was $3.3 million and $3.5 million at September 30, 2004 and December
31, 2003, respectively. In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," goodwill is not amortized, but rather is reviewed at least
annually for impairment.
9. COMPREHENSIVE INCOME
The components of comprehensive income, which represents the change in equity
from non-owner sources, for the three and nine month periods ended September 30,
2004 and 2003 were as follows:
14
Notes to Unaudited Consolidated Financial Statements
September 30, 2004
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
- ----------------------------------------------------------------------------
Three Month Period Ended
September 30,
2004 2003
- ----------------------------------------------------------------------------
Net income $ 21,255 $ 4,293
Other comprehensive income:
Net unrealized gains on marketable
securities available for sale, net of tax 40,830 1,405
Less: reclassification adjustment
for gains included in net income (765) (1,851)
-------- --------
Net unrealized gains on marketable
securities available for sale, net of tax 40,065 (446)
-------- --------
Total comprehensive income $ 61,320 $ 3,847
-------- --------
- ------------------------------------------------------------------------------
Nine Month Period Ended
September 30,
2004 2003
- ------------------------------------------------------------------------------
Net income $ 42,318 $ 8,139
Other comprehensive income:
Net unrealized gains on marketable
securities available for sale, net of tax 77,595 8,157
Less: reclassification adjustment
for gains included in net income (1,599) (6,096)
--------- ---------
Net unrealized gains on marketable
securities available for sale, net of tax 75,996 2,061
--------- ---------
Total comprehensive income $ 118,314 $ 10,200
--------- ---------
The unrealized gain related to the shares of Pharmion common stock for the
three- and nine-months ended September 30, 2004 was approximately $36.4 million
and $80.1 million, respectively.
10. SEGMENTS
The Company operates in two business segments - Human Pharmaceuticals and Stem
Cell Therapies. Revenues and income (loss) before taxes by segment for the three
and nine month periods ended September 30, 2004 and 2003 were as follows:
- --------------------------------------------------------------------------------
Three Months Ended
September 30, September 30,
2004 2003
- --------------------------------------------------------------------------------
Revenues:
Human Pharmaceuticals $ 100,100 $ 73,827
Stem Cell Therapies 1,368 505
--------- ---------
Total $ 101,468 $ 74,332
--------- ---------
Income (loss) before taxes:
Human Pharmaceuticals $ 26,738 $ 9,477
Stem Cell Therapies (3,509) (4,806)
--------- ---------
Total $ 23,229 $ 4,671
--------- ---------
15
Notes to Unaudited Consolidated Financial Statements
September 30, 2004
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30, September 30,
2004 2003
- --------------------------------------------------------------------------------
Revenues:
Human Pharmaceuticals $ 268,682 $ 188,157
Stem Cell Therapies 3,412 2,550
--------- ---------
Total $ 272,094 $ 190,707
--------- ---------
Income (loss) before taxes:
Human Pharmaceuticals $ 57,685 $ 19,701
Stem Cell Therapies (11,436) (10,839)
--------- ---------
Total $ 46,249 $ 8,862
--------- ---------
Expenses incurred at the consolidated level are included in the results of the
human pharmaceuticals segment.
11. ALKERAN DISTRIBUTION AGREEMENT
On March 31, 2003, the Company entered into a three-year supply and distribution
agreement with GlaxoSmithKline ("GSK") to distribute, promote and sell
ALKERAN(R) (melphalan), a therapy approved by the U.S. Food and Drug
Administration for the palliative treatment of multiple myeloma and carcinoma of
the ovary. Under the terms of the agreement, Celgene purchases ALKERAN tablets
and ALKERAN for infusion from GSK and distributes the products in the United
States under the Celgene label. The agreement requires the Company to purchase
certain minimum quantities each year for the initial three-year term under a
take-or-pay arrangement aggregating $56.6 million over such period and is
automatically extended by successive one-year periods, unless at least one-year
prior to the renewal date, either party advises the other party that it elects
not to extend the agreement. The remaining minimum purchase requirements at
September 30, 2004 were $34.9 million.
12. PHARMION AGREEMENTS
In March 2004, the Company converted the $12.0 million Pharmion Senior
Convertible Promissory Note, with a principal amount of $12.0 million, and
accrued interest of approximately $0.7 million into 1,150,511 shares of Pharmion
common stock at a conversion price of $11.00 per share. Additionally, in
September 2004, the Company exercised an aggregate of 789,089 warrants that it
had received in connection with the November 2001 license agreement with
Pharmion Corporation and Pharmion GmbH and in connection with the April 2003
securities purchase agreement with Pharmion. As a result of these transactions,
at September 30, 2004, the Company held 1,939,600 shares of Pharmion common
stock, which had a fair value of $100.3 million and was classified in Marketable
Securities Available for Sale. The related unrealized gain of approximately
$80.1 million was included in Accumulated Other Comprehensive Income in the
Stockholders' Equity section of the Consolidated Balance Sheet. For more
information on the Pharmion
16
Notes to Unaudited Consolidated Financial Statements
September 30, 2004
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
Senior Convertible Promissory Note and other Pharmion agreements, refer to Note
15 of the Notes to the Consolidated Financial Statements included in the
Company's 2003 Annual Report on Form 10-K.
13. SUBSEQUENT EVENTS
On October 21, 2004, the Company acquired all of the outstanding shares of Penn
T Limited ("Penn T"), the UK based manufacturer of THALOMID(R), from a
consortium of private investors for approximately $110 million in cash. The cash
consideration was determined by the parties in arms-length negotiations and was
paid from Celgene's existing cash and cash equivalents. Prior to the
acquisition, Celgene and Penn T were parties to a manufacturing agreement
pursuant to which Penn T manufactured THALOMID for Celgene.
In connection with the acquisition, on October 21, 2004, Celgene and its
operating subsidiary, Penn T, entered into a technical services agreement with
Penn Pharmaceutical Services Limited ("PPSL") and Penn Pharmaceutical Holding
Limited pursuant to which PPSL will provide the services and facilities
necessary for the manufacture of Celgene's requirements of THALOMID and other
thalidomide formulations.
On August 6, 2004, the Company executed a non-binding real estate purchase and
sale agreement to purchase certain property located in Summit, Union County, New
Jersey for an aggregate purchase price of $25.0 million. Under the terms of the
agreement, the Company had a ninety-day due diligence period under which it
could have terminated the agreement for any or no reason. On November 4, 2004,
the due diligence period expired without the Company seeking to terminate the
agreement.
Based on the satisfactory completion of due diligence, the Company now intends
to close the purchase on November 30, 2004 and subsequently, relocate its
corporate headquarters and consolidate its New Jersey locations at this new
site. The site consists of 45 acres of land and several buildings located at 86
Morris Avenue, Summit, New Jersey and enables the Company to gain operating
efficiencies by consolidating its four New Jersey locations as well as provides
the room to accommodate the Company's expected growth.
17
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FACTORS AFFECTING FUTURE RESULTS
Future operating results will depend on many factors, including demand for our
products, regulatory approvals of our products, the timing and market acceptance
of new products launched by us or competing companies, the timing of research
and development milestones, challenges to our intellectual property, and our
ability to control costs. The most salient factors are, in the near term,
competition with THALOMID(R), including generic competition, and delays in the
introduction of REVLIMID(TM) and, in the longer term, failure to commercialize
our early-stage drug candidates.
NEAR-TERM COMPETITION WITH THALOMID: While we believe that THALOMID will
continue to be used as a first-line treatment in multiple myeloma and that other
products such as Millennium Pharmaceuticals' Velcade(R) will usually be used in
patients that have not had success with THALOMID, it is possible that Velcade
could reduce THALOMID sales in multiple myeloma. Also, generic competition could
reduce THALOMID sales. However, we own intellectual property, which includes,
for example, numerous United States patents covering restrictive drug
distribution systems for more safely delivering drugs including our "System for
Thalidomide Education and Prescribing Safety," (or S.T.E.P.S.(R)) distribution
program, which all patients receiving thalidomide must follow and which are
listed in the FDA Approved Drug Products with Therapeutic Equivalence Evaluation
(Orange Book). These patents do not expire until the years 2018-2020. We also
have exclusive rights to several issued patents covering the use of THALOMID in
oncology. Even if generic competition could manage to enter the market, it is
unlikely such products could do so before 2007 based on a number of factors
including, the time needed to commercialize such a product and the fact that
challenges to THALOMID will require a generic competitor to make a patent
certification of non-infringement and/or invalidity of our patents listed in the
Orange Book pursuant to the Federal Food, Drug and Cosmetic Act, which would
then, in turn, entitle us up to a 30-month stay of market approval of that
generic equivalent. At that time, we expect to have at least partially replaced
THALOMID with REVLIMID. On October 22, 2004, we received an approvable letter
from the FDA relating to our THALOMID multiple myeloma sNDA. The FDA letter
stated that sufficient support for an accelerated approval could be provided by
the results of the completed study E1A100, a large randomized Eastern
Cooperative Oncology Group (ECOG) study comparing thalidomide plus dexamethasone
to dexamethasone alone in previously untreated multiple myeloma patients. The
submission of this additional data and completion of required responses and its
review by the FDA may result in an accelerated approval of THALOMID as a
treatment for multiple myeloma in approximately six to nine months.
DELAY IN THE INTRODUCTION OF REVLIMID: While we have made progress in REVLIMID's
path to potential regulatory approval based on ongoing pivotal Phase III Special
Protocol Assessment (SPA) trials for REVLIMID in multiple myeloma, a delay in
the introduction of REVLIMID or its failure to demonstrate efficacy or an
acceptable safety profile could adversely affect our business, consolidated
financial condition and results of operations. Moreover, other factors such as
Pharmion's approval of Vidaza(TM) in the treatment of myelodysplastic syndromes
18
("MDS") and SuperGen's expected NDA submission of Dacogen for the treatment of
MDS, could potentially impact the market's acceptance of REVLIMID. Additionally,
our ongoing open label Phase II trials in MDS and multiple myeloma have
completed their targeted enrollment. While the submission of an NDA based on
data from these trials could lead to an earlier regulatory approval if the data
were to be sufficiently compelling, it should be remembered though that the FDA
does not often grant approvals based on Phase II open label data alone.
FAILURE TO COMMERCIALIZE EARLY-STAGE DRUG CANDIDATES: Our long-term success and
sustainability depends on our ability to move our earlier-stage drug candidates
through development and to realize the commercial potential of our broad
pipeline.
ACQUISITIONS
On October 21, 2004, we acquired all of the outstanding shares of Penn T Limited
("Penn T"), the UK based manufacturer of THALOMID, from a consortium of private
investors for approximately $110 million in cash, which was paid from Celgene's
existing cash and cash equivalents. Prior to the acquisition, Celgene and Penn T
were parties to a manufacturing agreement pursuant to which Penn T manufactured
THALOMID for Celgene. In connection with the acquisition, we entered into a
technical services agreement with Penn Pharmaceutical Services Limited ("PPSL")
and Penn Pharmaceutical Holding Limited under which PPSL will provide the
services and facilities necessary for the manufacture of our requirements of
THALOMID and other thalidomide formulations. For more information see Note 13 of
the Notes to the Consolidated Financial Statements.
19
RESULTS OF OPERATIONS
Three-month period ended September 30, 2004 vs.
Three-month period ended September 30, 2003
- -------------------------------------------
TOTAL REVENUE: Total revenue and related percentages for the three-month periods
ended September 30, 2004 and 2003 were as follows:
- --------------------------------------------------------------------------------
Three-month period ended
September 30,
(In thousands $) 2004 2003 % Change
- --------------------------------------------------------------------------------
Net product sales:
THALOMID $ 78,716 $ 57,569 36.7%
Focalin 1,504 1,199 25.4%
ALKERAN 3,202 6,756 -52.6%
Other 381 (79) -582.3%
---------------------------
Total net product sales $ 83,803 $ 65,445 28.1%
Collaborative agreements
and other revenue 10,392 6,208 67.4%
Royalty revenue 7,273 2,679 171.5%
---------------------------
Total revenue $101,468 $ 74,332 36.5%
- --------------------------------------------------------------------------------
THALOMID net sales were higher in the three-month period ended September 30,
2004 primarily due to price increases implemented in the fourth quarter of 2003
and in the first nine months of 2004. The total number of prescriptions, which
increased approximately eight percent from the prior year period, was offset by
lower average daily doses. Focalin(TM) net sales were higher in the three-month
period ended September 30, 2004 due to the timing of shipments to Novartis for
their commercial distribution. ALKERAN(R) net sales were lower in the
three-month period ended September 30, 2004 due to supply disruptions earlier in
the year, which lead to inconsistent supplies of Alkeran IV and consequently
inconsistent end-market buying patterns.
Collaborative agreements and other revenue for the three-month period ended
September 30, 2004 included a $7.5 million milestone payment for the Focalin
XR(R) NDA submission by Novartis, approximately $1.8 million of research funding
and S.T.E.P.S. license fees received in connection with the Pharmion agreements,
approximately $1.0 million of umbilical cord blood enrollment, collection and
storage fees generated through our Stem Cell Therapies segment and approximately
$0.1 million of other revenue. Collaborative agreements and other revenue for
the three month period ended September 30, 2003 included $3.0 million related to
the agreement to terminate the Gelclair co-promotion agreement between OSI
Pharmaceuticals Inc. and Celgene, $1.3 million of research funding and
S.T.E.P.S. license fees received in connection with the Pharmion agreements,
approximately $1.3 million of reimbursements from Novartis for shipments of bulk
raw material used in the formulation of Focalin XR and utilized in clinical
studies
20
conducted by Novartis and approximately $0.6 million of umbilical cord blood
enrollment, collection and storage fees.
Royalty revenue reflects royalties received from Novartis on sales of their
entire family of Ritalin(R) drugs. The increase in royalty revenue was due to
Novartis' higher sales of Ritalin and Ritalin LA(R) and an increase in the
royalty rates.
COST OF GOODS SOLD: Cost of goods sold and related percentages for the
three-month periods ended September 30, 2004 and 2003 were as follows:
- --------------------------------------------------------------------------------
Three-month period ended
September 30,
(In thousands $) 2004 2003
- --------------------------------------------------------------------------------
Cost of goods sold $ 15,166 $ 15,932
Decrease from prior year $ 766 N/A
Percentage decrease from prior year 4.8% N/A
Percentage of net product sales 18.1% 24.3%
- --------------------------------------------------------------------------------
Cost of goods sold and cost of goods sold as a percentage of net product sales
decreased from the prior year period primarily due to lower ALKERAN costs,
largely offset by higher royalties on THALOMID net sales.
RESEARCH AND DEVELOPMENT: Research and development expenses consist primarily of
salaries and benefits, contractor fees, principally with contract research
organizations to assist in our clinical development programs, clinical drug
supplies for our clinical and preclinical programs as well as other consumable
research supplies, regulatory and quality expenditures and allocated facilities
charges such as building rent and utilities.
Research and development expenses and related percentages for the three-month
periods ended September 30, 2004 and 2003 were as follows:
- --------------------------------------------------------------------------------
Three-month period ended
September 30,
(In thousands $) 2004 2003
- --------------------------------------------------------------------------------
Research and development expenses $ 40,154 $ 32,804
Increase from prior year $ 7,350 N/A
Percentage increase from prior year 22.4% N/A
Percentage of total revenue 39.6% 44.1%
- --------------------------------------------------------------------------------
Research and development expenses increased from the prior year period primarily
due to increased clinical spending on Phase II regulatory programs for
REVLIMID in MDS, including patients with 5q minus chromosomal abnormalities
and those without, as well as ongoing REVLIMID Phase III SPA trials and Phase II
trials for multiple myeloma. During the three-month period ended September 30,
2004, approximately $19.7 million was spent on human pharmaceutical clinical
programs; $9.2 million was spent on other human pharmaceutical
21
programs, including toxicology, analytical research and development, drug
discovery, quality and regulatory affairs; $8.7 million was spent on
biopharmaceutical discovery and development programs; and $2.6 million was spent
on stem cell, biomaterials and placental extraction programs. These expenditures
support multiple core programs, including THALOMID, REVLIMID, ACTIMID(TM),
CC-11006, CC-10004, PDE4/TNF-a inhibitors and other investigational compounds,
such as kinase inhibitors, benzopyrans, ligase inhibitors, tubulin inhibitors
and placental and cord blood derived stem cell programs. During the three-month
period ended September 30, 2003, approximately $13.2 million was spent on human
pharmaceutical clinical programs; $9.6 million was spent on other human
pharmaceutical programs, including toxicology, analytical research and
development and drug discovery; $9.0 million was spent on biopharmaceutical
discovery and development; and $1.0 million was spent on stem cell, biomaterials
and placental extraction programs. As total revenue increases, research and
development expense may continue to decrease as a percentage of total revenue,
however the actual dollar amount may continue to increase as earlier stage
compounds are moved through the preclinical and clinical stages. Generally, the
time to completion of each phase is estimated as follows:
Phase I ----- 1-2 years
Phase II ---- 2-3 years
Phase III --- 2-3 years
Due to the significant risk factors and uncertainties inherent in preclinical
tests and clinical trials associated with each of our research and development
projects, the cost to complete such projects is not reasonably estimable. The
data obtained from these tests and trials may be susceptible to varying
interpretation that could delay, limit or prevent a project's advancement
through the various stages of clinical development, which would significantly
impact the costs incurred to bring a project to completion.
SELLING, GENERAL AND ADMINISTRATIVE: Selling expenses consist primarily of
salaries and benefits for sales and marketing and customer service personnel and
other commercial expenses to support the sales force. General and administrative
expenses consist primarily of salaries and benefits, outside professional
services for legal, audit, tax and investor activities, medical affairs expenses
and allocations of facilities costs, principally for rent, utilities and
property taxes.
22
Selling, general and administrative expenses and related percentages for the
three-month periods ended September 30, 2004 and 2003 were as follows:
- --------------------------------------------------------------------------------
Three-month period ended
September 30,
(In thousands $) 2004 2003
- --------------------------------------------------------------------------------
Selling, general and administrative
expenses $ 27,750 $ 24,690
Increase from prior year $ 3,060 N/A
Percentage increase from prior year 12.4% N/A
Percentage of total revenue 27.3% 33.2%
- --------------------------------------------------------------------------------
Selling, general and administrative expenses increased from the prior year
period as a result of an increase of approximately $2.7 million in general
administrative expenses primarily due to higher headcount related expenses and
an increase of approximately $1.1 million in sales force expenses primarily due
to the creation of a sales operations group, which among other things manages
pricing and reimbursement, corporate accounts, customer service and government
affairs as well as, sales fleet expenses, offset by decreases in marketing and
customer service expenses.
INTEREST AND OTHER INCOME: Interest and other income increased 12.1% to
approximately $7.2 million for the three-month period ended September 30, 2004,
compared to approximately $6.4 million in the prior year period. The increase
was primarily due to an increase in interest income as a result of higher
average balances of cash, cash equivalents and marketable securities available
for sale following the issuance of our $400 million convertible notes issued on
June 3, 2003 as well as generated through operations, partially offset by lower
realized gains on the sale of marketable securities.
INTEREST EXPENSE: Interest expense for the three-month period ended September
30, 2004 and 2003 was approximately $2.4 million and $2.7 million, respectively,
and both periods include a full three months of interest expense and
amortization of debt issuance costs on the $400 million convertible notes issued
on June 3, 2003.
INCOME TAX PROVISION: For the three-month period ended September 30, 2004, the
income tax provision was approximately $2.0 million and reflects an underlying
effective tax rate of 8.5%. For the prior year period, the income tax provision
was approximately $0.4 million and reflects an underlying effective tax rate of
8.1%.
23
NET INCOME: Net income and per common share amounts for the three-month periods
ended September 30, 2004 and 2003 were as follows:
- --------------------------------------------------------------------------------
Three-month period ended
(In thousands $, except per share September 30,
amounts) 2004 2003
- --------------------------------------------------------------------------------
Net income $ 21,255 $ 4,293
Per common share amounts:
Basic $ 0.13 $ 0.03
Diluted $ 0.12 $ 0.02
Weighted average number of shares of
common stock utilized to calculate
per common share amounts
Basic 164,091,000 162,094,000
Diluted 177,064,000 172,657,000
- --------------------------------------------------------------------------------
Net income increased approximately $17.0 million in the three-month period ended
September 30, 2004 compared to the prior year period primarily due to an
increase in total revenues of approximately $27.1 million (attributable
primarily to an increase in THALOMID net sales of $21.1 million and the $7.5
million milestone payment for the Focalin XR NDA submission by Novartis) offset
by higher operating expenses of approximately $9.6 million.
Nine-month period ended September 30, 2004 vs.
Nine-month period ended September 30, 2003
- ------------------------------------------
TOTAL REVENUE: Total revenue and related percentages for the nine-month periods
ended September 30, 2004 and 2003 were as follows:
- --------------------------------------------------------------------------------
Nine-month period ended
September 30,
(In thousands $) 2004 2003 % Change
- --------------------------------------------------------------------------------
Net product sales:
THALOMID $ 222,498 $ 158,075 40.8%
Focalin 3,698 2,534 45.9%
ALKERAN 12,025 12,800 -6.1%
Other 712 337 111.3%
-----------------------------
Total net product sales $ 238,933 $ 173,746 37.5%
Collaborative agreements
and other revenue 15,420 9,595 60.7%
Royalty revenue 17,741 7,366 140.8%
-----------------------------
Total revenue $ 272,094 $ 190,707 42.7%
- --------------------------------------------------------------------------------
THALOMID net sales were higher in the nine-month period ended September 30,
2004 primarily due to price increases implemented in the second half of 2003 and
in the first nine months of 2004. The total number of prescriptions, which
increased approximately ten percent from the prior year period, was offset by
lower average daily doses.
24
Focalin net sales were higher in the nine-month period ended September 30,
2004 due to the timing of shipments to Novartis for their commercial
distribution. ALKERAN net sales were lower in the nine-month period ended
September 30, 2004 due to supply disruptions earlier in the year, which lead to
inconsistent supplies of Alkeran IV and consequently inconsistent end-market
buying patterns. The ALKERAN supply and distribution agreement with
GlaxoSmithKline was executed in March 2003 and, consequently, the prior year
period only reflects six months of ALKERAN net sales.
Collaborative agreements and other revenue for the nine-month period ended
September 30, 2004 included a $7.5 million milestone payment for the Focalin
XR NDA submission by Novartis, approximately $5.0 million of research funding
and S.T.E.P.S. license fees received in connection with the Pharmion agreements,
$2.7 million of umbilical cord blood enrollment, collection and storage fees
generated through our Stem Cell Therapies segment and $0.2 million of other
revenue. Collaborative agreements and other revenue for the nine-month period
ended September 30, 2003 included $3.0 million related to the agreement to
terminate the Gelclair co-promotion agreement between OSI Pharmaceuticals Inc.
and Celgene, $2.9 million of research funding and S.T.E.P.S. license fees
received in connection with the Pharmion agreements, approximately $1.3 million
of reimbursements from Novartis for shipments of bulk raw material used in the
formulation of Focalin XR and utilized in clinical studies conducted by
Novartis, $2.2 million of umbilical cord blood enrollment, collection and
storage fees and $0.2 million of other revenue.
Royalty revenue reflects royalties received from Novartis on sales of their
entire family of Ritalin drugs. The increase in royalty revenue was due to an
increase in the royalty rate on both Ritalin and Ritalin LA as well as an
increase in Ritalin LA sales by Novartis.
COST OF GOODS SOLD: Cost of goods sold and related percentages for the
nine-month periods ended September 30, 2004 and 2003 were as follows:
- --------------------------------------------------------------------------------
Nine-month period ended
September 30,
(In thousands $) 2004 2003
- --------------------------------------------------------------------------------
Cost of goods sold $ 43,655 $ 36,359
Increase from prior year $ 7,296 N/A
Percentage increase from prior year 20.1% N/A
Percentage of net product sales 18.3% 20.9%
- --------------------------------------------------------------------------------
Cost of goods sold increased from the prior year period primarily as a result of
higher royalties on THALOMID net sales and higher costs at our Stem Cell
Therapies segment, which resulted from expensing pre-approval inventory costs
associated with processing umbilical cord blood and tissue units. These
increases were slightly offset by lower ALKERAN costs.
25
Cost of goods sold as a percentage of net product sales decreased primarily due
to lower ALKERAN costs. Profit margins on THALOMID remained flat, as the
increase in cost of goods sold resulting from higher royalties were offset by
increased net sales due to price increases implemented in the second half of
2003 and in the first nine months of 2004.
RESEARCH AND DEVELOPMENT: Research and development expenses and related
percentages for the nine-month periods ended September 30, 2004 and 2003 were as
follows:
- --------------------------------------------------------------------------------
Nine-month period ended
September 30,
(In thousands $) 2004 2003
- --------------------------------------------------------------------------------
Research and development expenses $116,520 $ 88,042
Increase from prior year $ 28,478 N/A
Percentage increase from prior year 32.3% N/A
Percentage of total revenue 42.8% 46.2%
- --------------------------------------------------------------------------------
Research and development expenses increased from the prior year period primarily
due to increased clinical spending on Phase II regulatory programs for REVLIMID
in MDS, including patients with 5q minus chromosomal abnormalities and those
without, as well as ongoing REVLIMID Phase III SPA trials and Phase II trials
for multiple myeloma. During the nine-month period ended September 30, 2004,
approximately $59.7 million was spent on human pharmaceutical clinical programs;
$25.4 million was spent on other human pharmaceutical programs, including
toxicology, analytical research and development, drug discovery, quality and
regulatory affairs; $25.4 million was spent on biopharmaceutical discovery and
development programs; and $6.0 million was spent on stem cell, biomaterials and
placental extraction programs. These expenditures support multiple core
programs, including THALOMID, REVLIMID, ACTIMID(TM), CC-11006, CC-10004,
PDE4/TNF-a inhibitors and other investigational compounds, such as kinase
inhibitors, benzopyrans, ligase inhibitors, tubulin inhibitors and placental and
cord blood derived stem cell programs. During the nine-month period ended
September 30, 2003, approximately $36.0 million was spent on human
pharmaceutical clinical programs; $21.5 million was spent on other human
pharmaceutical programs, including toxicology, analytical research and
development and drug discovery; $27.8 million was spent on biopharmaceutical
discovery and development; and $2.7 million was spent on stem cell, biomaterials
and placental extraction programs. As total revenue increases, research and
development expense may continue to decrease as a percentage of total revenue,
however the actual dollar amount may continue to increase as earlier stage
compounds are moved through the preclinical and clinical stages.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses and related percentages for the nine-month periods ended September 30,
2004 and 2003 were as follows:
26
- --------------------------------------------------------------------------------
Nine-month period ended
September 30,
(In thousands $) 2004 2003
- --------------------------------------------------------------------------------
Selling, general and administrative
expenses $ 79,408 $ 69,832
Increase from prior year $ 9,576 N/A
Percentage increase from prior year 13.7% N/A
Percentage of total revenue 29.2% 36.6%
- --------------------------------------------------------------------------------
Selling, general and administrative expenses increased from the prior year
period as a result of an increase of approximately $7.4 million in general
administrative and medical affairs expenses primarily due to higher headcount
related expenses and an increase of approximately $4.2 million in sales force
expenses primarily due to the creation of a sales operations group, which among
other things manages pricing and reimbursement, corporate accounts, customer
service and government affairs as well as, sales fleet expenses, offset by
decreases in marketing and customer service expenses.
INTEREST AND OTHER INCOME: Interest and other income increased 33.5% to
approximately $20.9 million for the nine-month period ended September 30, 2004,
compared to approximately $15.7 million in the prior year period. The increase
was primarily due to an increase in interest income as a result of higher
average balances of cash, cash equivalents and marketable securities available
for sale following the issuance of our $400 million convertible notes issued on
June 3, 2003 as well as generated through operations, partially offset by lower
realized gains on the sale of marketable securities.
INTEREST EXPENSE: Interest expense increased to approximately $7.2 million for
the nine-month period ended September 30, 2004 compared to approximately $3.3
million for the prior year period. The increase reflects interest expense and
amortization of debt issuance costs on the $400 million convertible notes issued
on June 3, 2003, whereas the prior year period only reflects four month of
interest and debt issuance expense.
INCOME TAX PROVISION: For the nine-month period ended September 30, 2004, the
income tax provision was approximately $3.9 million and reflects an underlying
effective tax rate of 8.5%. For the prior year period, the income tax provision
was approximately $0.7 million and reflects an underlying effective tax rate of
8.2%.
27
NET INCOME: Net income and per common share amounts for the nine-month periods
ended September 30, 2004 and 2003 were as follows:
- --------------------------------------------------------------------------------
Nine-month period ended
(In thousands $, except per share September 30,
amounts) 2004 2003
- --------------------------------------------------------------------------------
Net income $ 42,318 $ 8,139
Per common share amounts:
Basic $ 0.26 $ 0.05
Diluted $ 0.24 $ 0.05
Weighted average number of shares of
common stock utilized to calculate
per common share amounts
Basic 163,574,000 161,520,000
Diluted 176,273,000 170,427,000
- --------------------------------------------------------------------------------
Net income increased approximately $34.2 million in the nine-month period ended
September 30, 2004 compared to the prior year period primarily due to an
increase in total revenues of approximately $81.4 million (attributable
primarily to an increase in THALOMID net sales of $64.4 million and the $7.5
million milestone payment for the Focalin XR NDA submission by Novartis) offset
by higher operating expenses of approximately $45.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased to approximately $46.2
million for the nine-month period ended September 30, 2004 compared to $13.9
million for the prior year period. The increase was primarily due to higher
earnings, partially offset by increases in net working capital (i.e., current
assets minus current liabilities).
Cash, cash equivalents and marketable securities were $798.8 million at
September 30, 2004, an increase of $131.8, or 19.8% from December 31, 2003
levels and reflects the inclusion of 1,939,600 shares of Pharmion Corporation
common stock, of which 1,150,511 shares were obtained in connection with the
March 2004, conversion of the Pharmion Convertible Note and 789,089 shares were
obtained in connection with the September 2004, exercise of Pharmion warrants.
At September 30, 2004, the Pharmion common stock had an estimated fair value of
$100.3 million and was classified in marketable securities.
Net cash used in investing activities was $55.3 million for the nine-month
period ended September 30, 2004 compared to $184.0 million for the prior year
period. Included in the nine-month period ended September 30, 2004 was a $7.0
million investment in Royalty Pharma Strategic Partners, LP. The investment is
classified under Other Assets on the Consolidated Balance Sheet. Also included
in investing activities for the 2004 period were net marketable securities
purchases of approximately $41.6 million and capital expenditures of
28
approximately $6.7 million. Included in the nine-month period ended September
30, 2003 were net marketable securities purchases of approximately $164.1
million, the purchase of a Pharmion Corporation senior convertible note for
$12.0 million and capital expenditures of approximately $7.9 million.
Net cash provided by financing activities was $10.7 million for the nine-month
period ended September 30, 2004 compared to $397.8 million in the prior year
period. Included in the prior year period were net proceeds of $397.8 million
from the issuance of our convertible notes on June 3, 2003.
We expect increased research and product development costs, clinical trial
costs, expenses associated with the regulatory approval process and
commercialization of products and capital investments. However, existing cash,
cash equivalents and marketable securities available for sale, combined with
expected net product sales and revenues from various research, collaboration and
royalties agreements are expected to provide sufficient capital resources to
fund our operations for the foreseeable future.
On August 19, 2004, we brought suit, together with our licensee Novartis, in the
United States District Court, District of New Jersey against Teva
Pharmaceuticals USA, Inc. (Teva) based on their Federal Food, Drug and Cosmetic
Act, Paragraph IV certification that certain of our patents listed in the Orange
Book were invalid. By bringing this suit, we intend to vigorously defend our
patents. This suit also prohibits Teva from marketing generic Focalin for up to
30-months. This litigation does not concern certain patents held by us directed
to long acting formulation for Focalin XR or Ritalin LA.
CONTRACTUAL OBLIGATIONS
Our major outstanding contractual obligations relate primarily to our
convertible note obligation, real estate purchase commitment, operating leases,
ALKERAN supply and distribution agreement, employment agreements and certain
other contract commitments. The following table sets forth our contractual
obligations as of September 30, 2004 by contractual due dates:
- -----------------------------------------------------------------------------
Contractual Due Dates
Less than 1-3 3-5 More than
(IN MILLIONS $) 1 year Years Years 5 years Total
- -----------------------------------------------------------------------------
Convertible notes
obligation $ -- $ -- $ 400.0 $ -- $ 400.0
Real estate purchase
commitment(1) 25.0 -- -- -- 25.0
Operating leases 3.6 9.8 5.2 4.5 23.1
ALKERAN supply and
distribution agreement 9.9 25.0 -- -- 34.9
Employment agreements 2.4 2.8 -- -- 5.2
Other contract
Commitments 1.0 5.7 -- -- 6.7
--------------------------------------------------
Total $ 41.9 $ 43.3 $ 405.2 $ 4.5 $ 494.9
--------------------------------------------------
(1) On August 6, 2004, the Company executed a non-binding real estate purchase
and sale agreement to purchase certain property located in Summit, Union
County, New Jersey for an aggregate purchase price of $25.0 million. Under
the terms of the agreement, the Company had a ninety day due diligence
period under which it could
29
have terminated the agreement for any or no reason. On November 4, 2004,
the due diligence period expired without the Company seeking to terminate
the agreement.
Based on the satisfactory completion of due diligence, the Company now
intends to close the purchase on November 30, 2004 and subsequently,
relocate its corporate headquarters and consolidate its New Jersey
locations at this new site. The site consists of 45 acres of land and
several buildings located at 86 Morris Avenue, Summit, New Jersey and
enables the Company to gain operating efficiencies by consolidating its
four New Jersey locations as well as provides the room to accommodate the
Company's expected growth.
In 2003, we established a Long-Term Incentive Plan ("LTIP") designed to provide
key officers and executives with performance based incentive opportunities
contingent upon achievement of pre-established corporate performance objectives,
and payable only if employed at the end of the performance cycle. The 2003
performance cycle began on May 1, 2003 and ends on December 31, 2005 (the "2005
Plan"). The 2004 performance cycle began on January 1, 2004 and will end on
December 31, 2006 (the "2006 Plan"). Performance measures for the 2005 Plan and
the 2006 Plan are based on the following components: 25% on earnings per share,
25% on net income and 50% on revenue.
Payouts may be in the range of 0% to 200% of the participant's salary for the
2005 Plan and 0% to 150% of the participant's salary for the 2006 Plan. The
maximum potential payout, assuming objectives are achieved at the 200% level and
150% level, respectively, is $6.1 million for the 2005 Plan and $4.9 million for
the 2006 Plan. Such awards are payable in cash or, at its discretion, the
Company can elect to pay the same value in its common stock based upon the
Company's common stock fair value at the payout date. Upon a change in control,
participants will be entitled to an immediate payment equal to their target
award, or, if higher, an award based on actual performance through the date of
the change in control.
2004 FINANCIAL OUTLOOK
In our October 21, 2004 earnings release, we updated our 2004 THALOMID revenue
guidance to be in the range of $305 to $310 million and our 2004 earnings to be
in the range of $0.60 to $0.65 per diluted share on a pre-split basis, or $0.30
to $0.32 per diluted share on a post-split basis. Although management believes
that the October 21, 2004 guidance continues to reflect the current thinking of
management, there can be no assurance that revenues or earnings will develop in
the manner projected or if the analysis, on which the projections were based,
were to be redone on the date hereof that there would be no change in the
guidance.
30
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one which is both important to the portrayal of
the Company's financial condition and results of operation and requires
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. The Company's significant accounting policies are fully described in
Note 1 of the Notes to the Consolidated Financial Statements included in the
Company's 2003 Annual Report on Form 10-K. The Company's critical accounting
policies are disclosed in the Management's Discussion and Analysis of Financial
Condition and Results of Operation section of the Company's 2003 Annual Report
on Form 10-K. There have been no significant changes with respect to such
accounting policies.
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
The Management's Discussion and Analysis of Financial Condition and Results of
Operations provided above contains certain forward-looking statements which
involve known and unknown risks, delays, uncertainties and other factors not
under the Company's control which may cause actual results, performance and
achievements of Celgene to be materially different from the results, performance
or other expectations implied by these forward-looking statements. These factors
include the results of current or pending clinical trials, actions by the FDA
and other factors detailed herein and in the Company's other filings with the
Securities and Exchange Commission.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion provides forward-looking quantitative and qualitative
information about our potential exposure to market risk. Market risk represents
the potential loss arising from adverse changes in the value of financial
instruments. The risk of loss is assessed based on the likelihood of adverse
changes in fair values, cash flows or future earnings.
We have established guidelines relative to the diversification and maturities of
investments to maintain safety and liquidity. These guidelines are reviewed
periodically and may be modified depending on market conditions. Although
investments may be subject to credit risk, our investment policy specifies
credit quality standards for our investments and limits the amount of credit
exposure from any single issue, issuer or type of investment. Our investments
are also subject to interest rate risk and will decrease in value if market
interest rates increase. We do not use derivative instruments for investment or
trading purposes. At September 30, 2004, our market risk sensitive instruments
consisted of marketable securities available for sale and unsecured convertible
notes issued by the Company.
31
MARKETABLE SECURITIES AVAILABLE FOR SALE: At September 30, 2004 our marketable
securities available for sale consisted of U.S. government agency mortgage
obligations, U.S. government agency bonds, corporate debt securities and
1,939,600 shares of Pharmion common stock. Marketable securities available for
sale are carried at fair value, are held for an indefinite period of time and
are intended to be used to meet our ongoing liquidity needs. Unrealized gains
and losses (which are deemed to be temporary) on available for sale securities,
if any, are reported as a separate component of stockholders' equity, net of
tax. The cost of all debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. The amortization, along with realized
gains and losses, is included in interest and other income.
As of September 30, 2004, the principal amounts, fair values and related
weighted average interest rates of the Company's debt securities classified as
marketable securities available-for-sale were as follows:
- -----------------------------------------------------------------------------------------------------------------------
Fixed rate securities
Duration
0 to 1 1 to 3 3 to 5 5 to 8 Variable rate
(IN THOUSANDS $) Year Year Year Year securities Total
- -----------------------------------------------------------------------------------------------------------------------
Principal amount $63,719 $154,967 $49,011 $108,275 $47,150 $423,122
Fair value $65,059 $160,906 $50,100 $109,101 $44,391 $429,557
Average Interest Rate 4.81% 4.58% 4.16% 5.23% 6.67% 4.97%
- -----------------------------------------------------------------------------------------------------------------------
PHARMION COMMON STOCK: At September 30, 2004 the estimated fair value of the
1,939,600 shares of Pharmion common stock based on the closing price reported by
the National Association of Securities Dealers Automated Quotations ("NASDAQ")
system was approximately $100.3 million, which exceeded the cost by
approximately $80.1 million. The amount by which the fair value exceeded the
cost (i.e., unrealized gain) was included in Accumulated Other Comprehensive
Income in the Stockholders' Equity section of the Consolidated Balance Sheet.
The fair value of the Pharmion common stock investment is subject to market
price volatility and any increase or decrease in Pharmion's common stock quoted
market price will have a similar percentage increase or decrease in the fair
value of the investment.
CONVERTIBLE DEBT: At September 30, 2004, we had $400.0 million of unsecured
convertible notes outstanding. The notes have a five-year term and a coupon rate
of 1.75% payable semi-annually. The notes can be converted at any time into
16,511,840 shares of common stock at a conversion price of $24.225 per share
(for more information see Note 3 of the Notes to the Consolidated Financial
Statements).
At September 30, 2004, the fair value of our convertible notes exceeded the
carrying value of $400.0 million by approximately $157.3 million, which we
believe reflects the increase in the market price of the Company's common stock
to $29.115 per share (post-split basis) as of September 30, 2004. Assuming other
factors are held constant, an increase in interest rates generally results in a
decrease in the fair
32
value of fixed-rate convertible debt, but does not impact the carrying value,
and an increase in the Company's stock price generally results in an increase in
the fair value of convertible debt, but does not impact the carrying value.
Item 4 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our principal
executive officer and principal financial officer have concluded
that our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended), based on their evaluation of these controls and
procedures as of September 30, 2004, are effective.
(b) Changes in Internal Control Over Financial Reporting. There have
not been any changes in our internal control over financial
reporting during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Although to our knowledge no lawsuit has been brought by or against us
that rises to the level of required disclosure pursuant to Item 103 of
Regulation S-K, we have brought a suit together with our licensee
Novartis, against Teva Pharmaceuticals USA, Inc. based on their
Federal Food, Drug and Cosmetic Act, Paragraph IV certification
against Focalin. For more information on the lawsuit see further
discussions contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 2. Changes in Securities, Use of Proceeds
and Issuer Purchases of Equity Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits
10.1 Purchase and Sale Agreement between Ticona LLC, as Seller and
Celgene Corporation, as Buyer.
31.1 Certification by the Company's Chief Executive Officer dated
November 9, 2004
31.2 Certification by the Company's Chief Financial Officer dated
November 9, 2004.
32.1 Certification by the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350 dated November 9, 2004.
32.2 Certification by the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 dated November 9, 2004.
34
SIGNATURES
Pursuant to the requirements 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.
CELGENE CORPORATION
DATE November 9, 2004 BY /s/Robert J. Hugin
------------------------------ -----------------------------------
Robert J. Hugin
Senior Vice President
Chief Financial Officer
DATE November 9, 2004 BY /s/James R. Swenson
------------------------------ -----------------------------------
James R. Swenson
Controller
(Chief Accounting Officer)
35