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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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, 2004
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 No. 0-16132
CELGENE CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-2711928
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(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
86 Morris Avenue
Summit, New Jersey 07901
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(Address of principal executive offices) (Zip Code)
(732) 271-1001
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
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. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant on June 30, 2004, the last business day of the registrant's most
recently completed second quarter, was $4,694,329,287 based on the last reported
sale price of the registrant's Common Stock on the NASDAQ National Market on
that date. There were 165,269,970 shares of Common Stock outstanding as of March
1, 2005.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in 12b-2 of the Act).
Yes |X| No |_|
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2004. The proxy statement is incorporated herein by reference into the following
parts of the Form 10K:
Part III, Item 10, Directors and Executive Officers of the Registrant;
Part III, Item 11, Executive Compensation;
Part III, Item 12, Security Ownership of Certain Beneficial Owners and
Management and related Stockholder Matters;
Part III, Item 13, Certain Relationships and Related Transactions;
Part III, Item 14, Principal Accountant Fees and Services.
CELGENE CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM NO. PAGE
- ------- ----
Part I
1. Business 1
2. Properties 27
3. Legal Proceedings 28
4. Submission of Matters to a Vote of Security Holders 28
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 29
6. Selected Consolidated Financial Data 30
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 32
7a. Quantitative and Qualitative Disclosures About Market Risk 49
8. Financial Statements and Supplementary Data 51
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 51
9a. Controls and Procedures 51
9b. Other 51
Part III
10. Directors and Executive Officers of the Registrant 52
11. Executive Compensation 52
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 52
13. Certain Relationships and Related Transactions 52
14. Principal Accountant Fees and Services 52
Part IV
15. Exhibits, Financial Statement Schedules 53
Signatures 58
PART I
ITEM 1. BUSINESS
We are a multi-national integrated biopharmaceutical company, incorporated in
1986 as a Delaware corporation. We are primarily engaged in the discovery,
development and commercialization of innovative therapies designed to treat
cancer and immune-inflammatory-related diseases through the regulation of cells,
genes and proteins associated with diseases. We had total revenue of $377.5
million in 2004 and net income of $52.8 million. We had an accumulated deficit
of $234.4 million at December 31, 2004.
We continue to build a global discovery, development and commercialization
platform for drug and cell-based therapies that allows us to both create and
retain significant value within our therapeutic franchise areas of cancer and
immune-inflammatory diseases. This target-to-therapeutic platform integrates
both small molecule and cell-based therapies and spans the key functions
required to generate a broad, deep and diverse pipeline of new drugs and cell
therapy candidates, including: (i) cell biology, genomics, proteomics and
informatics technologies for identifying and validating clinically important
therapeutic targets; (ii) high throughput screening systems combined with
diverse and focused compound libraries for discovering new drug leads; (iii)
medicinal chemistry and structure-based drug design for optimizing drug
candidates; (iv) IN VITRO and IN VIVO models of disease for preclinical
evaluation of drug efficacy and safety; and (v) a clinical and regulatory
organization highly experienced in the successful development of pharmaceutical
agents. The ongoing development of immunomodulatory drugs (ImiDs),
cell-signaling inhibitors, as well as cellular and tissue therapeutics may allow
us to provide physicians and clinicians worldwide with a more comprehensive and
integrated set of therapeutic solutions for managing complex human diseases such
as cancer and immune-inflammatory-related diseases.
On August 31, 2000, we acquired Signal Pharmaceuticals, Inc., now Celgene
Research & Development, a privately held San Diego-based biopharmaceutical
company focused on the discovery and development of drugs that regulate genes
and proteins associated with diseases. Celgene Research & Development now
operates as a wholly owned subsidiary of Celgene Corporation.
On December 31, 2002, we acquired Anthrogenesis Corp., or Celgene Cellular
Therapeutics, a privately held New Jersey-based biotherapeutics company and cord
blood banking business, which is developing the technology for the recovery of
stem cells from human placental tissues following the completion of full-term,
successful pregnancies. Celgene Cellular Therapeutics, or CCT, now operates as a
wholly owned subsidiary of Celgene Corporation.
On October 21, 2004, we acquired all of the outstanding shares of Penn T, the
UK-based manufacturer of THALOMID(R), the current flagship product of our
commercial franchise. This acquisition expanded our corporate capabilities and
enabled the Company to control manufacturing for THALOMID(R) worldwide. Through
manufacturing contracts acquired in this purchase, Celgene increased its
participation in the potential growth of THALOMID(R) revenues in key
international markets.
COMMERCIAL STAGE PROGRAMS: Our commercial programs include pharmaceutical sales
of THALOMID(R) and ALKERAN(R), a licensing agreement with Novartis for
FOCALIN(R) and the entire RITALIN(R) family of drugs and biotherapeutic products
and services, including; LIFEBANK(TM), BIOVANCE(TM) and AMBIODRY(TM) through
CCT.
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THALOMID(R) (THALIDOMIDE): THALOMID(R), which had net product sales totaling
$308.6 million in 2004, was approved by the U.S. Food and Drug Administration,
or FDA, in July 1998 for the treatment of acute cutaneous manifestations of
moderate to severe erythema nodosum leprosum, or ENL, and as maintenance therapy
to prevent and suppress cutaneous manifestation recurrences. ENL, an
inflammatory complication of leprosy, is a chronic bacterial disease associated
with excess Tumor Necrosis Factor alpha, or TNF(alpha) production. Although
leprosy is relatively rare in the United States, the disease afflicts millions
worldwide. ENL occurs in about 30% of leprosy patients and is characterized by
skin lesions, acute inflammation, fever and anorexia.
We distribute THALOMID(R) in the United States through our 197-person U.S.
pharmaceutical commercial organization. Working with the FDA, we developed a
proprietary strategic comprehensive education and distribution program with
methods for the safe and appropriate use of THALOMID(R), the "System for
Thalidomide Education and Prescribing Safety", or S.T.E.P.S.(R).
In October 2004, Celgene received an approvable letter from the FDA in response
to our THALOMID(R) Supplemental New Drug Application, or sNDA, which we filed in
December 2003, for the treatment of multiple myeloma. Multiple myeloma is the
second most common blood cancer, affecting approximately 50,000 people in the
United States. About 14,000 new cases of multiple myeloma are diagnosed each
year and there are an estimated 11,000 deaths. We expect to complete the
resubmission of the application in the second quarter of 2005 with final action
from the FDA expected later in the year.
Additionally, THALOMID(R) is under development as a potential treatment for
other cancers. There are more than 100 clinical studies worldwide examining the
potential of this compound as a single agent or in combination therapy. As a
result of these clinical studies and subsequent publications, and inclusion in
the National Comprehensive Cancer Network, or NCCN, guidelines, physicians are
prescribing THALOMID(R) for use in a number of cancers.
THALOMID(R) is the first drug approved under a special "Restricted Distribution
for Safety" regulation. Our innovative S.T.E.P.S. system includes managed
delivery programs for products or drugs that are either teratogens (causing
birth defects) or have other adverse effects that make them contraindicated for
certain patients. This patented program includes comprehensive physician,
pharmacist and patient education. All patients are required to use
contraception, and female patients of child-bearing potential are given
pregnancy tests regularly. All patients are subject to other requirements,
including informed consent. Physicians are also required to comply with the
educational, contraception counseling, informed consent, pregnancy testing and
other elements of the program. Under the S.T.E.P.S. program, automatic refills
are not permitted and each prescription may not exceed four weeks' dosing. A new
prescription is required each month.
Our S.T.E.P.S. intellectual property estate includes five U.S. patents expiring
between the years 2018 and 2020 which cover methods of delivering drugs,
including THALOMID(R), in a manner that significantly decreases the risks of
adverse events. Two of these patents were issued in 2003 and expand the scope of
coverage contained in the previously issued patents. S.T.E.P.S. is designed as a
blueprint for pharmaceutical products that offer life-saving or other important
therapeutic benefits but have potentially problematic side effects. Furthermore,
we hold patents protecting methods of use for THALOMID(R) to treat symptoms
associated with abnormal concentrations of TNFa and unrestricted blood vessel
growth that expire after 2012.
In November 2004 Celgene granted a non-exclusive license to the four companies
who manufacture and distribute (sell) isotrentinoin (Accutane(R)) for the rights
to Celgene's patent portfolio directed to methods for safely delivering the
product to potentially high-risk patient populations.
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ALKERAN(R): In March 2003, we entered into a supply and distribution agreement
with GlaxoSmithKline to distribute, promote and sell ALKERAN(R) (melphalan), a
therapy approved by the FDA for the palliative treatment of multiple myeloma and
for palliation of carcinoma of the ovary. Under the terms of the agreement, we
purchase ALKERAN(R) tablets and ALKERAN(R) for injection from GlaxoSmithKline
and distribute the products in the United States under the Celgene label. The
agreement has an initial term of three years 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.
This agreement is strategically valuable to us because it provides us with an
approved oncology product that complements our drug candidates, THALOMID(R) and
REVLIMID(R), which are demonstrating potential in late-stage clinical trials for
the treatment of multiple myeloma and myelodysplastic syndromes. At the 2004
American Society of Hematology, or ASH, meeting, clinical trial data was
presented. In combination with other anti-cancer therapeutics, including
THALOMID(R), ALKERAN(R) was a key component of several investigational multiple
myeloma studies which reported positive results.
RITALIN(R) FAMILY OF DRUGS: We have a major collaboration with Novartis Pharma
AG concerning the entire RITALIN(R) family of drugs. We developed FOCALIN(R)
(d-MPH), the chirally pure version of RITALIN(R), which is approved for the
treatment of attention deficit disorder and attention deficit hyperactivity
disorder, or ADHD, in school-age children. The use of chirally pure compounds,
such as FOCALIN(R), can result in significant clinical benefits. Many
non-chirally pure pharmaceuticals contain two configurations, known as isomers,
which are mirror images of each other. Generally these isomers interact
differently with their biological targets, causing one isomer to have a
beneficial effect for one target and the other isomer to have a beneficial
effect on another target, or in some cases, one isomer may have either no effect
or potentially an undesirable side effect with respect to a target. In April
2000, we granted Novartis an exclusive license (excluding Canada) for the
development and marketing of FOCALIN(R) and long acting drug formulations in
return for substantial milestone payments and royalties on FOCALIN(R) and the
entire RITALIN(R) family of drugs. In 2002, Novartis launched FOCALIN(R) and
RITALIN(R) LA, the long-acting version of RITALIN(R), in the United States,
following regulatory approval.
Three separate studies presented at the 51st annual meeting of the American
Academy of Child and Adolescent Psychiatry indicated that FOCALIN(R) XR, the
long-acting version of FOCALIN(R), may help adults and children manage ADHD
symptoms. Pediatric studies showed that FOCALIN(R) XR (dexmethylphenidate HCl)
extended release capsules may help treat ADHD symptoms for 12 hours. ADHD is one
of the most common psychiatric disorders of childhood and is estimated to affect
five to seven percent of children and approximately four percent of the adult
population in the U.S.
The Division of Neuropharmacological Drug Products at the FDA has accepted for
review a New Drug Application, or NDA, submitted by Novartis, seeking approval
to market FOCALIN(R) XR for the treatment of pediatric and adult ADHD. FDA
action on the FOCALIN(R) XR NDA is expected in the first half of 2005.
We have retained the exclusive commercial rights to FOCALIN(R) and FOCALIN(R) XR
for oncology-related disorders, such as chronic fatigue associated with
chemotherapy. We have completed a double-blinded randomized placebo-controlled
trial evaluating the use of FOCALIN(R) for the treatment of fatigue symptoms
associated with chemotherapy. We are evaluating potential clinical and
regulatory development strategies for this indication.
CELLULAR THERAPEUTICS: With the acquisition of Anthrogenesis Corporation in
December 2002, we acquired a biotherapeutics company developing stem cell
therapies and biomaterials derived from human placental tissue. CCT has
organized its business into three main units: (1) private stem cell banking for
transplantation, (2) stem cell therapies and (3) biomaterials for organ and
tissue repair. CCT has developed proprietary methods for producing placental
biomaterials for organ and tissue repair which includes the BIOVANCE(TM) and
AMBIODRY(TM) products. Additionally, CCT has developed proprietary
3
technology for collecting, processing and storing placental stem cells with
potentially broad therapeutic applications in cancer, autoimmune,
cardiovascular, neurological and other diseases.
PRECLINICAL AND CLINICAL-STAGE PIPELINE: Our preclinical and clinical-stage
pipeline of new drug candidates, in addition to our cell therapies, is
highlighted by multiple classes of small molecule, orally administered
therapeutic agents designed to selectively regulate disease-associated genes and
proteins. The drug candidates in our pipeline are at various stages of
preclinical and clinical development. Successful results in preclinical or Phase
I/II clinical studies may not be an accurate predictor of the ultimate safety or
effectiveness of the drug candidate.
IMMUNOMODULATORY DRUGS (IMIDS(R)): IMiDs are novel small molecule, orally
available compounds that modulate the immune system through multiple mechanisms
of action. We have advanced four IMiDs into development: REVLIMID(R) (CC-5013),
ACTIMID(TM) (CC-4047) and CC-11006 are being evaluated in human clinical trials
and CC-10015 is presently undergoing preclinical evaluation.
Our IMiD class of drug candidates is covered by an extensive and comprehensive
intellectual property estate of U.S. and foreign issued patents and pending
patent applications including composition-of-matter and use patents and patent
applications.
REVLIMID(R) (LENALIDOMIDE): is a small molecule, orally-available
immunomodulatory drug being investigated in clinical trials as a potential
treatment for myelodysplastic syndromes (MDS) and multiple myeloma, malignant
blood disorders that affect approximately 300,000 and 200,000 people worldwide,
respectively. It is currently being studied in a number of clinical trials, the
most advanced of which are Phase III trials - in the United States (MM-009) and
in Europe (MM-010) - for previously treated multiple myeloma patients. On March
7, 2005, we announced that based on a review of the data by the Independent Data
Monitoring Committee, the trials were being unblinded due to the meeting of
pre-specified stopping rules for meeting efficacy targets.
Approximately 30 clinical trials are currently evaluating REVLIMID(R) in the
treatment of a broad range of conditions, including multiple myeloma, the blood
cell disorders known as myelodysplastic syndromes, or MDS, and solid tumor
cancers. Preliminary clinical data from several of these trials have been
announced with additional data to be presented at major medical meetings in
2005.
REVLIMID(R) has been granted fast track designation in both multiple myeloma and
MDS by the FDA. It has also received orphan drug status both in the United
States and Europe which provides potential regulatory and financial benefits to
products receiving regulatory approval with this designation. On the basis of
the Phase II study (MDS-003), we plan to file a New Drug Application with the
FDA for the 5q deletion MDS indication in the first quarter of 2005.
In addition to our pivotal Phase III and accelerated Phase II REVLIMID(R)
trials, the Southwest Oncology Group, the Eastern Cooperative Oncology Group,
and the Cancer and Leukemia Group B, three of the largest adult cancer clinical
trial organizations in the world, selected REVLIMID(R) for large clinical
studies in randomized controlled Phase III trials designed to evaluate the
safety and efficacy of REVLIMID(R) in multiple myeloma patients.
At the 2004 American Society of Hematology meeting, new data evaluating
REVLIMID(R) as a potential therapeutic approach for the treatment of patients
with multiple myeloma and MDS was presented. Encouraging preliminary reports
were presented in various stages of multiple myeloma and MDS. Additional data is
expected to be presented at medical meetings throughout 2005.
4
ACTIMID(TM): is one of the most potent Immunomodulatory drugs that we are
developing. Currently, ACTIMID is in Phase II trials to determine its potential
safety and efficacy as a treatment for multiple myeloma and prostate cancer.
ACTIMID and REVLIMID(R) have different activity profiles which may lead to their
evaluation in different diseases or stages of disease.
CC-11006: is a molecule we have identified as a potential treatment for chronic
inflammatory diseases, many of which are not well served today. CC-11006 entered
Phase I human clinical trials in 2004. Following the completion of Phase I
trials, we will review our development options.
PDE4/TNF(ALPHA) INHIBITORS: Our Phosphodiesterase 4, or PDE4/TNF(alpha),
inhibitors provide a potentially novel small molecule approach to treating
chronic inflammatory diseases. Our lead PDE-4 compound is CC-10004. During 2004,
CC-10004 entered Phase II clinical trials in exercise-induced asthma and
psoriasis after successfully completing Phase I testing in healthy human
volunteers. This compound is well tolerated with good bioavailability and
pharmacokinetics in humans. Data from these Phase II trials is expected in late
2005.
BENZOPYRANS: CC-8490, our lead compound in this category, is in Phase I clinical
trials for glioblastoma, a form of brain cancer, with investigators at the
National Cancer Institute. In Phase I trials in healthy human volunteers,
CC-8490 has been shown to be well-tolerated. Animal studies have demonstrated
that the compound could have an important effect on solid tumors such as
non-small cell lung cancer and colon cancer.
KINASE INHIBITORS: We have multiple target and drug discovery projects underway
this year in the field of kinase inhibition. Our kinase inhibitor platform
includes inhibitors of the c-Jun N-terminal kinase pathway, or JNK. This pathway
has been associated with the regulation of a number of important disease
indications. CC-401, our lead JNK inhibitor, successfully completed a Phase I
trial in healthy volunteers. We plan to initiate a Phase II Acute Mylegeneous
Leukemia, or AML, trial later this year.
TUBULIN INHIBITORS: Celgene scientists have discovered a new chemical class of
anti-cancer compounds called tubulin inhibitors that stop cancer cells from
proliferating by impeding cell division. In preclinical models, our proprietary
tubulin inhibitors have demonstrated activity against drug-resistant cancer
cells, inhibition of inflammatory cytokines and anti-angiogenic activity.
LIGASE INHIBITORS: We are conducting extensive discovery research in the field
of ligases, intracellular mechanisms that control the degradation of selected
proteins within cells. Celgene is identifying drug targets and compounds that
regulate ligase pathways with the goal of controlling cellular proliferation and
survival. Such compounds would have the potential to be an important new class
of anti-cancer and anti-inflammatory therapeutics.
STEM CELLS: Stem cell based therapies offer the potential to provide
disease-modifying outcomes for serious diseases which today lack adequate
therapy. We are researching the potential of cells and tissues derived from the
placenta and umbilical cord blood in a number of potential indications. In
December 2004, Celgene filed an investigational new drug application (IND) with
the FDA for our initial stem cell trial in sickle cell anemia. Celgene
researchers are also exploring the potential of our small molecule compounds to
lead to selective differentiation and expansion of pluripotent stem cells.
5
CELGENE PRODUCT OVERVIEW
Our products and our primary product candidates are targeted to address a
variety of key medical needs. These products and product candidates and our
development and/or marketing partners, if any, are described in the following
table:
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PRODUCT/ DISEASE
PRODUCT CANDIDATES INDICATION COLLABORATOR STATUS
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THALOMID(R) ENL Marketed.
Multiple Myeloma Phase III trials ongoing.
MDS Phase III trial ended.
Prostate Cancer Phase II trials ongoing.
Inflammatory Diseases Phase II trials ongoing.
ALKERAN(R) Multiple Myeloma & Ovarian
Cancer GlaxoSmithKline Marketed.
RITALIN(R) FAMILY OF DRUGS:
FOCALIN(R) ADHD Novartis Marketed.
Cancer Fatigue Phase II trial completed.
FOCALIN(R) XR ADHD Novartis NDA filed.
RITALIN(R) LA ADHD Novartis Marketed.
IMIDS:
REVLIMID(R) Multiple Myeloma Phase II and Pivotal Phase III
SPA trials ongoing.
Multiple Myeloma Various Cooperative Major Phase III trials ongoing
Oncology Groups and initiating.
Myelodysplastic Syndromes Accelerated Phase II trials
ongoing. Phase III studies
initiating.
Myelodysplastic Syndromes Accelerated Phase II trials
with 5Q deletion ongoing. Phase III studies
initiating.
Solid Tumor Cancers and Phase I/II trials ongoing and
Additional Hematological expanded. Additional trials
Malignancies planned.
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PRODUCT/ DISEASE
PRODUCT CANDIDATES INDICATION COLLABORATOR STATUS
- ----------------------------------------------------------------------------------------------------------------------
ACTIMID Multiple Myeloma Phase I/II trial completed.
Prostate Cancer Phase II trial ongoing.
CC-11006 Inflammatory Phase I studies ongoing.
CC11050 Inflammatory Diseases Preclinical studies ongoing.
PDE4 AND TNF(ALPHA)
INHIBITORS:
CC-10004 Asthma Phase II trial ongoing.
Psoriasis Phase II trial ongoing.
CC-10015 Inflammatory Diseases Preclinical studies ongoing.
BENZOPYRANS:
CC-8490 Cancer National Cancer Institute Phase I/II trial ongoing.
("NCI")
CC-227113 Cancer Preclinical studies ongoing.
KINASE INHIBITORS:
CC-401 Cancer/Inflammatory Phase I trials completed.
Diseases Additional trials planned.
JNK CC0389359 Ischemia/Reperfusion Injury Preclinical studies ongoing.
TUBULIN INHIBITORS:
CC-5079 Cancer Preclinical studies ongoing.
LIGASES INHIBITORS: Cancer Preclinical studies ongoing.
STEM CELLS AND
TISSUE PRODUCTS:
LIFEBANK(TM) USA Private Stem Cell Banking Marketed.
BIOVANCE(TM) Wound Covering Marketed.
AMBIODRY(TM) Ophthalmology Okto Ophtho Inc. Marketed.
Cord Blood Cells Sickle Cell Anemia Phase I IND filed.
- ----------------------------------------------------------------------------------------------------------------------
Clinical trials are typically conducted in three sequential phases, although the
phases may overlap.
PHASE I CLINICAL TRIALS
Phase I human clinical trials usually involve a small number of healthy
volunteers or patients. The tests study a drug's safety profile, and may include
the safe dosage range. The Phase I clinical studies also determine how a drug is
absorbed, distributed, metabolized and excreted by the body, and the duration of
its action.
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PHASE II CLINICAL TRIALS
In Phase II clinical trials, controlled studies are conducted on a limited
number of patients with the targeted disease. An initial evaluation of the
drug's effectiveness on patients is performed and additional information on the
drug's safety is obtained.
PHASE III CLINICAL TRIALS
This phase typically includes multi-center trials and involves a larger patient
population. During the Phase III clinical trials, physicians monitor patients to
determine efficacy and to gather further information on safety.
Successful results in preclinical studies or Phase I or II studies may not be an
accurate predictor of the ultimate safety or effectiveness of the drug.
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PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to our business. It is our
policy to seek patent protection for our inventions, and also to rely upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
We own or have exclusively licensed more than 128 U.S. patents and have over 157
additional U.S. patent applications pending. Our U.S. patents include patents
for a method of delivering a teratogenic drug to a patient while preventing
fetal exposure as well as patents for delivering drugs to patients while
restricting access to the drug to those for whom the drug is contra-indicated.
We also have patent applications pending which are directed to these inventions,
and are seeking worldwide protection. While we have a policy to seek worldwide
patent protection for our inventions, we have foreign patent rights
corresponding to most but not all of our U.S. patents. Although THALOMID(R) is
approved for use associated with ENL, we do not have patent protection relating
to the use of THALOMID(R) to treat ENL.
Our research at Celgene Research and Development in San Diego has led us to seek
patent protection for molecular targets and drug discovery technologies, as well
as therapeutic and diagnostic products and processes. More specifically,
proprietary technology has been developed for use in molecular target discovery,
the identification of regulatory pathways in cells, assay design and the
discovery and development of pharmaceutical product candidates. As of December
2004, and included in those inventions described above, our San Diego subsidiary
owned, in whole or in part, over 32 issued U.S. patents and had approximately 47
U.S. patent applications pending. An increasing percentage of our San Diego
subsidiary's recent patent applications have been related to potential product
candidates or compounds. They also hold licenses to U.S. patents and pending
U.S. patent applications, some of which are licensed exclusively or sub-licensed
to third parties in connection with sponsored or collaborative research
relationships.
CCT, our cellular therapeutics subsidiary, seeks patent protection for the
collection, processing and uses of mammalian placental tissue and placental stem
cells, and biomaterials recovered from the placenta. As of December 2004, CCT
owned, in whole or in part, more than 16 pending U.S. patent applications, and
holds licenses to certain U.S. patents and pending applications, including those
related to cord blood collection and storage.
In August 2001, we entered into an agreement, termed the New Thalidomide
Agreement, with EntreMed, Inc., Children's Medical Center Corporation and
Bioventure Investments, KFT relating to patents and patent applications owned by
CMCC, which agreement superceded several agreements already in place between
CMCC, EntreMed and us. Pursuant to the New Thalidomide Agreement, CMCC directly
granted to us an exclusive worldwide, royalty-bearing license under the relevant
patents and patent applications relating to thalidomide. Several U.S. patents
have already issued to CMCC in this patent family and certain of these patents
expire in 2014. Corresponding foreign patent applications and additional U.S.
patent applications are still pending.
In addition to the New Thalidomide Agreement, we entered into an agreement with
CMCC and EntreMed in December 2002, pursuant to which we have been granted an
exclusive worldwide, royalty-bearing license to certain CMCC patents and patent
applications relating to thalidomide analogs, or the New Analog Agreement. The
New Analog Agreement was executed in connection with the settlement of certain
pending litigation between and among us, EntreMed and the U.S. Patent and
Trademark Office relating to the allowance of certain CMCC patent applications
covering thalidomide analogs. These patent applications had been licensed
exclusively to EntreMed in the field of thalidomide analogs. In conjunction with
the settlement of these suits, we acquired equity securities in EntreMed, and
EntreMed
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terminated its license agreements with CMCC relating to thalidomide analogs. In
turn, under the New Analog Agreement, CMCC exclusively licensed to Celgene these
patents and patent applications, which relate to analogs, metabolites,
precursors and hydrolysis products of thalidomide, and stereoisomers thereof.
The New Analog Agreement grants us control over the prosecution and maintenance
of the licensed thalidomide analog patent rights. The New Analog Agreement also
grants us an option to inventions in the field of thalidomide analogs that may
be developed at CMCC in the laboratory of Dr. Robert D'Amato, pursuant to the
terms and conditions of a separate Sponsored Research Agreement negotiated
between CMCC and us.
Under an agreement with The Rockefeller University, pursuant to which we have
made a lump sum payment and issued stock options to The Rockefeller University
and the inventors, we have obtained certain exclusive rights and licenses to
manufacture, have manufactured, use, offer for sale and sell products that are
based on compounds which were identified in research carried out by The
Rockefeller University and us that have activity associated with TNF(alpha). In
particular, The Rockefeller University identified a method of using thalidomide
and certain thalidomide-like compounds to treat certain symptoms associated with
abnormal concentrations of TNF(alpha), including those manifested in septic
shock, cachexia and HIV infection. In 1995, The Rockefeller University was
issued a U.S. patent which claims such methods. This U.S. patent expires in 2012
and is included in the patent rights exclusively licensed to us under the
agreement with The Rockefeller University. The Rockefeller University did not
seek corresponding patents in any other country.
Our success will depend, in part, on our ability to obtain and enforce patents,
protect trade secrets, obtain licenses to technology owned by third parties
where necessary and conduct our business without infringing the proprietary
rights of others. The patent positions of pharmaceutical and biotechnology
firms, including ours, can be uncertain and involve complex legal and factual
questions. In addition, the coverage sought in a patent application can be
significantly reduced before the patent is issued. Consequently, we do not know
whether any of our owned or licensed pending patent applications will result in
the issuance of patents or, if any patents are issued, whether they will be
dominated by third-party patent rights, whether they will provide significant
proprietary protection or commercial advantage or whether they will be
circumvented or infringed upon by others.
There can be no assurance that additional patents will issue to us from any of
our pending applications or that, if patents issue, such patents will provide us
with significant proprietary protection or commercial advantage. Moreover, there
can be no assurance that any of our existing patents will not be dominated by
third-party patent rights or provide us with proprietary protection or
commercial advantage. Nor can we guarantee that these patents will not be either
infringed, invalidated or circumvented by others. Finally, we cannot guarantee
that our patents or pending applications will not be involved in, or be defeated
as a result of any interference proceedings before the U.S. Patent and Trademark
Office.
With respect to patents and patent applications we have licensed-in, there can
be no assurance that additional patents will issue to any of the third parties
from whom we have licensed patent rights, either with respect to thalidomide or
thalidomide analogs, or that, if any new patents issue, such patents will not be
dominated by third-party patent rights or provide us with significant
proprietary protection or commercial advantage. Moreover, there can be no
assurance that any of the existing licensed patents will provide us with
proprietary protection or commercial advantage. Nor can we guarantee that these
licensed patents will not be either infringed, invalidated or circumvented by
others, or that the relevant agreements will not be terminated. Any termination
of the licenses granted to Celgene by CMCC could have a material adverse effect
on our business, financial condition and results of operations.
10
Since patent applications filed in the United States on or before November 28,
2000 are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, we cannot be certain that we, or our licensors, were the first to
make the inventions covered by each of the issued patents or pending patent
applications or that we, or our licensors, were the first to file patent
applications for such inventions. In the event a third party has also filed a
patent for any of our inventions, we, or our licensors, may have to participate
in interference proceedings before the U.S. Patent and Trademark Office to
determine priority of invention, which could result in the loss of a U.S. patent
or loss of any opportunity to secure U.S. patent protection for the invention.
Even if the eventual outcome is favorable to us, such interference proceedings
could result in substantial cost to us.
We are aware of U.S. patents that have been issued to third parties claiming
subject matter relating to the NF-k(Beta) pathway, which could overlap with
technology claimed in some of our owned or licensed NF-k(Beta) patents or patent
applications. We believe that one or more interference proceedings may be
initiated by the U.S. Patent and Trademark Office to determine priority of
invention for this subject matter. While we cannot predict the outcome of any
such proceedings, in the event we do not prevail, we believe that we can use
alternative methods for our NF-k(Beta) drug discovery program for which we have
issued U.S. patents that are not claimed by the subject matter of the third
party patents. We are also aware of third-party U.S patents that relate to the
use of certain PDE 4 inhibitors to treat inflammation.
We may in the future have to prove that we are not infringing patents or we may
be required to obtain licenses to such patents. However, we do not know whether
such licenses will be available on commercially reasonable terms, or at all.
Prosecution of patent applications and litigation to establish the validity and
scope of patents, to assert patent infringement claims against others and to
defend against patent infringement claims by others can be expensive and
time-consuming. There can be no assurance that, in the event that claims of any
of our owned or licensed patents are challenged by one or more third parties,
any court or patent authority ruling on such challenge will determine that such
patent claims are valid and enforceable. An adverse outcome in such litigation
could cause us to lose exclusivity relating to the subject matter delineated by
such patent claims and may have a material adverse effect on our business. If a
third party is found to have rights covering products or processes used by us,
we could be forced to cease using the products or processes covered by the
disputed rights, subject to significant liabilities to such third party and/or
be required to license technologies from such third party. Also, different
countries have different procedures for obtaining patents, and patents issued by
different countries provide different degrees of protection against the use of a
patented invention by others. There can be no assurance, therefore, that the
issuance to us in one country of a patent covering an invention will be followed
by the issuance in other countries of patents covering the same invention or
that any judicial interpretation of the validity, enforceability or scope of the
claims in a patent issued in one country will be similar to the judicial
interpretation given to a corresponding patent issued in another country.
Competitors may choose to file oppositions to patent applications, which have
been deemed allowable by foreign patent examiners. Furthermore, even if our
owned or licensed patents are determined to be valid and enforceable, there can
be no assurance that competitors will not be able to design around such patents
and compete with us using the resulting alternative technology. Additionally,
for these same reasons, we cannot be sure that patents of a broader scope than
ours may be issued and thereby create freedom to operate issues. If this occurs
we may need to reevaluate pursuing such technology, which is dominated by
others' patent rights, or alternatively, seek a license to practice our own
invention, whether or not patented.
We also rely upon unpatented, proprietary and trade secret technology that we
seek to protect, in part, by confidentiality agreements with our collaborative
partners, employees, consultants, outside scientific collaborators, sponsored
researchers and other advisors. There can be no assurance that these agreements
provide meaningful protection or that they will not be breached, that we would
have adequate remedies
11
for any such breach or that our trade secrets, proprietary know-how and
technological advances will not otherwise become known to others. In addition,
there can be no assurance that, despite precautions taken by us, others have not
and will not obtain access to our proprietary technology or that such technology
will not be found to be non-proprietary or not a trade secret.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the manufacture and marketing of pharmaceuticals and
in our ongoing research and development activities. Most, if not all, of our
therapeutic products will require regulatory approval by governmental agencies
prior to commercialization. In particular, human therapeutic products are
subject to rigorous preclinical testing and clinical trials and other
pre-marketing approval requirements by the FDA and regulatory authorities in
other countries. In the United States, various federal and in some cases state
statutes and regulations also govern or impact upon the manufacturing, testing
for safety and effectiveness, labeling, storage, record-keeping and marketing of
such products. The lengthy process of seeking required approvals, and the
continuing need for compliance with applicable statutes and regulations, require
the expenditure of substantial resources. Regulatory approval, when and if
obtained, may be limited in scope which may significantly limit the indicated
uses for which a product may be marketed. Further, approved drugs, as well as
their manufacturers, are subject to ongoing review and discovery of previously
unknown problems with such products or the manufacturing or quality control
procedures used in their production may result in restrictions on their
manufacture, sale or use or in their withdrawal from the market. Any failure by
us, our suppliers of manufactured drug product, collaborators or licensees to
obtain or maintain, or any delay in obtaining, regulatory approvals could
adversely affect the marketing of our products and our ability to receive
product revenue, license revenue or profit sharing payments.
The activities required before a pharmaceutical may be marketed in the United
States begin with preclinical testing not involving human subjects. Preclinical
tests include laboratory evaluation of a product candidate's chemistry and its
biological activities and the conduct of animal studies to assess the potential
safety and efficacy of a product candidate and its formulations. The results of
these studies must be submitted to the FDA as part of an IND, which must be
reviewed by the FDA primarily for safety considerations before proposed clinical
trials in humans can begin.
Typically, clinical trials involve a three-phase process. In Phase I, clinical
trials are generally conducted with a small number of individuals, usually
healthy human volunteers, to determine the early safety and tolerability profile
and the pattern of drug distribution and metabolism within the body. If the
Phase I trials are satisfactory, Phase II clinical trials are conducted with
groups of patients in order to determine preliminary efficacy, dosing regimes
and expanded evidence of safety. In Phase III, large-scale, multi-center,
adequately powered and typically placebo-controlled comparative clinical trials
are conducted with patients in an effort to provide enough data for the
statistical proof of efficacy and safety required by the FDA and others for
marketing approval. In some limited circumstances, Phase III clinical trials may
be modified to allow the evaluation of safety and efficacy based upon (i)
comparisons with approved drugs, (ii) comparison with the historical progression
of the disease in untreated patients, or (iii) the use of surrogate markers,
together with a commitment for post-approval studies. In some cases, as a
condition for New Drug Application, or NDA, approval, further studies (Phase IV)
are required to provide additional information concerning the drug. The FDA
requires monitoring of all aspects of clinical trials, and reports of all
adverse events must be made to the agency, both before and after drug approval.
Additionally, we may have limited control over studies conducted with our
proprietary compounds if such studies are performed by others, (e.g.,
cooperative groups and the like).
12
The results of the preclinical testing and clinical trials are submitted to the
FDA as part of an NDA for evaluation to determine if the product is sufficiently
safe and effective for approval to commence commercial sales. In responding to
an NDA, the FDA may grant marketing approval, request additional information or
deny the application if it determines that the application does not satisfy its
regulatory approval criteria. When an NDA is approved, the developer and
marketer of the drug must employ a system for obtaining reports of experience
and side effects that are associated with the drug and make appropriate
submissions to the FDA.
Pursuant to the Orphan Drug Act, a sponsor may request that the FDA designate a
drug intended to treat a "rare disease or condition" as an "orphan drug." A rare
disease or condition is defined as one which affects less than 200,000 people in
the United States, or which affects more than 200,000 people, but for which the
cost of developing and making available the drug is not expected to be recovered
from sales of the drug in the United States. Upon the approval of the first NDA
for a drug designated as an orphan drug for a specified indication, the sponsor
of that NDA is entitled to exclusive marketing rights in the United States for
such drug for that indication for seven years unless the sponsor cannot assure
the availability of sufficient quantities of the drug to meet the needs of
persons with the disease. This period of exclusivity is concurrent with any
patent exclusivity that relates to the drug. Orphan drugs may also be eligible
for federal income tax credits for costs associated with the drug's development.
Possible amendment of the Orphan Drug Act by the U.S. Congress and possible
reinterpretation by the FDA has been discussed by regulators and legislators.
FDA regulations reflecting certain definitions, limitations and procedures for
orphan drugs initially went into effect in January 1993 and were amended in
certain respects in 1998. Therefore, there is no assurance as to the precise
scope of protection that may be afforded by orphan drug status in the future or
that the current level of exclusivity and tax credits will remain in effect.
Moreover, even if we have an orphan drug designation for a particular use of a
drug, there can be no assurance that another company also holding orphan drug
designation will not receive approval prior to us for the same indication. If
that were to happen, our applications for that indication could not be approved
until the competing company's seven-year period of exclusivity expired. Even if
we are the first to obtain approval for the orphan drug indication, there are
certain circumstances under which a competing product may be approved for the
same indication during our seven-year period of exclusivity. First, particularly
in the case of large molecule drugs, a question can be raised whether the
competing product is really the "same drug" as that which was approved. In
addition, even in cases in which two products appear to be the same drug, the
agency may approve the second product based on a showing of clinical superiority
compared to the first product.
Among the conditions for NDA approval is the requirement that the prospective
manufacturer's quality control and manufacturing procedures continually conform
with the FDA's current Good Manufacturing Practice, or cGMP (cGMP are
regulations established by the FDA that govern the manufacture, processing,
packing, storage and testing of drugs intended for human use). In complying with
cGMP, manufacturers must devote extensive time, money and effort in the area of
production and quality control and quality assurance to maintain full technical
compliance. Manufacturing facilities and company records are subject to periodic
inspections by the FDA to ensure compliance. If a manufacturing facility is not
in substantial compliance with these requirements, regulatory enforcement action
may be taken by the FDA, which may include seeking an injunction against
shipment of products from the facility and recall of products previously shipped
from the facility.
Failure to comply with applicable FDA regulatory requirements can result in
informal administrative enforcement actions such as warning letters, recalls or
adverse publicity issued by the FDA or in legal actions such as seizures,
injunctions, fines based on the equitable remedy of disgorgement, restitution
and criminal prosecution.
13
Steps similar to those in the United States must be undertaken in virtually
every other country comprising the market for our products before any such
product can be commercialized in those countries. The approval procedure and the
time required for approval vary from country to country and may involve
additional testing. There can be no assurance that approvals will be granted on
a timely basis or at all. In addition, regulatory approval of drug pricing is
required in most countries other than the United States. There can be no
assurance that the resulting pricing of our drugs would be sufficient to
generate an acceptable return to us.
COMPETITION
The pharmaceutical and biotechnology industries in which we compete are each
highly competitive. Our competitors include major pharmaceutical and
biotechnology companies, many of which have considerably greater financial,
scientific, technical and marketing resources than us. We also experience
competition in the development of our products and processes from universities
and other research institutions and, in some instances, compete with others in
acquiring technology from such sources.
Competition in the pharmaceutical industry, and specifically in the oncology and
immune-inflammatory areas being addressed by us, is particularly intense.
Numerous pharmaceutical and biotechnology companies have extensive anti-cancer
and anti-inflammatory drug discovery, development and commercial resources.
Bristol-Myers Squibb Co., Amgen Inc., Genentech, Inc., Sanofi-Aventis SA.,
Novartis AG, AstraZeneca PLC., Eli Lilly and Company, F. Hoffmann-LaRoche Ltd,
Pharmion Corp., Millennium Pharmaceuticals, Inc., SuperGen, Inc., Cell
Therapeutics, Inc., Vertex Pharmaceuticals Inc., Biogen Idec Inc., Merck and
Co., Inc. and Pfizer Inc. are among some of the companies researching and
developing new compounds in the oncology and immunology fields.
The pharmaceutical and biotechnology industries have undergone, and are expected
to continue to undergo, rapid and significant technological change. Also,
consolidation and competition are expected to intensify as technical advances in
each field are achieved and become more widely known. In order to compete
effectively, we will be required to continually upgrade and expand our
scientific expertise and technology, identify and retain capable personnel and
pursue scientifically feasible and commercially viable opportunities.
Our competition will be determined in part by the indications and geographic
markets for which our products are developed and ultimately approved by
regulatory authorities. An important factor in competition will be the timing of
market introduction of our or our competitors' products. Accordingly, the
relative speed with which we can develop products, complete clinical trials and
approval processes and supply commercial quantities of products to the market
are expected to be important competitive factors. Competition among products
approved for sale will be based, among other things, on product efficacy,
safety, convenience, reliability, availability, price, third-party reimbursement
and patent and non-patent exclusivity.
SIGNIFICANT ALLIANCES
From time to time we enter into collaborative research and/or license agreements
with other pharmaceutical and biotechnology companies by which, in exchange for
the rights to certain compounds, the partnering company will provide funding in
the form of upfront payments, milestone payments or direct research funding, and
may also purchase product and pay royalties on product sales. The following are
our most significant collaborations.
NOVARTIS PHARMA AG: We entered into an agreement with Novartis in April 2000 in
which we granted to Novartis an exclusive license (excluding Canada) for the
development and marketing of FOCALIN(R) (d-
14
MPH). We received a $10.0 million upfront payment in July 2000, a $5.0 million
milestone payment upon the acceptance of the NDA filing by the FDA in December
2000, a $12.5 million milestone payment upon approval by the FDA to market
FOCALIN(R) in November 2001 and a $7.5 million milestone payment in 2004 for
filing an NDA for FOCALIN(R) XR. We are currently selling FOCALIN(R) to Novartis
as well as receiving royalties on all of Novartis' RITALIN(R) family of
ADHD-related products. The research portion of the agreement ended in June 2003.
We may receive an additional milestone payment in 2005 for U.S. regulatory
approval of FOCALIN(R) XR.
PHARMION: In November 2001, we entered into an agreement with Pharmion
Corporation and Pharmion GmbH ("Pharmion") pursuant to which we granted an
exclusive license to Pharmion for the use of our intellectual property covering
thalidomide. In addition, we entered into a second agreement with Pharmion,
pursuant to which we granted to Pharmion an exclusive license to use
S.T.E.P.S.(R) in all countries other than North America, Japan, China, Taiwan
and Korea in exchange for licensing payments and, upon regulatory approvals,
royalties based on commercial sales. The thalidomide license agreement
terminates upon the tenth anniversary following regulatory approval in the
United Kingdom. Pursuant to the S.T.E.P.S.(R) license agreement, we are entitled
to receive $0.3 million on a quarterly basis beginning in January 2002, until
initial regulatory approval in the United Kingdom is received. In April 2003, we
entered into a collaborative clinical trials development agreement whereby
Pharmion agreed to provide to us an aggregate of $8.0 million in funding for
further clinical development of THALOMID(R) through December 2005. We received
three installments totaling $3.0 million in 2003 and four installments totaling
$3.0 million in 2004.
In April 2003, we entered into a Securities Purchase Agreement with Pharmion to
acquire, for a total purchase price of $12 million (i) $12.0 million principal
amount of 6.0% Senior Convertible Promissory Note due 2008 (the "Note") and (ii)
a five-year warrant to purchase up to 363,636 shares of common stock of
Pharmion, each convertible into shares of common stock of Pharmion at a purchase
price of $11.00 per share, which was subsequently adjusted for Pharmion's
one-for-four reverse stock split. The Note was automatically convertible into
common stock under certain conditions. In March 2004, we converted the Note
(with accrued interest of approximately $0.7 million) into 1,150,511 shares of
Pharmion common stock. In addition, in September 2004, we exercised certain
warrants that we had received in connection with both the November 2001
thalidomide license and the Securities Purchase Agreement for an aggregate of
789,089 shares of common stock of Pharmion. At December 31, 2004 we held
1,939,600 shares of Pharmion common stock.
In December 2004, following our acquisition of Penn T Limited, we expanded our
THALOMID(R) development and commercialization collaboration with Pharmion.
Pursuant to an amended thalidomide supply agreement with Pharmion, we received a
one-time payment of $77.0 million in exchange for a substantial reduction in
Pharmion's purchase price of thalidomide. In addition, Pharmion has agreed to
fund us an aggregate of $10.0 million (including amounts remaining under the
initial 2003 clinical trials agreement) from January 2005 to December 2007 to
extend the two companies' April 2003 thalidomide development collaboration. We
also received a one-time payment of $3.0 million in return for granting license
rights to Pharmion to develop and market thalidomide in three additional Asian
territories (Hong Kong, Korea and Taiwan) and eliminating certain of our license
termination rights.
MANUFACTURING
The bulk active pharmaceutical ingredient, or API, for THALOMID(R) is
manufactured by ChemSyn Laboratories, a Division of Eagle-Picher Technologies,
L.L.C., which operates a FDA cGMP-approved facility. (cGMP, or current Good
Manufacturing Practices, are regulations established by the FDA that govern the
manufacturing, processing, packaging, storing and testing of drugs intended for
human use). The bulk drug substance is shipped to Celgene UK Manufacturing II
Ltd., which contracts with Penn
15
Pharmaceuticals Services Limited of Great Britain to formulate and encapsulate
THALOMID(R) for us in an FDA cGMP-approved facility. In October 2003, we signed
an agreement with Institute of Drug Technology Australia Limited, or IDT, for
the second-source manufacture of finished dosage form of THALOMID(R) capsules.
The agreement is scheduled to commence with the FDA's approval of IDT's
facility. The agreement provides us with additional capacity and reduces our
dependency on one manufacturer for the formulation and encapsulation of
THALOMID(R). In certain instances, we may be required to make substantial
capital expenditures to access additional manufacturing capacity.
The bulk API for REVLIMID(R) is manufactured by Evotec OAI, Ltd. under a supply
agreement entered into in August 2004. We contracted with Penn Pharmaceuticals
Services Ltd. in September 2004 for the formulation and encapsulation of
REVLIMID(R) in different dosage forms. We also entered into a contract
manufacturing agreement with OSG Norwich Pharmaceuticals, Inc. in April 2004 as
a second source for the formulation, encapsulation and packaging of REVLIMID(R)
in different dosage forms. We plan to construct and operate our own
manufacturing facility to produce and supply REVLIMID(R) for commercial sale in
the United States, Europe and potentially in other geographic markets.
The bulk API for FOCALIN(R) and FOCALIN(R) XR is manufactured and supplied by
Johnson Matthey Inc. A Supply Agreement was executed in March 2003 with a second
supplier, Siegfried USA Inc. The product is manufactured into finished dosage
forms of different strengths and packaged as FOCALIN(R) tablets by Mikart, Inc.
for distribution.
INTERNATIONAL EXPANSION
In November 2001, we signed agreements with Pharmion Corporation and Penn
Pharmaceuticals Services Limited to expand the THALOMID(R) franchise in all
countries outside North America, Japan, China, Taiwan and Korea. The strategic
partnership combined Penn's FDA-compliant manufacturing capability, Pharmion's
global development and marketing expertise and our intellectual property. The
alliance was designed to accelerate the establishment of THALOMID(R) as an
important therapy in the international markets. To date, Pharmion has received
regulatory approval in Australia, New Zealand, Turkey and Israel to market and
distribute Thalidomide for the treatment of multiple myeloma after the failure
of standard therapies, as well as for the treatment of complications of leprosy.
In October 2004, we acquired Penn T Limited, a worldwide supplier of
THALOMID(R). Through manufacturing contracts purchased in this acquisition, we
are able to control manufacturing for THALOMID(R) worldwide and we also
increased our participation in the potential sales growth of THALOMID(R) in key
international markets. In December 2004, we amended several agreements with
Pharmion including a collaborative R&D agreement and a manufacturing supply
agreement, as well as the License agreement signed in November 2001, which added
to the territories licensed in that agreement. In December 2003, we established
a legal entity in Switzerland where we are developing a facility to perform
formulation, encapsulation, packaging, warehousing and distribution of future
products.
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SALES AND COMMERCIALIZATION
We have a 197-person U.S. pharmaceutical commercial organization. These
individuals have considerable experience in the pharmaceutical industry, and
many have experience with oncological and immunological products. We expect to
expand our sales and commercialization group to support products we develop to
treat oncological and immunological diseases. We intend to market and sell the
products we develop for indications with accessible patient populations. For
drugs with indications involving larger patient populations, we may partner with
other pharmaceutical companies. In addition, we are positioned to accelerate the
expansion of these sales and marketing resources as appropriate to take
advantage of product in-licensing and product acquisition opportunities.
EMPLOYEES
As of March 1, 2005, we had 766 full-time employees, 432 of who were engaged
primarily in research and development activities, 204 (including CCT) who were
engaged in sales and commercialization activities and the remainder of who were
engaged in executive and general and administrative activities. We also maintain
consulting arrangements with a number of researchers at various universities and
other research institutions in Europe and the United States.
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this annual report
are forward-looking statements concerning our business, financial condition,
results of operations, economic performance and financial condition.
Forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and within the meaning of Section 21E of the Securities Exchange Act
of 1934 are included, for example, in the discussions about:
o our strategy;
o new product discovery, development or product introduction;
o product manufacturing
o product sales, royalties and contract revenues;
o expenses and net income;
o our credit risk management;
o our liquidity;
o our asset/liability risk management; and
o our operational and legal risks.
These statements involve risks and uncertainties. Actual results may differ
materially from those expressed or implied in those statements. Factors that
could cause such differences include, but are not
17
limited to, those discussed under "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
RISK FACTORS
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT.
Until 2003, we had sustained losses in each year since our incorporation in
1986. For the years ended December 31, 2004 and December 31, 2003, we posted net
income of $52.8 million and $25.7 million, respectively. In addition, we had an
accumulated deficit of $234.4 million at December 31, 2004. We expect to make
substantial expenditures to further develop and commercialize our products. We
also expect that our rate of spending will accelerate as the result of increased
clinical trial costs and expenses associated with regulatory approval and
commercialization of products now in development.
IF WE ARE UNSUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR PRODUCTS, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED WHICH COULD IMPACT NEGATIVELY ON THE VALUE OF OUR COMMON
STOCK.
Many of our products and processes are in the early or mid-stages of research
and development and will require the commitment of substantial resources,
extensive research, development, preclinical testing, clinical trials,
manufacturing scale-up and regulatory approval prior to being ready for sale.
With the exception of FOCALIN(R), ALKERAN(R), THALOMID(R), AMBIODRY(TM) and
BIOVANCE(TM), all of our other products will require further development,
clinical testing and regulatory approvals before initial commercial marketing in
the United States and internationally. If it becomes too expensive to sustain
our present commitment of resources on a long-term basis, we will be unable to
continue our necessary research and development activities. Furthermore, we
cannot be certain that our clinical testing will render satisfactory results, or
that we will receive required regulatory approval for our products. If any of
our products, even if developed and approved, cannot be successfully
commercialized, our business, financial condition and results of operations
could be materially adversely affected which could impact negatively on the
value of our common stock.
DURING THE NEXT SEVERAL YEARS, WE WILL BE VERY DEPENDENT ON THE COMMERCIAL
SUCCESS OF THALOMID(R), ALKERAN(R), FOCALIN(R), AND THE ENTIRE RITALIN(R)
PRODUCT LINE.
At our present level of operations, we may not be able to maintain profitability
if physicians prescribe THALOMID(R) only for patients who are diagnosed with
ENL. ENL, a complication of leprosy, is a chronic bacterial disease. Under
current FDA regulations, we are precluded from promoting THALOMID(R) outside
this approved use. The market for the use of THALOMID(R) in patients suffering
from ENL is relatively small. We have conducted clinical studies designed to
show that THALOMID(R) is active when used to treat disorders other than ENL,
such as multiple myeloma, but we do not know whether we will succeed in
receiving regulatory approval to market THALOMID(R) for such indications. FDA
regulations place restrictions on our ability to communicate the results of
additional clinical studies to patients and physicians without first obtaining
approval from the FDA to expand the authorized uses for this product. In
addition, if adverse experiences are reported in connection with the use of
THALOMID(R) by patients, this could undermine physician and patient comfort with
the product, could limit the commercial success of the product and could even
impact the acceptance of THALOMID(R) in the ENL market. We are dependent upon
royalties from Novartis Pharma AG's entire RITALIN(R) product line, including
FOCALIN(R), although we cannot directly impact their ability to successfully
commercialize these products. We have annual minimum purchase requirements
relating to ALKERAN(R)
18
through March 31, 2006, which we license from GlaxoSmithKline. Additionally, our
revenues would be negatively impacted if generic versions of any of these
products were to be approved and launched.
WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
SUFFICIENT INSURANCE ON COMMERCIALLY REASONABLE TERMS OR WITH ADEQUATE COVERAGE.
We may be subject to a variety of types of product liability or other claims
based on allegations that the use of our technology or products has resulted in
adverse effects, whether by participants in our clinical trials, by patients
using our products or by other persons exposed to our products. Thalidomide,
when used by pregnant women, has resulted in serious birth defects. Therefore,
necessary and strict precautions must be taken by physicians prescribing the
drug to women with childbearing potential. These precautions may not be observed
in all cases or, if observed, may not be effective. Use of thalidomide has also
been associated, in a limited number of cases, with other side effects,
including nerve damage. Although we have product liability insurance that we
believe is appropriate, we may be unable to maintain existing coverage or obtain
additional coverage on commercially reasonable terms if required, or our
coverage may be inadequate to protect us in the event of a multitude of claims
being asserted against us. Our obligation to defend against or pay any product
liability or other claim may be expensive and divert the efforts of our
management and technical personnel.
IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, DEMAND FOR OUR PRODUCTS WILL
DETERIORATE OR NOT MATERIALIZE AT ALL.
It is necessary that our, and our distribution partner's products, including
THALOMID(R), ALKERAN(R) and FOCALIN(R), achieve market acceptance. A number of
factors can render the degree of market acceptance of our products uncertain,
including the products' efficacy, safety and advantages, if any, over competing
products, as well as the reimbursement policies of third-party payors, such as
government and private insurance plans. In particular, thalidomide, when used by
pregnant women, has resulted in serious birth defects, and the negative history
associated with thalidomide and birth defects may decrease the market acceptance
of THALOMID(R). In addition, the products that we are attempting to develop
through our Celgene Cellular Therapeutics subsidiary may represent substantial
departures from established treatment methods and will compete with a number of
traditional drugs and therapies which are now, or may be in the future,
manufactured and marketed by major pharmaceutical and biopharmaceutical
companies. Furthermore, public attitudes may be influenced by claims that stem
cell therapy is unsafe, and stem cell therapy may not gain the acceptance of the
public or the medical community. If our products are not accepted by the market,
demand for our products will deteriorate or not materialize at all.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.
We have historically experienced, and expect to continue for the foreseeable
future to experience, significant fluctuations in our quarterly operating
results. These fluctuations are due to a number of factors, many of which are
outside our control, and may result in volatility of our stock price. Future
operating results will depend on many factors, including:
o demand for our products;
o regulatory approvals for our products;
o reimbursement from third party payors for our products;
o the timing of the introduction and market acceptance of new products by us
or competing companies;
19
o the timing and recognition of certain research and development milestones
and license fees; and
o our ability to control our costs.
WE HAVE NO U.S. COMMERCIAL MANUFACTURING FACILITIES AND WE ARE DEPENDENT ON ONE
SUPPLIER FOR THE RAW MATERIAL OF THALOMID(R) AND ARE DEPENDENT ON TWO SUPPLIERS
FOR THE RAW MATERIAL AND ONE MANUFACTURER FOR THE TABLETING AND PACKAGING OF
FOCALIN(R).
We currently have no U.S. facilities for manufacturing any products on a
commercial scale. The bulk drug material for THALOMID(R) is manufactured by
ChemSyn Laboratories, a Division of Eagle-Picher Technologies, L.L.C. We
currently obtain all of our bulk active pharmaceutical ingredient for FOCALIN(R)
from two suppliers, Johnson Matthey Inc. and Seigfried USA, Inc., and we rely on
a single manufacturer, Mikart, Inc., for the packaging and tableting of
FOCALIN(R).
On October 21, 2004, we acquired all of the outstanding shares of Penn T
Limited, the UK-based manufacturer of THALOMID(R), which subsequently became
known as Celgene UK Manufacturing II, Limited (or CUK II). In connection with
the acquisition, we and CUK II entered into a Technical Services Agreement with
Penn Pharmaceuticals Services Limited (PPSL), pursuant to which PPSL provides
the services and facilities necessary for the manufacture of our requirements of
THALOMID(R) and other thalidomide formulations. In addition, we have signed an
agreement with the Institute of Drug Technology Australia Limited ( IDT) for the
manufacture of finished dosage form of THALOMID capsules. The agreement is
scheduled to commence with the FDA's approval of IDT's facility, which we
anticipate to occur in the second half of 2005.
Presently, we are actively seeking alternative sources to each of Mikart and
PPSL, including our arrangements with IDT. The FDA requires that all suppliers
of pharmaceutical bulk material and all manufacturers of pharmaceuticals for
sale in or from the United States achieve and maintain compliance with the FDA's
cGMP regulations and guidelines. If the operations of either Mikart or PPSL were
to become unavailable for any reason (and/or if the FDA's approval of IDT's
facility was either delayed or denied for any reason), any required FDA review
and approval of the operations of an alternative could cause a delay in the
manufacture of THALOMID(R) or FOCALIN(R). In addition, although we have now
acquired the THALOMID(R) manufacturing operations of CUK II, we intend to
continue to utilize outside manufacturers if and when needed to produce certain
of our other products on a commercial scale. If our outside manufacturers do not
meet our requirements for quality, quantity or timeliness, or do not achieve and
maintain compliance with all applicable regulations, demand for our products or
our ability to continue supplying such products could substantially decline, to
the extent we depend on these outside manufacturers.
WE HAVE LIMITED MARKETING AND DISTRIBUTION CAPABILITIES.
Although we have a 197-person U.S. pharmaceutical commercial organization to
support our products, we may be required to seek one or more corporate partners
to provide marketing services with respect to our other products. Any delay in
developing these resources could substantially delay or curtail the marketing of
these products. We have contracted with Ivers Lee Corporation, d/b/a Sharp, a
specialty distributor, to distribute THALOMID(R). If Sharp does not perform its
obligations, our ability to distribute THALOMID(R) may be severely restricted.
WE ARE DEPENDENT ON COLLABORATIONS AND LICENSES WITH THIRD PARTIES.
Our ability to fully commercialize our products, if developed, may depend to
some extent upon our entering into joint ventures or other arrangements with
established pharmaceutical and biopharmaceutical
20
companies with the requisite experience and financial and other resources to
obtain regulatory approvals and to manufacture and market such products. Our
collaborations and licenses include an exclusive license (excluding Canada) to
Novartis for the development and commercialization of FOCALIN(R) ("d-MPH"); an
agreement with Biovail Corporation International, wherein we granted to Biovail
exclusive Canadian marketing rights for d-MPH; and an agreement with Pharmion
Corporation to expand the THALOMID(R) franchise internationally; and an
agreement with GlaxoSmithKline to distribute, promote and sell ALKERAN(R). Our
present and future arrangements may be jeopardized if any or all of the
following occur:
o we are not able to enter into additional joint ventures or other
arrangements on acceptable terms, if at all;
o our joint ventures or other arrangements do not result in a compatible
working relationship;
o our joint ventures or other arrangements do not lead to the successful
development and commercialization of any products;
o we are unable to obtain or maintain proprietary rights or licenses to
technology or products developed in connection with our joint ventures or
other arrangements; or
o we are unable to preserve the confidentiality of any proprietary rights or
information developed in connection with our joint ventures or other
arrangements.
THE HAZARDOUS MATERIALS WE USE IN OUR RESEARCH AND DEVELOPMENT COULD RESULT IN
SIGNIFICANT LIABILITIES THAT COULD EXCEED OUR INSURANCE COVERAGE AND FINANCIAL
RESOURCES.
We use some hazardous materials in our research and development activities.
While we believe we are currently in substantial compliance with the federal,
state and local laws and regulations governing the use of these materials, we
cannot be certain that accidental injury or contamination will not occur. Any
such accident or contamination could result in substantial liabilities that
could exceed our insurance coverage and financial resources. Additionally, the
cost of compliance with environmental and safety laws and regulations may
increase in the future, requiring us to expend more financial resources either
in compliance or in purchasing supplemental insurance coverage.
THE PHARMACEUTICAL INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, WHICH
PRESENTS NUMEROUS RISKS TO US.
The preclinical development, clinical trials, manufacturing, marketing and
labeling of pharmaceuticals are all subject to extensive regulation by numerous
governmental authorities and agencies in the United States and other countries.
If we or our contractors and collaborators are delayed in receiving, or are
unable to obtain at all, necessary governmental approvals, we will be unable to
effectively market our products.
The testing, marketing and manufacturing of our products require regulatory
approval, including approval from the FDA and, in some cases, from the U.S.
Environmental Protection Agency or governmental authorities outside of the
United States that perform roles similar to those of the FDA and EPA. Certain of
our pharmaceutical products, such as FOCALIN(R), fall under the Controlled
Substances Act of 1970 that requires authorization by the U.S. Drug Enforcement
Agency, or DEA, of the U.S. Department of Justice in order to handle and
distribute these products. The regulatory approval process presents several
risks to us:
21
o In general, preclinical tests and clinical trials can take many years, and
require the expenditure of substantial resources, and the data obtained
from these tests and trials can be susceptible to varying interpretation
that could delay, limit or prevent regulatory approval;
o Delays or rejections may be encountered during any stage of the regulatory
process based upon the failure of the clinical or other data to
demonstrate compliance with, or upon the failure of the product to meet, a
regulatory agency's requirements for safety, efficacy and quality or, in
the case of a product seeking an orphan drug indication, because another
designee received approval first;
o Requirements for approval may become more stringent due to changes in
regulatory agency policy, or the adoption of new regulations or
legislation;
o The scope of any regulatory approval, when obtained, may significantly
limit the indicated uses for which a product may be marketed and may
impose significant limitations in the nature of warnings, precautions and
contraindications that could materially affect the sales and profitability
of the drug;
o Approved drugs, as well as their manufacturers, are subject to continuing
and ongoing review, and discovery of previously unknown problems with
these products or the failure to adhere to manufacturing or quality
control requirements may result in restrictions on their manufacture, sale
or use or in their withdrawal from the market;
o Regulatory authorities and agencies may promulgate additional regulations
restricting the sale of our existing and proposed products;
o Once a product receives marketing approval, the FDA may not permit us to
market that product for broader or different applications, or may not
grant us approval with respect to separate product applications that
represent extensions of our basic technology. In addition, the FDA may
withdraw or modify existing approvals in a significant manner or
promulgate additional regulations restricting the sale of our present or
proposed products;
o Our labeling and promotional activities relating to our products are
regulated by the FDA and state regulatory agencies and, in some
circumstances, by the DEA, and are subject to associated risks. If we fail
to comply with FDA regulations prohibiting promotion of off-label uses and
the promotion of products for which marketing clearance has not been
obtained, the FDA, or the Office of the Inspector General of the
Department of Health and Human Services or the state Attorneys General
could bring an enforcement action against us that could inhibit our
marketing capabilities as well as result in significant penalties.
FDA's Center for Biologics Evaluation and Research currently regulates under 21
CFR Parts 1270 and 1271 human tissue intended for transplantation that is
recovered, processed, stored or distributed by methods that do not change tissue
function or characteristics and that is not currently regulated as a human drug,
biological product or medical device. Certain stem cell activities fall within
this category. Part 1270 requires tissue establishments to screen and test
donors, to prepare and follow written procedures for the prevention of the
spread of communicable disease and to maintain records. It also provides for
inspection by FDA of tissue establishments. Part 1271 requires human cells,
tissue and cellular and tissue-based product establishments (HCT/Ps) to register
with the agency and list their HCT/Ps.
Currently, we are required to be, and are, licensed to operate in New York and
New Jersey, two of the states in which we currently collect placentas and
umbilical cord blood for our allogeneic and private stem cell banking
businesses. If other states adopt similar licensing requirements, we would need
to
22
obtain such licenses to continue operating. If we are delayed in receiving, or
are unable to obtain at all, necessary licenses, we will be unable to provide
services in those states which would impact negatively on our revenues.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY.
Our success will depend, in part, on our ability to obtain and enforce patents,
protect trade secrets, obtain licenses to technology owned by third parties,
when necessary, and conduct our business without infringing upon the proprietary
rights of others. The patent positions of pharmaceutical and biopharmaceutical
firms, including ours, can be uncertain and involve complex legal and factual
questions.
Under the current U.S. patent laws, patent applications in the United States are
maintained in secrecy from six to eighteen months, and publications of
discoveries in the scientific and patent literature often lag behind actual
discoveries. Thus, we may discover sometime in the future, that we, or the third
parties from whom we have licensed patents or patent applications, were not the
first to make the inventions covered by the patents and patent applications in
which we have rights, or that such patents and patent applications were not the
first to be filed on such inventions. In the event that a third party has also
filed a patent application for any of the inventions claimed in our patents or
patent applications, or those we have licensed-in, we could become involved in
an interference proceeding declared by the U.S. Patent and Trademark Office to
determine priority of invention. Such an interference could result in the loss
of an issued U.S. patent or loss of any opportunity to secure U.S. patent
protection for that invention. Even if the eventual outcome is favorable to us,
such interference proceedings could result in substantial cost to us.
In addition, the coverage sought in a patent application may not be obtained or
may be significantly reduced before the patent is issued. Consequently, if our
pending applications, or a pending application that we have licensed-in from
third parties, do not result in the issuance of patents or if any patents that
are issued do not provide significant proprietary protection or commercial
advantage, our ability to sustain the necessary level of intellectual property
rights upon which our success depends may be restricted.
Furthermore, even if our patents, or those we have licensed-in, are issued, our
competitors may still challenge the scope, validity or enforceability of our
patents in court, requiring us to engage in complex, lengthy and costly
litigation. Alternatively, our competitors may be able to design around such
patents and compete with us using the resulting alternative technology. If any
of our issued or licensed patents are infringed, we may not be successful in
enforcing our intellectual property rights or defending the validity or
enforceability of our issued patents.
Moreover, different countries have different procedures for obtaining patents,
and patents issued in different countries provide different degrees of
protection against the use of a patented invention by others. Therefore, if the
issuance to us or our licensor, in a given country, of a patent covering an
invention is not followed by the issuance in other countries of patents covering
the same invention, or if any judicial interpretation of the validity,
enforceability or scope of the claims in a patent issued in one country is not
similar to the interpretation given to the corresponding patent issued in
another country, our ability to protect our intellectual property in other
countries may be limited.
On January 15, 2004, an opposition proceeding was brought by Celltech R&D Ltd.
against granted European Patent 0728143 which we have licensed from the
University of California relating to JNK 1 and JNK 2 polypeptides. This
proceeding is directed to only the claims for JNK 2 and not JNK 1. We intend to
respond to this proceeding. A decision on the merits is not expected until
sometime in 2005 at the earliest.
23
It is also possible that third-party patent applications and patents could issue
with claims that cover certain aspects of our business or of the subject matter
claimed in the patents owned or optioned by us or licensed to us, which may
limit our ability to conduct our business or to practice under our patents, and
may impede our efforts to obtain meaningful patent protection of our own. If
patents are issued to third parties that contain competitive or conflicting
claims, we may be legally prohibited from pursuing research, development or
commercialization of potential products or be required to obtain licenses to
these patents or to develop or obtain alternative technology. We may be legally
prohibited from using patented technology, may not be able to obtain any license
to the patents and technologies of third parties on acceptable terms, if at all,
or may not be able to obtain or develop alternative technologies. Consequently,
if we cannot successfully defend against any patent infringement suit that may
be brought against us by a third party, we may lose the ability to continue to
conduct our business as we presently do, or to practice certain subject matter
delineated by patent claims that we have exclusive rights to, whether by
ownership or by license, and that may have a material adverse effect on our
business.
We rely upon trademarks and service marks to protect our rights to the
intellectual property used in our business. On October 29, 2003, we filed a
lawsuit against Centocor, Inc. to prevent Centocor's use of the term "I.M.I.D.s"
in connection with Centocor's products, which use, we believe, is likely to
cause confusion with our IMiDs mark for compounds being developed by us to treat
cancer and inflammatory diseases. If we are not successful in this suit, it may
be necessary for us to adopt a different trademark for that class of compounds
and thereby lose the value we believe we have built in the IMiDs mark.
On August 19, 2004 we, together with our exclusive licensee Novartis, filed an
infringement action in the United States District Court of New Jersey against
Teva Pharmaceuticals USA, Inc., in response to notices of Paragraph IV
certifications made by Teva in connection with the filing of an ANDA
(Abbreviated New Drug Application) for d-methylphenidate immediate release
(FOCALIN(R)). The notification letters contend that United States Patent Nos.
5,908,850, or 850 patent, and 6,355,656, or 656 patent, were invalid. The 656
patent is currently the subject of reexamination proceedings in the United
States Patent and Trademark Office. After the suit was filed, Novartis listed
another patent, United States Patent No. 6,528,530, or 530 patent, in the Orange
Book in association with the FOCALIN(R) NDA. The 530 patent is currently not
part of the Celgene v. Teva case. This case does not relate to RITALIN(R) LA or
any other long acting formulation. Discovery is at the earliest stage. If
successful, Teva will be permitted to sell a generic version of FOCALIN(R)
immediate release.
Further, we rely upon unpatented proprietary and trade secret technology that we
try to protect, in part, by confidentiality agreements with our collaborative
partners, employees, consultants, outside scientific collaborators, sponsored
researchers and other advisors. If these agreements are breached, we may not
have adequate remedies for any such breach. Despite precautions taken by us,
others may obtain access to or independently develop our proprietary technology
or such technology may be found to be non-proprietary or not a trade secret.
In addition, our right to practice the inventions claimed in some patents that
relate to THALOMID(R) arises under licenses granted to us by others, including
The Rockefeller University and Children's Medical Center Corporation, or CMCC.
In addition to these patents, which relate to thalidomide, we have also licensed
from CMCC certain patents relating to thalidomide analogs. In December 2002, we
entered into an exclusive license agreement with CMCC and EntreMed Inc. pursuant
to which CMCC exclusively licensed to us certain patents and patent applications
that relate to analogs, metabolites, precursors and hydrolysis products of
thalidomide, and all stereoisomers thereof. Our license under the December 2002
agreement is worldwide and royalty-bearing, and we have complete control over
the prosecution of the licensed thalidomide analog patent rights. The December
2002 agreement also grants us an option to inventions in the field of
thalidomide analogs that may be developed at CMCC in the laboratory of Dr.
Robert D'Amato, pursuant to the terms and conditions of a separate Sponsored
Research Agreement negotiated between CMCC and us.
24
Further, while we believe these confidentiality and license agreements to be
valid and enforceable, our rights under these agreements may not continue or
disputes concerning these agreements may arise. If any of the foregoing should
occur, we may be unable to rely upon our unpatented proprietary and trade secret
technology, or we may be unable to use the third-party proprietary technology we
have licensed-in, either of which may prevent or hamper us from successfully
pursuing our business.
The orphan drug exclusivity for thalidomide expires on July 16, 2005. Generic
drug companies can file an abbreviated new drug application, or ANDA to seek
approval to market thalidomide in the United States. However, such an ANDA filer
will need to challenge the validity or enforceability of our United States
patents relating to our S.T.E.P.S.(R) program or to demonstrate that they do not
use an infringing risk management program. We cannot predict whether an ANDA
challenge to our patents will be made, nor can we predict whether our
S.T.E.P.S.(R) patents can be circumscribed or invalidated or otherwise rendered
unenforceable.
THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND
SIGNIFICANT TECHNOLOGICAL CHANGE.
The pharmaceutical industry in which we operate is highly competitive and
subject to rapid and significant technological change. Our present and potential
competitors include major pharmaceutical and biotechnology companies, as well as
specialty pharmaceutical firms, such as:
o Bristol Myers Squibb Co., which potentially competes in clinical trials
with our IMiDs and PDE4 inhibitors;
o Genentech Inc., which potentially competes in clinical trials with our
IMiDs and PDE4 inhibitors;
o AstraZeneca p.l.c., which potentially competes in clinical trials with our
IMiDs and PDE4 inhibitors;
o ICOS Corporation which potentially competes in clinical trials with our
PDE4 inhibitors;
o Millennium Pharmaceuticals, which potentially competes in clinical trials
with our IMiDs and PDE4 inhibitors as well as with THALOMID(R);
o Cell Therapeutics Inc., which potentially competes in clinical trials with
our IMiDs and THALOMID(R);
o Vertex Pharmaceuticals Inc. and Pfizer which potentially competes in
clinical trials with our kinase inhibitors; and
o Biogen IDEC Inc. and Genzyme Corporation both of which are generally
developing drugs that address the oncology and immunology markets,
although we are not aware of specific competing products.
Many of these companies have considerably greater financial, technical and
marketing resources than we. We also experience competition from universities
and other research institutions and, in some instances, we compete with others
in acquiring technology from these sources. The pharmaceutical industry has
undergone, and is expected to continue to undergo, rapid and significant
technological change, and we expect competition to intensify as technical
advances in the field are made and become more widely known. The development of
products or processes by our competitors with significant advantages over those
that we are seeking to develop could cause the marketability of our products to
stagnate or decline.
SALES OF OUR PRODUCTS ARE DEPENDENT ON THIRD-PARTY REIMBURSEMENT.
Sales of our products will depend, in part, on the extent to which the costs of
our products will be paid by health maintenance, managed care, pharmacy benefit
and similar health care management organizations, or reimbursed by government
health administration authorities, private health coverage insurers and other
third-party payors. These health care management organizations and third-party
payors are increasingly
25
challenging the prices charged for medical products and services. Additionally,
the containment of health care costs has become a priority of federal and state
governments, and the prices of drugs have been a focus in this effort. If these
organizations and third-party payors do not consider our products to be
cost-effective or competitive with other available therapies, they may not
reimburse providers or consumers of our products or, if they do, the level of
reimbursement may not be sufficient to allow us to sell our products on a
profitable basis.
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY MAKE IT
DIFFICULT FOR YOU TO SELL THE COMMON STOCK WHEN YOU WANT OR AT PRICES YOU FIND
ATTRACTIVE.
There has been significant volatility in the market prices for publicly traded
shares of biopharmaceutical companies, including ours. We expect that the market
price of our common stock will continue to fluctuate. After adjusting prices to
reflect our two-for-one stock split effected on October 22, 2004, the intra-day
price of our common stock fluctuated from a high of $32.58 to a low of $18.74 in
2004. On March 11, 2005 our common stock closed at a price of $32.80. The price
of our common stock may not remain at or exceed current levels. The following
key factors may have an adverse impact on the market price of our common stock:
o results of our clinical trials;
o announcements of technical or product developments by our competitors;
o market conditions for pharmaceutical and biotechnology stocks;
o market conditions generally;
o governmental regulation;
o health care legislation;
o public announcements regarding medical advances in the treatment of the
disease states that we are targeting;
o patent or proprietary rights developments;
o changes in third-party reimbursement policies for our products; or
o fluctuations in our operating results.
In addition, the stock market in general has experienced extreme volatility that
has often been unrelated to the operating performance of a particular company.
These broad market fluctuations may adversely affect the market price of our
common stock.
THE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE WOULD DILUTE
THE OWNERSHIP INTEREST OF EXISTING STOCKHOLDERS AND COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.
Future sales of substantial amounts of our common stock could adversely affect
the market price of our common stock. As of March 1, 2005, there were
outstanding stock options and warrants for 25,186,118 shares of common stock, of
which 24,567,768 were currently exercisable at an exercise price range between
$0.07 and $35.00, with a weighted average exercise price of $15.00. These
amounts include outstanding options and warrants of Anthrogenesis (which is now
our Celgene Cellular Therapeutics
26
subsidiary) that we assumed as part of our acquisition of Anthrogenesis on
December 31, 2002 and that were converted into outstanding options and warrants
of our common stock pursuant to an exchange ratio. In addition, in June 2003, we
issued $400.0 million of unsecured convertible notes that are convertible into
16,511,840 shares of our common stock at a conversion price of approximately
$24.225 per share. The conversion of some or all of these notes, if it occurs,
will dilute the ownership interest of existing stockholders.
OUR SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BY-LAW PROVISIONS MAY DETER
A THIRD PARTY FROM ACQUIRING US AND MAY IMPEDE THE STOCKHOLDERS' ABILITY TO
REMOVE AND REPLACE OUR MANAGEMENT OR BOARD OF DIRECTORS.
Our board of directors has adopted a shareholder rights plan, the purpose of
which is to protect stockholders against unsolicited attempts to acquire control
of us that do not offer a fair price to all of our stockholders. The rights plan
may have the effect of dissuading a potential acquirer from making an offer for
our common stock at a price that represents a premium to the then current
trading price.
Our board of directors has the authority to issue, at any time, without further
stockholder approval, up to 5,000,000 shares of preferred stock, and to
determine the price, rights, privileges and preferences of those shares. An
issuance of preferred stock could discourage a third party from acquiring a
majority of our outstanding voting stock. Additionally, our board of directors
has adopted certain amendments to our by-laws intended to strengthen the board's
position in the event of a hostile takeover attempt. These provisions could
impede the stockholders' ability to remove and replace our management and/or
board of directors.
Furthermore, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law, which may also dissuade a
potential acquirer of our common stock.
AVAILABLE INFORMATION
Our current reports on Form 8-K, quarterly reports on Form 10-Q and annual
reports on Form 10-K are electronically filed with the Securities and Exchange
Commission, or SEC, and all such reports and amendments to such reports filed
have been and will be made available, free of charge, through our website
(HTTP://WWW.CELGENE.COM) as soon as reasonably practicable after such filing.
Such reports will remain available on our website for at least twelve months.
The contents of our website are not incorporated by reference into this annual
report. The public may read and copy any materials filed by us with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC.
ITEM 2. PROPERTIES
We currently lease an aggregate of 92,100-square feet of laboratory and office
space in Warren, New Jersey, under various leases with unaffiliated parties,
which have lease terms ending between June 2005 and July 2010 with renewal
options ranging from either one or two additional five-year terms. Annual rent
for these facilities is approximately $1.0 million. We also are required to
reimburse the lessors for real estate taxes, insurance, utilities, maintenance
and other operating costs. We also lease an 18,000-square foot laboratory and
office facility in North Brunswick, New Jersey under a lease with an
27
unaffiliated party that has a term ending in March 2009 with two five-year
renewal options. Annual rent for this facility is approximately $0.5 million.
In November 2004, we purchased approximately 45 acres of land and several
buildings located in Summit, New Jersey at a cost of $25.0 million. The purchase
of this site enables us to consolidate four New Jersey locations into one
corporate headquarters and provide the space needed to accommodate the Company's
expected growth. As a result, the Company is currently exploring available
options to reduce or eliminate the financial impact of existing lease
commitments on redundant facilities.
In December 2001, we entered into a lease to consolidate our San Diego,
California operations into one building. The 78,202-square foot laboratory and
office facility in San Diego, California was leased from an unaffiliated party
and has a term ending in August 2012 with one five-year renewal option. Annual
rent for this facility is approximately $1.9 million and is subject to specified
annual rental increases. Under the lease, we also are required to reimburse the
lessor for real estate taxes, insurance, utilities, maintenance and other
operating costs.
Upon completion of the acquisition of Anthrogenesis Corp. on December 31, 2002,
we assumed two separate leases in the same facility for office and laboratory
space in Cedar Knolls, New Jersey and have subsequently entered into one
additional lease for additional space in the same facility. The leases are for
an aggregate 20,000-square feet with annual rent of approximately $0.2 million.
We also are required to reimburse the lessor for real estate taxes, insurance,
utilities, maintenance and other operating costs. The leases have terms ending
between September 2007 and April 2009 with renewal options ranging from either
one or two additional five-year terms. In November of 2002, Anthrogenesis
entered into a lease for an additional 11,000 square feet of laboratory space in
Baton Rouge, Louisiana. The lease has a five-year term with a three-year renewal
option. Annual rent for this facility is approximately $0.1 million.
ITEM 3. LEGAL PROCEEDINGS
We are not engaged in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ National Market under the symbol
"CELG." The following table sets forth, for the periods indicated, the intra-day
high and low bid prices per share of common stock on the NASDAQ National Market
(as adjusted for the two-for-one stock split affected on October 22, 2004):
- --------------------------------------------------------------------------------
HIGH LOW
---------------------
2004
Fourth Quarter $32.58 $25.75
Third Quarter 30.09 23.33
Second Quarter 30.30 22.50
First Quarter 24.46 18.74
2003
Fourth Quarter $24.08 $18.26
Third Quarter 24.44 14.26
Second Quarter 18.57 12.36
First Quarter 13.98 10.08
- --------------------------------------------------------------------------------
The last reported sales price per share of common stock on the NASDAQ National
Market on March 11, 2005 was $32.80. As of February 24, 2005, there were
approximately 40,518 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate paying any cash dividends on our common stock in
the foreseeable future.
29
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes the equity compensation plans under which our
common stock may be issued as of December 31, 2004:
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS,
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A)
PLAN CATEGORY (A) (B) (C)
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
security holders 23,936,754 $15.51 1,823,735
Equity compensation plans not approved
by security holders 1,539,256 $ 8.15 97,664
-----------------------------------------------------------------
Total 25,476,010 $15.07 1,921,399
====================================================================================================================
The Anthrogenesis Corporation Qualified Employee Incentive Stock Option Plan has
not been approved by our stockholders. As a result of the acquisition of
Anthrogenesis on December 31, 2002, we acquired the Anthrogenesis Qualified
Employee Incentive Stock Option Plan, or the Qualified Plan, and the
Non-Qualified Recruiting and Retention Stock Option Plan, or the Non-Qualified
Plan. No future awards will be granted under the Non-Qualified Plan. The
Qualified Plan authorizes the award of incentive stock options, which are stock
options that qualify for special federal income tax treatment. The exercise
price of any stock option granted under the Qualified Plan may not be less than
the fair market value of the common stock on the date of grant. In general,
options granted under the Anthrogenesis Qualified Plan vest evenly over a
four-year period and expire ten years from the date of grant, subject to earlier
expiration in case of termination of employment. The vesting period is subject
to certain acceleration provisions if a change in control occurs. No award will
be granted under the Qualified Plan on or after December 31, 2008.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data should be read in conjunction
with our Consolidated Financial Statements and the related Notes thereto,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other financial information included elsewhere in this Annual
Report. The data set forth below with respect to our Consolidated Statement of
Operations for the year ended December 31, 2004 and the Consolidated Balance
Sheet data as of December 31, 2004 are derived from our Consolidated Financial
Statements which have been audited by KPMG LLP, independent registered public
accounting firm, and which are included elsewhere in this Annual Report and are
qualified by reference to such Consolidated Financial Statements and related
Notes thereto. The data set forth below with respect to our Consolidated
Statements of Operations for the years ended December 31, 2003 and 2002 and the
Consolidated Balance Sheets data as of December 31, 2003 and 2002 have been
restated to reflect adjustments to the original filings that are discussed
further in Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 2 of the Notes to the Consolidated Financial
Statements which are included elsewhere in this Annual Report and are qualified
by reference to such Consolidated Financial Statements and related Notes
thereto. The data set forth
30
below with respect to our Consolidated Statements of Operations for the years
ended December 31, 2001 and 2000 and the Consolidated Balance Sheets data as of
December 31, 2001 and 2000 are derived from our Consolidated Financial
Statements, which have been audited by KPMG LLP and which are not included
elsewhere in this Annual Report. Our historical results are not necessarily
indicative of future results of operations.
- ---------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
IN THOUSANDS, EXCEPT PER SHARE DATA 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
As restated As restated
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenue $ 377,502 $ 271,475 $ 135,746 $ 114,243 $ 84,908
Costs and operating expenses 334,774 274,124 250,367 139,186 119,217
Other income (expense), net 20,443 23,310 23,031 20,807 15,496
Income tax provision (benefit) 10,415 718 (98) (1,232) (1,810)
-------------------------------------------------------------------
Income (loss) from continuing Operations 52,756 24,943 (91,492) (2,904) (17,003)
Discontinued operations:
Gain on sale of chiral assets -- 750 1,000 992 719
-------------------------------------------------------------------
Net income (loss) applicable to common
stockholders $ 52,756 $ 25,693 $ (90,492) $ (1,912) $ (16,284)
===================================================================
Income (loss) from continuing operations
per common share(1):
Basic $ 0.32 $ 0.15 $ (0.60) $ (0.02) $ (0.13)
Diluted $ 0.31 $ 0.14 $ (0.60) $ (0.02) $ (0.13)
Discontinued operations per common share(1):
Basic $ -- $ 0.01 $ 0.01 $ 0.01 $ 0.01
Diluted $ -- $ 0.01 $ 0.01 $ 0.01 $ 0.01
Net income (loss) applicable to common
stockholders(1):
Basic $ 0.32 $ 0.16 $ (0.59) $ (0.01) $ (0.12)
Diluted $ 0.31 $ 0.15 $ (0.59) $ (0.01) $ (0.12)
Weighted average number of shares of common
stock outstanding (1):
Basic 163,869 161,774 154,674 150,216 133,196
Diluted 172,855 170,796 154,674 150,216 133,196
- ---------------------------------------------------------------------------------------------------------------------
(1) Amounts have been adjusted for the two-for-one stock split affected in
October 2004 and the three-for-one stock split affected in April 2000.
31
- ----------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
IN THOUSANDS 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
As restated As restated
CONSOLIDATED BALANCE SHEETS DATA
Cash and cash equivalents, and marketable
Securities $ 748,537 $ 666,967 $ 261,182 $ 310,041 $ 306,162
Total assets 1,107,293 813,026 336,795 353,982 346,726
Long-term obligations under capital leases
and equipment notes payable 4 16 40 46 633
Convertible notes 400,000 400,000 -- 11,714 11,714
Accumulated deficit (234,410) (287,166) (312,859) (222,367) (220,455)
Stockholders' equity 477,444 331,744 281,814 310,425 295,533
- ----------------------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We are a multi-national integrated biopharmaceutical company primarily engaged
in the discovery, development and commercialization of innovative therapies
designed to treat cancer and immune-inflammatory related diseases. Our lead
product THALOMID(R) (thalidomide) is currently marketed for the treatment of
erythema nodosum leprosum, or ENL. This product is more widely used off-label
for treating multiple myeloma and other cancers. Over the past several years,
THALOMID(R) net sales have grown rapidly. The sales growth of THALOMID(R) has
enabled us to make substantial investments in research and development, which
has resulted in a broad portfolio of drug candidates in our product pipeline.
These include a pipeline of THALOMID(R) analogs known as IMiDsTM. REVLIMID(R),
one of our clinical-stage IMiDs, is now being tested in multiple cancer trials,
including ongoing pivotal Phase III Special Protocol Assessment, or SPA, trials
in multiple myeloma, or MM, and Phase II trials in myelodysplastic syndromes, or
MDS, MDS with 5q deletion chromosomal abnormalities and MM that have the
potential to result in FDA approval in late 2005 or early 2006. Given
REVLIMID(R)'s safety and efficacy profile, its large sales potential and the
cost efficiencies we can achieve from marketing REVLIMID(R) through our
established sales force, we anticipate the approval and launch of REVLIMID(R),
if it occurs, would result in increased revenue and earnings. We believe that
the sales growth of THALOMID(R), the growth potential for REVLIMID(R), the depth
of our product pipeline, and our strong balance sheet position, make us
competitive within the biopharmaceuticals sector.
RESTATEMENT
Following a review in December 2004 of our accounting treatment for the
convertible preferred shares and warrants we received in connection with the
December 31, 2002 litigation settlement and related agreements with EntreMed,
Inc. and the Children's Medical Center Corporation, or CMCC, where in return for
approximately $26.8 million in cash we acquired all related EntreMed thalidomide
analog patents, terminated the litigation and received preferred shares
convertible into 16,750,000 shares of EntreMed common stock and warrants to
purchase 7,000,000 shares of EntreMed common stock, it was determined that an
adjustment to our consolidated financial statements was required for the years
ended December 31, 2003 and 2002. For more information about the litigation
settlement with EntreMed Inc. and related agreements see Note 5 to our
consolidated financial statements.
At December 31, 2002, based on what we believed was the appropriate accounting
treatment under generally accepted accounting principles, we wrote off the
entire $26.8 million relating to the convertible
32
preferred shares, the warrants and the litigation settlement and did not
recognize any gains or losses on the warrants during 2003. This accounting
treatment was based on multiple reasons including: (1) EntreMed's financial
condition and its continuing losses; (2) the fact that we included the warrants
along with the convertible preferred shares investment in applying the equity
method of accounting, under which we wrote off the entire investment in December
2002; and (3) our inability to place a reliable fair value on the warrants
given the significant number of shares underlying the warrants and, in our
opinion, the inability to convert the underlying shares into cash (even if the
warrants were to be net share settled) without significantly affecting
EntreMed's stock price.
Upon further review of the warrant terms, as well as the accounting treatment
prescribed under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", or SFAS 133, and related Derivative Implementation Group,
or DIG, interpretations, we have concluded that the warrants should be accounted
for as a derivative instrument and carried on the balance sheet at fair value,
with changes in fair value recorded through earnings.
In addition we reviewed the impairment of the investment in the EntreMed
preferred shares. We have concluded that the investment should not have been
written-down as of the date of the transaction. Accordingly we have restored the
investment of $4.4 million as of December 31, 2002 and reduced the net loss by a
like amount. Under the equity method of accounting, we have recorded our share
of the EntreMed losses in 2003 until the investment is written down to zero in
the third quarter of 2003.
We have now restated our consolidated financial statements for the years ended
December 31, 2003 and 2002. The cumulative effect of the restatement through
December 31, 2003 is an increase in other assets of $21.7 million and a decrease
in accumulated deficit of $21.7 million. Equity losses in associated companies
of $4.4 million were recorded for the year ended December 31, 2003. Interest and
other income increased by $16.6 million for the year ended December 31, 2003 and
litigation settlement and related agreements expense decreased by $9.5 million
for the year ended December 31, 2002. Previously reported diluted net earnings
per share increased by $0.07 and $0.06 for the years ended December 31, 2003 and
2002, respectively. The restatement did not have any impact on previously
reported total revenues, reported net cash flows or the 2003 operating loss.
The following is a summary of the impact of the restatement on (i) our
Consolidated Balance Sheet at December 31, 2003 and (ii) our Consolidated
Statements of Operations for the years ended December 31, 2003 and 2002. We have
not presented a summary of the impact of the restatement on our Consolidated
Statements of Cash Flows for any of the above-referenced years because there is
no net impact for any such year.
33
- ----------------------------------------------------------------------------------------------------------
PREVIOUSLY
IN THOUSANDS, EXCEPT PER SHARE DATA REPORTED ADJUSTMENTS AS RESTATED
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003:
Consolidated Statement of Operations:
Interest and other income $ 21,795 $ 16,574 $ 38,369
Equity losses in associated companies -- 4,392 4,392
Income before income taxes 13,479 12,182 25,661
Income from continuing operations 12,761 12,182 24,943
Net income 13,511 12,182 25,693
Per share:
Income from continuing operations per - Basic 0.08 0.07 0.15
Income from continuing operations per - Diluted 0.07 0.07 0.14
Net income - Basic 0.08 0.08 0.16
Net income - Diluted 0.08 0.07 0.15
Consolidated Balance Sheet:
Other assets $ 32,506 $ 21,690 $ 54,196
Total assets 791,336 21,690 813,026
Accumulated deficit (308,856) 21,690 (287,166)
Total stockholders' equity 310,054 21,690 331,744
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002:
Consolidated Statement of Operations:
Litigation settlement and related agreements $ 32,212 $ 9,508 $ 22,704
Total expenses 259,875 (9,508) 250,367
Operating loss 124,129 (9,508) 114,621
Loss before income taxes (101,098) 9,508 (91,590)
Loss from continuing operations (101,000) 9,508 (91,492)
Net loss (100,000) 9,508 (90,492)
Per share:
Loss from continuing operations - Basic (0.65) 0.05 (0.60)
Loss from continuing operations - Diluted (0.65) 0.05 (0.60)
Net loss - Basic (0.65) 0.06 (0.59)
Net loss - Diluted (0.65) 0.06 (0.59)
- ----------------------------------------------------------------------------------------------------------
Refer to Note 20 to our consolidated financial statements (unaudited) of the
Notes to the Consolidated Financial Statements for the impact of the restatement
on the 2004 and 2003 quarterly information. In addition, certain prior year
amounts in Notes 1, 3, 4, 5, 9, 17, 19 and 20 to our consolidated financial
statements have been restated to reflect the restatement adjustments described
above.
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
34
THALOMID(R), including generic competition, and delays in the introduction of
REVLIMID(R) and, in the longer term, failure to commercialize our early-stage
drug candidates.
NEAR-TERM COMPETITION WITH THALOMID(R): While we believe that THALOMID(R) will
continue to be used as a treatment in multiple myeloma and that competing
products will not eliminate its use, it is possible that competition could
reduce THALOMID(R) sales in multiple myeloma. In addition, generic competition
could reduce THALOMID(R) sales. However, we own intellectual property which
includes, for example, numerous U.S. 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 in the United States must
follow and which are listed in the FDA Approved Drug Products with Therapeutic
Equivalence Evaluation, or 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(R) in oncology. Even if generic competition were
able 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(R) 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. By that time, we plan to have at
least partially replaced THALOMID(R) sales with REVLIMID(R) sales. On October
22, 2004, we received an approvable letter from the FDA relating to our
THALOMID(R) multiple myeloma supplemental new drug application, or sNDA. The FDA
letter stated that sufficient support for an accelerated approval could be
provided by the results of the completed Eastern Cooperative Oncology Group, or
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(R) as a treatment for multiple
myeloma in the second half of 2005.
DELAY IN THE INTRODUCTION OF REVLIMID(R): While we have made progress toward
regulatory approval of REVLIMID(R) based on ongoing pivotal Phase III Special
Protocol Assessment, or SPA, trials for REVLIMID(R) in multiple myeloma, a delay
in the introduction of REVLIMID(R) 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
the availability of FDA-approved competing products for the treatment of MDS
could impact the market's acceptance of REVLIMID(R). In addition, 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 result in an earlier regulatory approval if the data were to be
sufficiently compelling, it should be noted 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 advance our earlier-stage drug
candidates through development and to realize the commercial potential of our
broad product pipeline.
COMPANY BACKGROUND
In 1986, we were spun off from Celanese Corporation and in July 1987 we
completed an initial public offering of our common stock. Initially, our
operations involved research and development of chemical and biotreatment
processes for the chemical and pharmaceutical industries. In 1994, we
discontinued the biotreatment operations to focus on our programs for developing
small molecule compounds for cancer and immunology indications, and on our
biocatalytic chiral chemistry program.
35
Between 1990 and 1998, our revenues were derived primarily from the development
and supply of chirally pure intermediates to pharmaceutical companies for use in
new drug development. By 1998, sales of chirally pure intermediates became a
less integral part of our strategic focus and, in January 1998 we sold the
chiral intermediates business to Cambrex Corporation. Revenue from license
agreements and milestone payments related to our cancer and immunology programs
began to increase at this time.
In July 1998, we received approval from the FDA to market THALOMID(R) for use in
ENL, a complication of the treatment of leprosy, and, in September 1998 we
commenced sales of THALOMID(R) in the United States. Sales of THALOMID(R) have
grown significantly each year, and THALOMID(R) has become our lead product. In
2002, 2003 and 2004 we recorded net THALOMID(R) sales of $119.1 million, $223.7
million and $308.6 million, respectively.
In February 2000, we completed a follow-on public offering in which we raised
proceeds, net of offering expenses, of approximately $278.0 million. In April
2000, we signed a licensing and development agreement with Novartis Pharma AG in
which we granted to Novartis a license for FOCALIN(R), our chirally pure version
of RITALIN(R). The agreement provided for significant upfront and milestone
payments to us based on the achievement of various stages in the regulatory
approval process. It also provided for Celgene to receive royalties on the
entire family of RITALIN(R) products. Pursuant to the agreement we retained
the rights to FOCALIN(R) in oncology indications.
In August 2000, we acquired Signal Pharmaceuticals, Inc., a privately held
biopharmaceutical company focused on the discovery and development of drugs that
regulate genes associated with disease. In December 2002, we acquired
Anthrogenesis Corp., a privately held biotherapeutics company developing
processes for the recovery of stem cells from human placental tissue following
the completion of a successful full-term pregnancy for use in stem cell
transplantation, regenerative medicine and biomaterials for organ and wound
repair.
In March 2003, we entered into a three-year supply and distribution agreement
with GlaxoSmithKline, or GSK, to distribute, promote and sell ALKERAN(R),
ormelphalan, a therapy approved by the FDA for the palliative treatment of
multiple myeloma and carcinoma of the ovary. The agreement, which provides us
with an FDA approved oncology product, requires that we purchase ALKERAN(R) from
GSK and distribute the products in the United States under the Celgene label. In
June 2003, we raised an additional $387.8 million, net of expenses, through the
issuance of $400.0 million of five-year unsecured convertible notes.
In October 2004, through an indirect wholly-owned subsidiary, we acquired all of
the outstanding shares of Penn T Limited, or Penn T, a worldwide supplier of
THALOMID(R), from a consortium of private investors for a US dollar equivalency
of approximately $117.4 million in cash, net of cash acquired and including
working capital adjustments and total estimated transaction costs. Through
manufacturing contracts purchased in this acquisition, we are now able to
control manufacturing for THALOMID(R) worldwide and we also increased our
participation in the potential sales growth of THALOMID(R) in key international
markets. Following this acquisition, in December 2004 we revised the Pharmion
product supply agreement acquired in the Penn T acquisition. Under the modified
agreement, Pharmion paid us a one-time payment of $77.0 million in return for a
reduction in their total product supply purchase price from 28.0 percent of
Pharmion's thalidomide net sales, including cost of goods to 15.5 percent of net
sales. The collaboration also entails Pharmion paying us an additional $8.0
million over the next three years to extend the two companies' existing
thalidomide research and development efforts and a one-time payment of $3.0
million for granting Pharmion license rights to develop and market thalidomide
in three additional Asian territories (Hong Kong, Korea and Taiwan), as well as
for eliminating termination rights held by Celgene tied to the regulatory
approval of thalidomide in Europe in November 2006. In late
36
2004, we entered into an agreement providing manufacturers of isotretinoin
(Acutane(R)) a non-exclusive license to our System for Thalidomide Education and
Prescribing Safety, or S.T.E.P.S., patent portfolio. The manufacturers of
isotretinoin have licensed these patents with the intention of implementing a
new pregnancy risk management system to safely deliver isotretinoin in
potentially high-risk patient populations.
Until 2003, we had sustained losses in each year since our incorporation in
1986. For the years ended December 31, 2003 and 2004, we posted net income of
$25.7 million and $52.8 million, respectively, and at December 31, 2004 we had
an accumulated deficit of $234.4 million. Since our inception, we have financed
our working capital requirements primarily through product sales; public and
private sales of our equity securities and debt; income earned from investment
of the proceeds of such securities sales; and revenues from research contracts
and license payments. We expect to make substantial additional expenditures to
further develop and commercialize our products. We expect that our rate of
spending will accelerate as a result of increases in clinical trial costs,
expenses associated with regulatory approval and expenses related to
commercialization of products currently in development. However, we anticipate
these expenditures to be more than offset by increased product sales, royalties,
revenues from various research collaborations and license agreements with other
pharmaceutical and biopharmaceutical companies, and investment income.
RESULTS OF OPERATIONS -
FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
TOTAL REVENUE: Total revenue and related percentages for the years ended
December 31, 2004, 2003 and 2002, were as follows:
- ------------------------------------------------------------------------------------------
% CHANGE
-----------------
2003 2002
TO TO
(IN THOUSANDS $) 2004 2003 2002 2004 2003
- ------------------------------------------------------------------------------------------
Net product sales:
THALOMID(R) $308,577 $223,686 $119,060 38.0% 87.9%
FOCALIN(R) 4,177 2,383 3,861 75.3% (38.3%)
ALKERAN(R) 16,956 17,827 -- (4.9%) N/A
Other 861 557 -- 54.6% N/A
------------------------------------
Total net product sales $330,571 $244,453 $122,921 35.2% 98.9%
Collaborative agreements
and other revenue 20,012 15,174 8,115 31.9% 87.0%
Royalty revenue 26,919 11,848 4,710 127.2% 151.5%
------------------------------------
Total revenue $377,502 $271,475 $135,746 39.1% 100.0%
==========================================================================================
NET PRODUCT SALES:
2004 COMPARED TO 2003: THALOMID(R) net sales were higher in 2004, as compared to
2003, 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 9.4% from the prior year period, was offset by lower
average daily doses. FOCALIN(R) net sales were higher in 2004, as compared to
2003, due to the timing of shipments to Novartis for their commercial
distribution. ALKERAN(R) net sales were lower in 2004, as compared to 2003, due
to supply disruptions earlier in the year, which lead to inconsistent supplies
of ALKERAN(R) IV and consequently inconsistent end-market buying patterns. Other
37
net product sales consist of sales of dehydrated human amniotic membrane for use
in ophthalmic applications, which are generated through our Stem Cell Therapies
segment following the December 2002 acquisition of Anthrogenesis Corp.
2003 COMPARED TO 2002: THALOMID(R) net sales were higher in 2003, as compared to
2002, due to the combination of price increases and oncologists' expanded use of
the product as a treatment for various types of cancers, especially first-line
use in multiple myeloma. THALOMID(R) net sales in 2003 also benefited from the
market introduction, during the first half of the year, of two new
higher-strength formulations, which had higher per unit sales prices. FOCALIN(R)
net sales were lower in 2003, as compared to 2002, due to the timing of
shipments to Novartis for their commercial distribution. The ALKERAN(R) supply
and distribution agreement with GSK was executed in March 2003. Accordingly,
sales for this product are reflected only in the 2003 period. Other net product
sales consist of sales of dehydrated human amniotic membrane for use in
ophthalmic applications, which are generated through our Stem Cell Therapies
segment.
COLLABORATIVE AGREEMENTS AND OTHER REVENUE: Revenues from collaborative
agreements and other sources in 2004 included a $7.5 million payment received
from Novartis related to their FOCALIN(R) XR NDA submission; approximately $7.5
million related to the Pharmion collaboration agreements, primarily thalidomide
research and development funding and S.T.E.P.S. licensing fees; approximately
$3.7 million of umbilical cord blood enrollment, collection and storage fees
generated through our Stem Cell Therapies segment; $0.5 million from S.T.E.P.S.
use licensing fees; and approximately $0.8 million from other miscellaneous
research and development and licensing agreements. The 2003 period included
approximately $6.0 million related to the agreement to terminate the GelclairTM
co-promotion agreement between OSI Pharmaceuticals Inc. and Celgene;
approximately $4.3 million of thalidomide research and development funding and
S.T.E.P.S. licensing fees received in connection with the Pharmion collaboration
agreements; approximately $1.3 million of reimbursements from Novartis for
shipments of bulk raw material used in the formulation of FOCALIN(R) XR and
utilized in clinical studies conducted by Novartis; approximately $2.9 million
of umbilical cord blood enrollment, collection and storage fees generated
through our Stem Cell Therapies segment; and $0.7 million from other
miscellaneous research and development and licensing agreements. The 2002 period
included approximately $4.9 million for amortization of an up-front payment and
a $1.0 million milestone payment received from Novartis Pharma AG in connection
with the SERM license agreement; $1.2 million of licensing fees from Pharmion;
and $1.0 million of other milestone and other miscellaneous payments.
ROYALTY REVENUE: Royalty revenue reflects royalties received from Novartis on
sales of their entire family of RITALIN(R) drugs. The increases in royalty
revenue were due to increases in the royalty rate on both RITALIN(R) and
RITALIN(R) LA as well as increases in RITALIN(R) LA sales by Novartis.
COST OF GOODS SOLD: Cost of goods sold and related percentages for the years
ended December 31, 2004, 2003 and 2002 were as follows:
- -------------------------------------------------------------------------------
(IN THOUSANDS $) 2004 2003 2002
- -------------------------------------------------------------------------------
Cost of goods sold $ 59,726 $ 52,950 $ 20,867
Increase from prior year $ 6,776 $ 32,083 $ 1,885
Percentage increase from prior year 12.8% 153.7% 9.9%
Percentage of net product sales 18.1% 21.7% 17.0%
===============================================================================
38
2004 COMPARED TO 2003: Cost of goods sold increased in 2004 from 2003, primarily
as a result of higher royalties on THALOMID(R), partially offset by lower
ALKERAN(R) costs. As a percentage of net product sales, however, cost of goods
sold decreased primarily due to lower ALKERAN(R) costs. Profit margins on
THALOMID(R) remained flat, as the increase in cost of goods sold (resulting from
higher royalties) were offset by higher net sales (which were due to price
increases implemented in the second half of 2003 and in the first nine months of
2004).
2003 COMPARED TO 2002: Cost of goods sold increased in 2003 from 2002, primarily
due to significant growth in THALOMID(R) sales volumes, higher royalties on
THALOMID(R) product sales and the introduction of ALKERAN(R). Cost of goods sold
also increased as a percentage of net product sales primarily because of the
introduction of ALKERAN(R), which has a significantly higher cost structure than
THALOMID(R). The increase in the percentage, however, was partially offset by
higher gross profits on THALOMID(R) (due to price increases initiated during the
year) and by lower sales of FOCALIN(R) (which also has a higher reported cost
structure than THALOMID(R)).
RESEARCH AND DEVELOPMENT: Research and development expenses consist primarily of
salaries and benefits, contractor fees (paid principally to contract research
organizations to assist in our clinical development programs), costs of drug
supplies for our clinical and preclinical programs, costs of 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 years ended
December 31, 2004, 2003 and 2002 were as follows:
- -------------------------------------------------------------------------------
(IN THOUSANDS $) 2004 2003 2002
- -------------------------------------------------------------------------------
Research and development
expenses $ 160,852 $ 122,700 $ 84,924
Increase from prior year $ 38,152 $ 37,776 $ 17,271
Percentage increase from prior year 31.1% 44.5% 25.5%
Percentage of total revenue 42.6% 45.2% 62.6%
===============================================================================
2004 COMPARED TO 2003: Research and development expenses increased by $38.2
million in 2004 from 2003, primarily due to increased spending in various
late-stage regulatory programs. These included Phase II regulatory programs for
REVLIMID(R) in MDS and MM, as well as ongoing REVLIMID(R) Phase III SPA trials
in MM.
2003 COMPARED TO 2002: Research and development expenses increased in 2003 from
2002, primarily due to the initiation of several large studies related to our
THALOMID(R) and REVLIMID(R) clinical programs in the second half of 2002.
Research and development expenses in 2004 consisted of approximately $78.3
million spent on human pharmaceutical clinical programs; $33.4 million spent on
other human pharmaceutical programs, including toxicology, analytical research
and development, drug discovery, quality and regulatory affairs; $40.6 million
spent on biopharmaceutical discovery and development programs; and $8.6 million
spent on placental stem cell and biomaterials programs. These expenditures
support multiple core programs, including THALOMID(R), REVLIMID(R), ACTIMID(TM),
CC-11006, PDE4/TNF-alpha inhibitors, other investigational compounds, such as
kinase inhibitors, benzopyrans, ligase inhibitors and tubulin inhibitors, and
placental and cord blood derived stem cell programs. In 2003, approximately
$52.8 million was spent on human pharmaceutical clinical programs; $29.2 million
was spent on other human
39
pharmaceutical programs, including toxicology, analytical research and
development, drug discovery, quality and regulatory affairs; $33.7 million was
spent on biopharmaceutical discovery and development programs; and $7.0 million
was spent on placental stem cell and biomaterials programs. In 2002,
approximately $27.4 million was spent on human pharmaceutical clinical programs;
$22.2 million was spent on other human pharmaceutical programs, including
toxicology, analytical research and development, drug discovery, quality and
regulatory affairs; $32.3 million was spent on biopharmaceutical discovery and
development programs; and $3.0 million was spent on agro-chemical programs.
For information about the commercial and development status and target diseases
of our drug compounds, refer to the product overview table contained in Part I,
Item I of this annual report.
In general, the estimated times to completion within the various stages of
clinical development are as follows:
- --------------------------------------------------------------------------------
ESTIMATED COMPLETION
CLINICAL PHASE TIME
- --------------------------------------------------------------------------------
Phase I 1-2 years
Phase II 2-3 years
Phase III 2-3 years
- --------------------------------------------------------------------------------
Due to the significant risks and uncertainties inherent in preclinical testing
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 in completing a project.
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 our sales force. General and administrative
expenses consist primarily of salaries and benefits, outside services for legal,
audit, tax and investor activities and allocations of facilities costs,
principally for rent, utilities and property taxes.
Selling, general and administrative expenses and related percentages for the
years ended December 31, 2004, 2003 and 2002 were as follows:
- -------------------------------------------------------------------------------
(IN THOUSANDS $) 2004 2003 2002
- -------------------------------------------------------------------------------
Selling, general and administrative
expenses $ 114,196 $ 98,474 $ 66,172
Increase from prior year $ 15,722 $ 32,302 $ 13,621
Percentage increase from prior year 16.0% 48.8% 25.9%
Percentage of total revenue 30.3% 36.3% 48.7%
===============================================================================
2004 COMPARED TO 2003: Selling, general and administrative expenses increased by
$15.7 million in 2004 from 2003, as a result of an increase of approximately
$12.0 million in general administrative and medical affairs expenses primarily
due to higher headcount-related expenses and an increase of approximately $3.6
million in sales force expenses primarily due to the creation of a sales
operations group. The sales operations group,
40
among other things, manages pricing and reimbursement, corporate accounts,
customer service and government affairs, as well as sales fleet expenses.
2003 COMPARED TO 2002: Selling, general and administrative expenses increased in
2003 from 2002, primarily due to first-time expenses of approximately $10.1
million related to our Stem Cell Therapies segment following the December 2002
acquisition of Anthrogenesis Corp.; an increase of approximately $12.0 million
in commercial expenses related to the expansion of the sales and marketing
organization and an increase in customer service staff; and an increase of
approximately $10.0 million in general administrative and medical affairs
expenses.
LITIGATION SETTLEMENT AND RELATED AGREEMENTS: In December 2002, we entered into
a series of agreements with EntreMed, Inc. and Children's Medical Center
Corporation, or CMCC, terminating ongoing litigation relating to patents for
thalidomide analogs and directly granting to us an exclusive license issued by
CMCC for the rights to those patents. Under the terms of an asset purchase
agreement with EntreMed, we paid EntreMed $10.0 million for all thalidomide
analog patents and associated clinical data and records, and the termination of
any litigation surrounding those patents. Under the terms of a securities
purchase agreement with EntreMed, we acquired from EntreMed 3,350,000 shares of
Series A Convertible Preferred Stock and warrants to purchase an additional
7,000,000 common shares for an aggregate cash consideration of approximately
$16.8 million. The Series A Convertible Preferred Stock is convertible, at our
option into an aggregate of 16,750,000 shares of common stock at an initial
conversion price of $1.00 per share provided, however, that the conversion price
in effect from time to time shall be subject to certain adjustments. Dividends
are payable prior and in preference to the declaration or payment of any
dividend or distribution to the holders of common stock. We have the right to
one vote for each share of Common Stock into which such share of Series A
Convertible Preferred Stock could then be converted and with respect to such
vote we have full voting rights and powers equal to the voting rights and powers
of the holders of shares of Common Stock. We completed an assessment of the
estimated realizable value of the investment. After assessing the level of our
ownership interest in EntreMed, its history of operating losses and the fact
that EntreMed is a clinical-stage biopharmaceutical company engaged primarily in
research and development activities with proposed products and research programs
in the early stage of clinical development, the entire amount of such Preferred
Stock was written down. As restated, we ascribed a value of $11.6 million to the
convertible preferred stock.
We signed an exclusive license agreement with CMCC that terminated any existing
thalidomide analog agreements between CMCC and EntreMed and directly granted to
Celgene an exclusive worldwide license for the analog patents. We paid CMCC $2.5
million in December 2002 and $0.5 million in January 2004 under the agreement.
Another $2.0 million is payable between 2005 and 2006. The present value of
these payments totaled $4.7 million and was expensed in 2002. Additionally, we
entered into a five year sponsored research agreement with CMCC whereby we have
committed $0.3 million per year in funding. Additional payments are possible
under the agreement depending on the successful development and
commercialization of thalidomide analogs.
Prior to the restatement, we recorded a charge to earnings for the cost of these
agreements and related expenses of $32.2 million in 2002 including the
write-down of the EntreMed Convertible Preferred Stock and certain legal
expenses incurred in connection with the settlement.
The warrants have an exercise price of $1.50 per share, vest after six months
from the date of grant and expire after seven years from the date of grant. The
warrants also include a net settlement feature and as discussed in Note 2, it
was subsequently determined that they should be accounted for as a derivative.
We ascribed a value of $5.1 million to the warrants as of December 31, 2002,
which represents their fair value at such date.
41
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT: On December 31, 2002, we completed
the acquisition of Anthrogenesis Corp., which now operates as Celgene Cellular
Therapeutics, for an aggregate purchase price of $60.0 million. The acquisition
was accounted for using the purchase method of accounting for business
combinations, under which approximately $55.7 million was allocated to IPR&D and
charged to expense at the acquisition date. For more information on the
Anthrogenesis acquisition, refer to Notes 3 and 19 of the Notes to our
Consolidated Financial Statements.
INTEREST AND OTHER INCOME: Interest and other income decreased approximately
21.8% to $30.0 million in 2004 from $38.4 million in 2003. The decrease was
primarily due to changes in the fair value of the EntreMed warrants. In 2004, we
recorded unrealized losses of $1.9 million related to these warrants whereas, in
2003 we recorded unrealized gains of $16.6 million. This reduction was partially
offset by higher returns on our cash and marketable securities portfolio (which
was largely due to higher average balances of cash and marketable securities as
a result of the issuance of $400 million of convertible notes, on June 3, 2003,
as well as cash generated through operations) and foreign exchange gains.
Interest and other income increased approximately 66.4% to $38.4 million in 2003
from $23.1 million in 2002. The increase was primarily due to unrealized gains
of $16.6 in the fair value of the EntreMed warrants partially offset by lower
interest income as a result of lower interest rates in 2003.
EQUITY IN LOSSES OF ASSOCIATED COMPANIES: As restated (see further discussions
contained in this Management's Discussion and Analysis of Financial Condition
and Results of Operations and Footnote 2 of our consolidated financial
statements), during 2003 under the equity method of accounting we recorded $4.4
million for our share of the EntreMed losses.
INTEREST EXPENSE: Interest expense in 2004 was approximately $9.6 million and
includes twelve months of interest expense and amortization of debt issuance
costs on the $400 million of convertible notes issued on June 3, 2003. Interest
expense in 2003 was approximately $5.7 million and only includes seven months of
interest expense and amortization of debt issuance costs on the $400 million of
convertible notes issued on June 3, 2003. Interest expense in 2002 was
immaterial.
INCOME TAX BENEFIT (PROVISION): In 2004, we recorded an income tax provision of
approximately $10.4 million, which reflects an effective underlying tax rate of
16.5%. Our rate rose in 2004 from 2003 primarily due to federal tax expense and
decreases in the valuation allowance available to offset income tax expense. In
2003, our income tax provision was approximately $0.7 million and included
income tax expense of $1.1 million for federal and state purposes, offset by a
tax benefit of $0.4 million from the sale of certain state net operating loss
carryforwards. In 2002, we recorded a net income tax benefit of approximately
$0.1 million, which reflected income tax expense of $0.6 million for state
purposes offset by a tax benefit of $0.7 million from the sale of certain state
net operating loss carryforwards.
INCOME (LOSS) FROM CONTINUING OPERATIONS: Income (loss) from continuing
operations and per common share amounts for the years ended December 31, 2004,
2003 and 2002 were as follows:
- --------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 2003 2002
- --------------------------------------------------------------------------------------
As restated As restated
Income (loss) from continuing
Operations $ 52,756 $ 24,943 $ (91,492)
Per common share amounts:
Basic $ 0.32 $ 0.15 $ (0.60)
Diluted $ 0.31 $ 0.14 $ (0.60)
Weighted average number of shares of
common stock utilized to calculate per
common share amounts:
Basic 163,869 161,774 154,674
Diluted 172,855 170,796 154,674
======================================================================================
42
2004 COMPARED TO 2003: Income from continuing operations increased in 2004 from
2003 due to an increase in total revenue of approximately $106.0 million
(attributable primarily to an increase in THALOMID(R) net sales) partly offset
by higher operating expenses of approximately $60.7 million and a decrease in
interest and other income, net of approximately $7.9 million (attributable to a
$1.9 million decrease in fair value of EntreMed warrants versus a prior year
increase of $16.6 million partly offset by an increase in interest income and
foreign exchange gains and the inclusion in 2003 of equity losses of associated
companies of $4.4 million).
2003 COMPARED TO 2002: In 2003, we recorded income from continuing operations
for the first time since our inception in 1986. Income from continuing
operations increased in 2003 from 2002 due to an increase in total revenues of
approximately $135.8 million (attributable primarily to an increase in
THALOMID(R) net sales and first-time ALKERAN(R) sales that resulted from
executing the ALKERAN(R) supply and distribution agreement with GSK in March of
2003) and a $9.7 million increase in interest and other income, net primarily
due to a $16.6 million increase in the fair value of EntreMed warrants.
Partially offsetting these increases were higher operating expenses of
approximately $23.8 million and the inclusion in 2003 of equity losses of
associated companies of $4.4 million. Impacting the 2003 to 2002 operating
expenses comparison were aggregate one-time costs of approximately $78.4 million
incurred in the 2002 period ($55.7 million from the write-off of acquired
in-process research and development related to the Anthrogenesis acquisition and
$22.7 million associated with the litigation settlement and related agreements
with EntreMed, Inc. and CMCC).
GAIN ON SALE OF CHIRAL ASSETS: In January 1998, we completed the sale of our
chiral intermediate business to Cambrex Corporation. Pursuant to the minimum
royalty provisions of the agreement, we received approximately $0.8 million and
$1.0 million in 2003 and 2002, respectively. For more information on the
disposition of the chiral intermediates business, refer to Note 3 of our Notes
to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased to approximately $155.9
million in 2004 compared to $18.7 million in 2003. The increase was primarily
due to higher earnings, the receipt of $80.0 million in connection with the
December 2004 THALOMID(R) development and commercialization collaboration with
Pharmion and a decrease in net working capital levels. Net cash provided by
operating activities in 2003 increased approximately $47.0 million from 2002.
The increase in 2003 compared to 2002 was primarily due to higher earnings and
the inclusion of $22.7 million of spending in the 2002 period related to the
litigation settlement and related agreements with EntreMed, Inc. and CMCC,
partially offset by an increase in net working capital levels.
Net cash used in investing activities was $92.6 million in 2004 compared to
$443.6 million in 2003. Included in the 2004 activities were cash outflows of
$109.9 million for the October 2004 acquisition of Penn T, $7.0 million for an
investment made in Royalty Pharma Strategic Partners, LP, which is classified in
other assets on the consolidated balance sheet, and $36.0 million for capital
expenditures. Partially offsetting these outflows were cash inflows of
approximately $60.3 million from net marketable securities sales. Included in
the 2003 activities were cash outflows of $421.2 million for net marketable
securities purchases, $12.0 million for the purchase of a Pharmion Corporation
senior convertible note and $11.2 million for capital expenditures. In 2002,
approximately $63.3 million of net cash was provided by investing activities,
which was due to cash inflows of approximately $93.1 million from net marketable
securities sales, offset by cash outflows of $11.1 million for capital
expenditures, $10.3 million related to the December 2002 acquisition of
Anthrogenesis and $9.5 million for the value ascribed to the EntreMed
convertible preferred shares and warrants received in connection with the
December 31, 2002 litigation settlement and related agreements with EntreMed.
The Company previously followed the common practice of classifying its
investments in auction rate notes as cash and cash equivalents on the
consolidated balance sheet. It was determined that these instruments are not
cash equivalents and therefore, the Company has made a reclassification to its
43
Consolidated Balance Sheet as of December 31, 2003 in order to conform to the
current year's presentation. The reclassification resulted in a decrease in cash
and cash equivalents and a corresponding increase in marketable securities
available for sale as of December 31, 2003 of approximately $207.1 million. The
reclassification resulted in a net decrease of $207.1 million in net cash
provided by investing activities in 2003, which was comprised of the following
components; an increase in the proceeds from the sale of marketable securities
of $229.2 million and an increase in the purchase of marketable securities of
approximately $436.3 million. The Company did not hold such securities in 2002.
Net cash provided by financing activities was approximately $16.0 million,
$399.7 million and $3.4 million in 2004, 2003 and 2002, respectively, and
included cash inflows from the exercise of common stock options and warrants of
approximately $16.3 million, $12.0 million and $4.0 million in 2004, 2003 and
2002, respectively. Included in 2003 were cash inflows of $387.9 million from
net proceeds of the issuance of our convertible notes on June 3, 2003.
Currency rate changes negatively impacted our cash and cash equivalents balances
by $4.4 million in 2004. At December 31, 2004, cash, cash equivalents and
marketable securities were $748.5 million, an increase of $81.6 million 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 December 31, 2004, the Pharmion common stock investment
classified in marketable securities had an estimated fair value of $81.9
million.
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.
CONTRACTUAL OBLIGATIONS
The following table sets forth our contractual obligations as of December 31,
2004:
- ------------------------------------------------------------------------------------------------------------
PAYMENT DUE BY PERIOD
---------------------
LESS THAN MORE THAN
(IN MILLIONS $) 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------
Convertible Note Obligations $ -- $ -- $400.0 $ -- $400.0
Operating leases 3.6 6.7 5.6 6.3 22.2
ALKERAN(R) supply and distribution agreement 20.0 5.0 -- -- 25.0
Employment agreements 2.6 0.7 -- -- 3.3
Other contract commitments 5.8 7.5 4.4 -- 17.7
---------------------------------------------------------
$ 32.0 $ 19.9 $410.0 $ 6.3 $468.2
============================================================================================================
CONVERTIBLE NOTE OBLIGATIONS: In June 2003, we issued an aggregate principal
amount of $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 stock split adjusted conversion rate of $24.225 per share, which
represented a 50% premium to our closing stock price of $16.15, after adjusting
prices for the two-for-one stock split effected on October 22, 2004, on May 28,
2003. The debt issuance costs related to these convertible
44
notes, which totaled approximately $12.2 million, are 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. In addition, the noteholders have the right to
require us 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. We have registered the notes and common stock
issuable upon conversion with the Securities and Exchange Commission, and we are
required to use reasonable best efforts to keep the related registration
statement effective for the defined period. Pursuant to the indenture governing
the notes, we may not merge or transfer substantially all assets, as defined,
unless certain conditions are met.
OPERATING (FACILITIES) LEASES: We lease an aggregate of 92,100-square feet of
laboratory and office space in Warren, New Jersey, under various leases with
unaffiliated parties, which have lease terms ending between June 2005 and July
2010 with renewal options ranging from either one or two additional five-year
terms. Annual rent for these facilities is approximately $1.0 million. We also
are required to reimburse the lessors for real estate taxes, insurance,
utilities, maintenance and other operating costs. We also lease an 18,000-square
foot laboratory and office facility in North Brunswick, New Jersey, under a
lease with an unaffiliated party that has a term ending in March 2009 with two
five-year renewal options. Annual rent for this facility is approximately $0.5
million.
In November 2004, we purchased land and several buildings in Summit, New Jersey,
which will enable us to consolidate four New Jersey locations into one corporate
headquarters and provide the room to accommodate our anticipated growth. As a
result, we are currently exploring available to reduce or eliminate the
financial impact of existing lease commitments on redundant facilities.
In connection with our acquisition of Anthrogenesis in December 2002, we assumed
two separate leases in the same facility for office and laboratory space in
Cedar Knolls, New Jersey and have subsequently entered into one additional lease
for additional space in the same facility. The leases are for an aggregate
20,000-square feet with annual rent of approximately $0.2 million. We also are
required to reimburse the lessors for real estate taxes, insurance, utilities,
maintenance and other operating costs. The leases have terms ending between
September 2007 and April 2009 with renewal options ranging from either one or
two additional five-year terms. In November of 2002, Anthrogenesis entered into
a lease for an additional 11,000 square feet of laboratory space in Baton Rouge,
Louisiana. The lease has a five-year term with a three-year renewal option.
Annual rent for this facility is approximately $0.1 million.
We lease a 78,202-square foot laboratory and office facility in San Diego,
California from an unaffiliated party, which has a term ending in August 2012
with one five-year renewal option. Annual rent for this facility is
approximately $1.9 million and is subject to specified annual rental increases.
Under the lease, we also are required to reimburse the lessor for real estate
taxes, insurance, utilities, maintenance and other operating costs.
For a schedule of payments related to operating leases, refer to Note 18 of the
Notes to the Consolidated Financial Statements.
ALKERAN(R) PURCHASE COMMITMENTS: In March 2003, we entered into a three-year
supply and distribution agreement with GSK to distribute, promote and sell
ALKERAN(R) (melphalan), a therapy approved by the FDA for the palliative
treatment of multiple myeloma and carcinoma of the ovary. Under the terms of the
agreement, we purchase ALKERAN tablets and ALKERAN for infusion from GSK and
distribute the products in the United States under the Celgene label. The
agreement requires that we purchase certain
45
minimum quantities each year for an 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. At December 31, 2004, the remaining minimum purchase requirements
under the agreement totaled $25.0 million.
EMPLOYMENT AGREEMENTS: We have employment agreements with certain officers and
employees. Employment contracts provide for base compensation and an annual
target bonus based upon achievement of our performance measures and annual
increases in base compensation reflecting annual reviews and related salary
adjustment. The outstanding commitment for base compensation related to
employment contracts as of December 31, 2004 was approximately $2.6 million for
2005 and $0.7 million for 2006 (excluding any change in control provisions).
OTHER CONTRACT COMMITMENTS: We signed an exclusive license agreement with CMCC,
terminating any existing thalidomide analog agreements between CMCC and EntreMed
and directly granting to us an exclusive worldwide license by CMCC for the
analog patents. Under the agreement, we are required to pay CMCC $2.0 million
between 2005 and 2006, the present value of which was expensed in 2002.
Additional payments are possible under the agreement depending on the successful
development and commercialization of thalidomide analogs.
On October 21, 2004, the Company, through an indirect wholly-owned subsidiary,
acquired all of the outstanding shares of Penn T Limited, or Penn T, a worldwide
supplier of THALOMID(R), from a consortium of private investors. Penn T was
subsequently renamed Celgene UK Manufacturing II, Limited, or CUK II. In
connection with the acquisition, we and CUK II entered into a technical services
agreement with Penn Pharmaceutical Services Limited, or PPSL, and Penn
Pharmaceutical Holding Limited pursuant to which PPSL provides the services and
facilities necessary for the manufacture of THALOMID(R) and other thalidomide
formulations. The total cost over the five-year minimum agreement period is
approximately $11.0 million.
In October 2003, we signed an agreement with Institute of Drug Technology
Australia Limited, or IDT, for the manufacture of finished dosage form of
THALOMID(R) capsules. The agreement requires minimum payments for THALOMID(R)
capsules of $4.7 million for the three-year term commencing with the FDA's
approval of IDT as an alternate supplier. The agreement provides us with
additional capacity and reduces our dependency on one manufacturer for the
production of THALOMID(R). As of December 31, 2004, the FDA has not approved
such alternate supplier.
2005 FINANCIAL OUTLOOK
In our January 27, 2005 earnings release, we set forth our initial earnings
estimate for the full year 2005. Although we believe that the January 27, 2005
estimate continues to reflect our current thinking, there can be no assurance
that revenues or earnings will develop in the manner projected or if the
analysis, on which the projection were based, were to be redone on the date
hereof that there would be no change in the guidance.
REVENUES: Our initial 2005 financial guidance anticipates total revenue in the
range of $525 million, with THALOMID(R) revenues targeted in the range of $400
million. Our 2005 revenue forecast for the RITALIN(R) family of drugs remains at
approximately $60 million, which includes a payment for the approval of
FOCALIN(R) XR. Our initial financial guidance does not include REVLIMID(R)
product sales, nor does it include expenses associated with the potential
commercial launch of REVLIMID(R). As regulatory timelines become more certain we
will update this guidance.
46
R&D EXPENSES: Research and development expenses are expected to increase to the
$190 million range in 2005. Important components of the increased spending
include (1) expansion of both United States and European regulatory programs
directed toward hematological and malignant blood disorders, (2) spending for
the investigation of agents in solid tumor clinical trials, and (3) the
potential advancement of compounds in our discovery programs, including
PDE4/TNF-alpha inhibitors, kinase inhibitors, ligase inhibitors, benzopyrans and
placental-derived stem cells into our pre-clinical and clinical development
pipeline.
SG&A EXPENSES: Selling, general and administrative expenses are expected to
increase to the $140 million range in 2005, which includes increased spending
for the commercial support of THALOMID(R) and ALKERAN(R) and expand our
commercial and manufacturing capabilities in the United Kingdom and Switzerland.
This guidance excludes the potential costs of employee's stock options.
NEW ACCOUNTING PRINCIPLES
In December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 123R, "Share-Based
Payment", or SFAS 123R, 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. SFAS No. 123R addresses all forms of share-based
payment awards, including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. SFAS No. 123R
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, "Accounting for Stock Issued to Employees", that was
provided in Statement 123 as originally issued. Instead, under SFAS No. 123R
companies are required to record compensation expense for all share-based
payment award transactions measured at fair value. This statement is effective
for quarters ending after June 15, 2005. We are currently evaluating the impact
of adopting this statement.
Emerging Issues Task Force, or EITF, Issue No. 03-01, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," or
EITF 03-01, was issued in February 2004. EITF 03-01 stipulates disclosure
requirements for investments with unrealized losses that have not been
recognized as other-than-temporary impairments. The provisions of EITF 03-01 are
effective for fiscal years ending after December 15, 2003. We have complied with
the disclosure provisions of EITF 03-01. In September 2004, the FASB staff
issued two proposed FASB Staff Positions, or FSP: Proposed FSP EITF Issue
03-1-a, which provides guidance for the application of paragraph 16 of EITF
Issue 03-1 to debt securities that are impaired because of interest rate and/or
sector spread increases, and Proposed FSP EITF Issue 03-1-b, which delays the
effective date of Issue 03-1 for debt securities that are impaired because of
interests rate and/or sector spread increases. We are currently monitoring these
developments to assess the potential impact on our financial position and
results of operations.
EITF Issue No. 03-6, "Participating Securities and the Two-Class Method Under
FASB Statement No. 128, Earnings Per Share." In April 2004, the EITF issued
Statement No. 03-6, "Participating Securities and the Two-Class Method Under
FASB Statement No. 128, Earnings Per Share." EITF 03-6 addresses a number of
questions regarding the computation of earnings per share by a company that has
issued securities other than common stock that contractually entitle the holder
to the right to participate in dividends when, and if, declared. The issue also
provides further guidance in applying the two-class method of calculating
earnings per share, clarifying the definition of a participating security and
how to apply the two-class method. EITF 03-6 was effective for fiscal periods
beginning after March 31, 2004 and was required to be retroactively applied. We
evaluated the terms of our convertible notes and
47
debentures and determined that none of these instruments qualified as
participating securities under the provisions of EITF 03-6. As a result, the
adoption of EITF 03-6 had no impact on the Company.
EITF Issue No. 02-14, "Whether an Investor Should Apply the Equity Method of
Accounting to Investments Other Than Common Stock," or EITF 02-14, is effective
in the fourth quarter of 2004. EITF 02-14 states that an investor should only
apply the equity method of accounting when it has investments in either common
stock or in-substance common stock. EITF 02-14 also provides characteristics to
be evaluated in determining whether an investment in other than common stock is
in-substance substantially similar to an investments in that entity's common
stock and thus, accounted for under the equity method. For investments that are
not common stock or in-substance common stock, but were accounted for under the
equity method, EITF 02-14 requires discontinued use of the equity method of
accounting prospectively for reporting periods beginning after September 15,
2004. Previously recognized equity method earnings and losses should not be
reserved.
Based on the above guidance, the Company concluded that is EntreMed preferred
stock investments, which had previously been written-down to zero under the
equity method of accounting, was not in-substance common stock as defined in
EITF 02-14 and therefore, discontinued use of the equity method of accounting
beginning on October 1, 2004. Prospectively, the Company will account for such
investment under the cost method since the preferred stock is not publicly
traded. This change does not impact the carrying value of the EntreMed preferred
stock investment and accordingly, did not have an impact on the Conpany's
consolidated financial statements.
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. While our significant accounting policies are more fully described in
Note 1 of the Notes to the Consolidated Financial Statements included in this
annual report, we believe the following accounting policies to be critical:
REVENUE RECOGNITION ON COLLABORATION AGREEMENTS: We have formed collaborative
research and development agreements and alliances with several pharmaceutical
companies. These agreements are in the form of research and development and
license agreements. The agreements are for both early- and late-stage compounds
and are focused on specific disease areas. For the early-stage compounds, the
agreements are relatively short-term agreements that are renewable depending on
the success of the compounds as they move through preclinical development. The
agreements call for nonrefundable upfront payments, milestone payments on
achieving significant milestone events, and in some cases ongoing research
funding. The agreements also contemplate royalty payments on sales if and when
the compound receives FDA marketing approval.
In accordance with Staff Accounting Bulletin No. 104, or SAB 104, "REVENUE
RECOGNITION IN FINANCIAL STATEMENTS," upfront payments are recorded as deferred
revenue and recognized over the estimated service period. If the estimated
service period is subsequently modified, the period over which the upfront fee
is recognized is modified accordingly on a prospective basis. Continuation of
certain contracts is dependent upon our achieving specific contractual
milestones; however, none of the payments received to date are refundable
regardless of the outcome of the project. Revenue under research contracts is
recorded as earned under the contracts, as services are provided.
SAB No. 104 updates the guidance in SAB No. 101 and requires companies to
identify separate units of accounting based on the consensus reached on Emerging
Issues Task Force, or EITF, Issue No. 00-21, "REVENUE ARRANGEMENTS WITH MULTIPLE
DELIVERABLES", or EITF 00-21. EITF 00-21 provides guidance on how to determine
when an arrangement that involves multiple revenue-generating activities or
deliverables should be divided into separate units of accounting for revenue
recognition purposes, and if this division is required, how the arrangement
consideration should be allocated among the separate units of accounting. EITF
00-21 is effective for revenue arrangements entered into in quarters beginning
after June 15, 2003. If the deliverables in a revenue arrangement constitute
separate units of accounting according to the EITF's separation criteria, the
revenue-recognition policy must be determined for each identified unit. If the
arrangement is a single unit of accounting, the revenue-recognition policy must
be determined for the entire arrangement. Prior to the adoption of EITF 00-21,
revenues from the achievement of research and development milestones, which
represent the achievement of a significant step in the research and development
process, were recognized when and if the milestones were achieved.
GROSS TO NET SALES ACCRUALS FOR SALES RETURNS, MEDICAID REBATES AND CHARGEBACKS:
We record an allowance for sales returns based on the actual returns history for
consumed lots and the trend experience for lots where product is still being
returned. We record Medicaid rebate accruals based on historical payment data
and estimates of Medicaid beneficiary utilization. We record chargeback accruals
based on actual sales to customers who are covered under federally qualified
programs.
48
DEFERRED TAX ASSET VALUATION ALLOWANCE: We utilize the asset and liability
method of accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates in effect for years in which the temporary differences are expected to
reverse. We provide a valuation allowance when it is more likely than not that
deferred tax assets will not be realized.
ACCOUNTING FOR LONG-TERM INCENTIVE PLANS: The recorded liability for long-term
incentive plans was $3.9 million as of December 31, 2004. Plan 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 and the maximum potential
payouts are $6.1 million and $4.9 million for the 2005 and 2006 Plans,
respectively. 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.
BUSINESS COMBINATIONS: The Penn T and Anthrogenesis acquisitions completed in
October 2004 and December 2002, respectively, have been accounted for under the
provisions of SFAS No. 141, "Business Combinations," which requires the use of
the purchase method. Under SFAS 141, the purchase price is allocated to the
assets received and liabilities assumed based upon their respective fair values.
The initial purchase price allocations may be adjusted within one year of the
purchase date for changes in the estimated fair value of assets acquired and
liabilities assumed. The resulting goodwill, which represents the excess of
costs of an acquired entity over the fair value of identifiable assets acquired
and liabilities assumed, and intangible assets are accounted for under SFAS No.
142, "Goodwill and Other Intangible Assets." Under SFAS 142, goodwill and
intangible assets determined to have an indefinite useful life are not
amortized, but instead are tested for impairment at least annually. Intangible
assets with estimable useful lives are amortized to their estimated residual
values over their respective estimated useful lives, and reviewed for impairment
in accordance with SFAS No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets."
ITEM 7A. 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. At December 31,
2004, our market risk sensitive instruments consisted of marketable securities
available for sale, warrants to purchase up to 7,000,000 shares of EntreMed
common stock and unsecured convertible notes issued by the Company.
MARKETABLE SECURITIES AVAILABLE FOR SALE: At December 31, 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 on available for sale securities, which are deemed to be temporary,
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.
49
As of December 31, 2004, the principal amounts, fair values and related weighted
average interest rates of the Company's investments in debt securities
classified as marketable securities available-for-sale were as follows:
- --------------------------------------------------------------------------------------------------------
DURATION
----------------------------------------------------------------
FIXED RATE SECURITIES VARIABLE
0 TO 1 1 TO 3 3 TO 5 5 TO 7 RATE
(IN THOUSANDS $) YEAR YEARS YEARS YEARS SECURITIES TOTAL
- --------------------------------------------------------------------------------------------------------
Principal amount $287,443 $108,996 $ 30,264 $ 83,425 $ 20,513 $530,641
Fair value $288,542 $112,424 $ 31,895 $ 80,862 $ 17,717 $531,440
Average interest rate 2.98% 4.33% 4.92% 5.81% 5.88% 3.93%
PHARMION COMMON STOCK: In March 2004, we converted our $12.0 million Pharmion
Senior Convertible Note investment, which had accrued interest of approximately
$0.7 million, into 1,150,511 shares of Pharmion common stock. Additionally, in
September 2004, we exercised a total of 789,089 warrants to purchase shares of
Pharmion common stock, which we had received in connection with previous
transactions with Pharmion Corporation, (i.e., the November 2001 license
agreement and the April 2003 securities purchase agreement). As a result of
these transactions, at December 31, 2004, we held a total of 1,939,600 shares of
Pharmion Corporation common stock, which had an estimated fair value of
approximately $81.9 million (based on the closing price reported by the National
Association of Securities Dealers Automated Quotations, or NASDAQ system, and,
which exceeded the cost by approximately $61.7 million. The amount by which the
fair value exceeded the cost (i.e., the 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 our investment.
ENTREMED WARRANTS: In connection with the December 31, 2002, litigation
settlement and related agreements with EntreMed Corporation and CMCC, we
received warrants to purchase 7,000,000 shares of EntreMed common stock. The
warrants have an exercise price of $1.50 per share and expire seven years from
the date of grant. Based on EntreMed's closing stock price on December 31, 2004,
of $3.24, the intrinsic value of the warrants is approximately $12.2 million and
the fair value using a Black-Scholes options pricing model is estimated to be
approximately $19.8 million. Since the warrants give us the right, but not an
obligation, to purchase the shares of EntreMed common stock, the warrants can
never result in a cumulative negative charge to earnings.
CONVERTIBLE DEBT: In June 2003, we issued an aggregate principal amount of
$400.0 million of unsecured convertible notes. The convertible notes have a
five-year term and a coupon rate of 1.75% payable semi-annually. The convertible
notes can be converted at any time into 16,511,840 shares of common stock at a
stock split adjusted conversion price of $24.225 per share (for more information
see Note 10 of the Notes to the Consolidated Financial Statements). At December
31, 2004, the fair value of the convertible notes exceeded the carrying value of
$400.0 million by approximately $117.0 million, which we believe reflects the
increase in the market price of the Company's common stock to $26.52 per share
as of December 31, 2004. Assuming other factors are held constant, an increase
in interest rates generally results in a decrease in the fair 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.
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 15 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this annual report, we carried out
an evaluation, under the supervision and with the participation of the
Company's management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in the Securities Exchange
Act of 1934 Rules 13a-15(e) and 15d-15(e)). Based upon the foregoing
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
the rules and forms of the Securities and Exchange Commission.
Management's report on the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act), and the related report of our independent public
accounting firm, are included in our 2004 Financial Report under the
headings MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
and REPORT OF INDEPENDENT ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING, respectively, and are incorporated by reference.
(b) Changes in Internal Control Over Financial Reporting. In connection
with our quarterly review of accounting procedures and issues during the
fourth quarter of 2004 the Company reviewed their accounting for warrants
received during the EnterMed transaction of December 31, 2002. Based on
this review the Company determined that the warrants, which had previously
been considered as part of our equity investment under APB 18, should have
been accounted for as derivatives under SFAS 133. (See Footnote 2).
Accordingly, the Company has restated the 2003 and 2002 financial
statements to reflect this accounting. Prior to the the fourth quarter of
2004, our technical review of the accounting for warrants, specifically
the consideration of the application of SFAS 133 was viewed as a material
weakness in internal controls. The weakness was remediated before year-end
by expanding our knowledge of SFAS 133 and engaging outside experts to
assist in reviewing technical matters. Our expanded knowledge in this area
in conjunction with our quarterly review of accounting procedures and
issues led to our identification of this matter. There were no other
changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act
Rules 13a-15 and 15d-15 that occurred during our latest fiscal quarter to
which this report relates that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information required by Part III (Items 10, 11, 12, 13 and 14) is being
incorporated by reference herein from our definitive proxy statement (or
an amendment to our Annual Report on Form 10-K) to be filed with the
Securities and Exchange Commission within 120 days of the end of the
fiscal year ended December 31, 2004 in connection with our 2005 Annual
Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
See Item 10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 10.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
See Item 10.
52
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1),(a)(2) See Index to Consolidated Financial Statements and
Consolidated Financial Statement Schedule immediately following Signatures
and Power of Attorney.
(b) Exhibits
The following exhibits are filed with this report or incorporated by
reference:
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ------- --------------------------------------------------------------------
2.1 Purchase Option Agreement and Plan of Merger, dated April 26, 2002,
among the Company, Celgene Acquisition Corp. and Anthrogenesis Corp.
(incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-4 dated November 13, 2002 (No.
333-101196)).
2.2 Amendment to the Purchase Option Agreement and Plan of Merger, dated
September 6, 2002, among the Company, Celgene Acquisition Corp. and
Anthrogenesis Corp. (incorporated by reference to Exhibit 2.2 to the
Company's Registration Statement on Form S-4 dated November 13, 2002
(No. 333-101196)).
2.3 Asset Purchase Agreement by and between the Company and EntreMed,
Inc., dated as of December 31, 2002 (incorporated by reference to
Exhibit 99.6 to the Company's Schedule 13D filed on January 3,
2003).
2.4 Securities Purchase Agreement by and between EntreMed, Inc. and the
Company, dated as of December 31, 2002 (incorporated by reference to
Exhibit 99.2 to the Company's Schedule 13D filed on January 3,
2003).
2.5 Share Acquisition Agreement for the Purchase of the Entire Issued
Share Capital of Penn T Limited among Craig Rennie and Others,
Celgene UK Manufacturing Limited and the Company dated October 21,
2004 (incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated October 26, 2004).
3.1 Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, dated July 24, 1987).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 2 to the
Company's Current Report on Form 8-K, dated September 16, 1996).
4.1 Rights Agreement, dated as of September 16, 1996, between the
Company and American Stock Transfer & Trust Company (incorporated by
reference to the Company's Registration Statement on Form 8A, filed
on September 16, 1996), as amended on February 18, 2000
(incorporated by reference to Exhibit 99 to the Company's Current
Report on Form 8-K filed on February 22, 2000), as amended on August
13, 2003
53
(incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on August 14, 2003).
4.2 Indenture dated as of June 3, 2003 between the Company and The Bank
of New York, Trustee (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-3 dated August 14,
2003 (No. 333-107977)).
10.1 Purchase and Sale Agreement between Ticona LLC, as Seller, and the
Company, as Buyer, relating to the purchase of the Company's Summit,
New Jersey, real property (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004).
10.2 1986 Stock Option Plan (incorporated by reference to Exhibit A to
the Company's Proxy Statement dated April 13, 1990).
10.3 1992 Long-Term Incentive Plan (incorporated by reference to Exhibit
A to the Company's Proxy Statement, dated May 30, 1997).
10.4 1995 Non-Employee Directors' Incentive Plan (incorporated by
reference to Exhibit A to the Company's Proxy Statement, dated May
24, 1999).
10.5 Form of indemnification agreement between the Company and each
officer and director of the Company (incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996).
10.6 Employment Agreement dated as of May 1, 2003 between the Company and
John W. Jackson (incorporated by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2003).
10.7 Employment Agreement dated as of May 1, 2003 between the Company and
Sol J. Barer (incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2003).
10.8 Employment Agreement dated as of May 1, 2003 between the Company and
Robert J. Hugin (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2003).
10.9 Celgene Corporation Replacement Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Company's Registration Statement on
Form S-3 dated May 18, 1998 (No. 333-52963)).
10.10 Form of Stock Option Agreement to be issued in connection with the
Celgene Corporation Replacement Stock Option Plan (incorporated by
reference to Exhibit 99.2 to the Company's Registration Statement on
Form S-3 dated May 18, 1998 (No. 333-52963)).
10.11 1998 Stock Incentive Plan, Amended and Restated as of April 23, 2003
(incorporated by reference to Exhibit A to the Company's Proxy
Statement, filed April 30, 2003).
54
10.12 Stock Purchase Agreement dated June 23, 1998 between the Company and
Biovail Laboratories Incorporated (incorporated by reference to
Exhibit 10 to the Company's Current Report on Form 8-K filed on July
17, 1998).
10.13 Registration Rights Agreement dated as of July 6, 1999 between the
Company and the Purchasers in connection with the issuance of the
Company's 9.00% Senior Convertible Note Due June 30, 2004
(incorporated by reference to Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999).
10.14 Development and License Agreement between the Company and Novartis
Pharma AG, dated April 19, 2000 (incorporated by reference to
Exhibit 10.21 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000).
10.15 Collaborative Research and License Agreement between the Company and
Novartis Pharma AG, dated December 20, 2000 (incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000).
10.16 Custom Manufacturing Agreement between the Company and Johnson
Matthey Inc., dated March 5, 2001 (incorporated by reference to
Exhibit 10.24 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001).
10.17 Manufacturing and Supply Agreement between the Company and Mikart,
Inc., dated as of April 11, 2001 (incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001).
10.18 Distribution Services Agreement between the Company and Ivers Lee
Corporation, d/b/a Sharp, dated as of June 1, 2000 (incorporated by
reference to Exhibit 10.26 to the Company's Annual Report on Form
10-K for the year ended December 31, 2001).
10.19 Amendment No. 1 to the 1992 Long-Term Incentive Plan, effective as
of June 22, 1999 (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002).
10.20 Amendment No. 1 to the 1995 Non-Employee Directors' Incentive Plan,
effective as of June 22, 1999 (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002).
10.21 Amendment No. 2 to the 1995 Non-Employee Directors' Incentive Plan,
effective as of April 18, 2000 (incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002).
10.22* Celgene Corporation 2005 Deferred Compensation Plan, effective as of
January 1, 2005.
10.23 Anthrogenesis Corporation Qualified Employee Incentive Stock Option
Plan (incorporated by reference to Exhibit 10.35 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2002).
10.24 Agreement dated August 2001 by and among the Company, Children's
Medical Center Corporation, Bioventure Investments KFT and EntreMed
Inc. (certain portions of the agreement have been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment, which request has been
55
granted) (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
10.25 Exclusive License Agreement among the Company, Children's Medical
Center Corporation and, solely for purposes of certain sections
thereof, EntreMed, Inc., effective December 31, 2002 (incorporated
by reference to Exhibit 10.32 to the Company's Annual Report on Form
10-K for the year ended December 31, 2002).
10.26 Supply Agreement between the Company and Sifavitor s.p.a., dated as
of September 28, 1999 (incorporated by reference to Exhibit 10.32 to
the Company's Annual Report on Form 10-K for the year ended December
31, 2002).
10.27 Supply Agreement between the Company and Seigfried (USA), Inc.,
dated as of January 1, 2003 (incorporated by reference to Exhibit
10.33 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.28 Distribution and Supply Agreement by and between SmithKline Beecham
Corporation, d/b/a GlaxoSmithKline and Celgene Corporation, entered
into as of March 31, 2003 (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003).
10.29 Securities Purchase Agreement dated as of April 8, 2003 between the
Company and Pharmion Corporation in connection with the purchase by
the Company of Pharmion's Senior Convertible Promissory Note in the
principal amount of $12,000,000 (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003).
10.30 Purchase Agreement dated May 28, 2003 between the Company and Morgan
Stanley & Co. Incorporated, as Initial Purchaser, in connection with
the purchase of $400,000,000 principal amount of the Company's 1
3/4% Convertible Note Due 2008 (incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003).
10.31 Registration Rights Agreement dated as of June 3, 2003 between the
Company, as Issuer, and Morgan Stanley & Co. Incorporated, as
Initial Purchaser (incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-3 dated August 14, 2003
(No. 333-107977)).
10.32 Form of 1 3/4% Convertible Note Due 2008 (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement of Form S-3
dated August 14, 2003).
10.33* Technical Services Agreement among the Company, Celgene UK
Manufacturing II, Limited (f/k/a Penn T Limited), Penn
Pharmaceutical Services Limited and Penn Pharmaceutical Holding
Limited dated October 21, 2004.
10.34 Purchase and Sale Agreement between Ticona LLC and the Company dated
August 6, 2004, with respect to the Summit, New Jersey property
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 31,
2003).
56
10.35* Letter Agreement among the Company, Pharmion Corporation and
Pharmion GmbH dated December 3, 2004.
10.36* Letter Agreement among the Company, Pharmion Corporation and
Pharmion GmbH dated December 3, 2004.
10.37* Letter Agreement among the Company, Pharmion Corporation and
Pharmion GmbH dated December 3, 2004.
10.38* Amendment No. 2 to the Amended and Restated Distribution and License
Agreement dated as of November 16, 2001, as amended March 4, 2003
and supplemented June 18, 2003, by and between Pharmion GmbH and
Celgene UK Manufacturing II, Limited, dated December 3, 2004.
10.39* Sublease between Gateway, Inc. ("Sublandlord') and Celgene
Corporation (Subtenant), entered into as of December 10, 2001, with
respect to the San Diego property.
10.40 Lease Agreement, dated January 16, 1987, between the Company and
Powder Horn Associates, with respect to the Warren, New Jersey
property (incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-1, dated July 24, 1987).
14.1 Code of Ethics (incorporated by reference to Exhibit 14.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2004).
21.1* List of Subsidiaries.
23.1* Consent of KPMG LLP.
24.1* Power of Attorney (included in Signature Page).
31.1* Certification by the Company's Chief Executive Officer dated March
18, 2005.
31.2* Certification by the Company's Chief Financial Officer dated March
18, 2005.
32.1* Certification by the Company's Chief Executive Officer pursuant to
18 U.S.C. Section 1350 dated March 18, 2005.
32.2* Certification by the Company's Chief Financial Officer pursuant to
18 U.S.C. Section 1350 dated March 18, 2005.
* Filed herewith.
(c) See Financial Statements immediately following Index to Consolidated
Financial Statements and Consolidated Financial Statement Schedule.
57
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person or entity whose signature
appears below constitutes and appoints John W. Jackson, Sol J. Barer and Robert
J. Hugin, and each of them, its true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for it and in its name,
place and stead, in any and all capacities, to sign any and all amendments to
this Form 10-K and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all contents and purposes as it might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes may
lawfully do or cause to be done by virtue thereof.
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.
CELGENE CORPORATION
By: /s/ John W. Jackson
---------------------------
John W. Jackson
Chairman of the Board and
Chief Executive Officer
Date: March 16, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ John W. Jackson Chairman of the Board and Chief March 18, 2005
- ------------------------------ Executive Officer
John W. Jackson
/s/ Sol J. Barer Director, Chief Operating Officer March 18, 2005
- ------------------------------
Sol J. Barer
/s/ Robert J. Hugin Director, Chief Financial Officer March 18, 2005
- ------------------------------
Robert J. Hugin
/s/ Jack L. Bowman Director March 18, 2005
- ------------------------------
Jack L. Bowman
58
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Frank T. Cary Director March 18, 2005
- ------------------------------
Frank T. Cary
/s/ Michael D. Casey Director March 18, 2005
- ------------------------------
Michael D. Casey
/s/ Arthur Hull Hayes, Jr. Director March 18, 2005
- ------------------------------
Arthur Hull Hayes, Jr.
/s/ Gilla Kaplan Director March 18, 2005
- ------------------------------
Gilla Kaplan
/s/ Richard C. E. Morgan Director March 18, 2005
- ------------------------------
Richard C. E. Morgan
/s/ Walter L. Robb Director March 18, 2005
- ------------------------------
Walter L. Robb
/s/ James R. Swenson Controller (Chief Accounting Officer) March 18, 2005
- ------------------------------
James R. Swenson
The foregoing constitutes a majority of the directors.
59
CELGENE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Consolidated Financial Statements
Management's Report on Internal Control over Financial Reporting F-2
Reports, Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-6
Consolidated Statements of Operations - Years Ended December 31, 2004, 2003, and 2002 F-7
Consolidated Statements of Cash Flows - Years Ended December 31, 2004, 2003, and 2002 F-8
Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2004, 2003, and 2002 F-10
Notes to Consolidated Financial Statements F-11
Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts F-44
F-1
MANAGEMENT'S REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Celgene Corporation, or the Company, is responsible for
establishing and maintaining adequate internal control over financial reporting
and for the assessment of the effectiveness of internal control over financial
reporting. As defined by the Securities and Exchange Commission, internal
control over financial reporting is a process designed by, or under the
supervision of the Company's principal executive and principal financial
officers and effected by the Company's Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the consolidated financial statements
in accordance with U.S. generally accepted accounting principles.
The Company's internal control over financial reporting is supported by written
policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the Company's transactions and
dispositions of the Company's assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of the consolidated
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of the Company's management and
directors; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In connection with the preparation of the Company's annual consolidated
financial statements, management has undertaken an assessment of the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or the COSO Framework. Management's assessment included an
evaluation of the design of the Company's internal control over financial
reporting and testing of the operational effectiveness of those controls.
Based on this evaluation, management has concluded that the Company's internal
controls over financial reporting were effective as of December 31, 2004.
Management has not evaluated the effectiveness of internal control over
financial reporting at Penn T Limited, or Penn T, which was acquired on October
21, 2004 and, as such, does not extend its conclusion regarding the
effectiveness of internal control over financial reporting to the controls of
that entity. Penn T represents approximately $9.6 million of consolidated total
assets and $2.3 million of consolidated net revenue in the consolidated
financial statements as of and for the year ended December 31, 2004. See Note 3
of the notes to consolidated financial statements for additional information on
the Penn T acquisition. Accordingly, management's assessment as of December 31,
2004 does not include the internal control over financial reporting of Penn T.
KPMG LLP, the independent registered public accounting firm that audited the
Company's consolidated financial statements included in this report, has issued
their report on management 's assessment of internal control over financial
reporting, a copy of which appears on the page F-4 of this annual report.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Celgene Corporation:
We have audited the consolidated financial statements of Celgene Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the consolidated
financial statement schedule as listed on the accompanying index. These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Celgene Corporation
and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Celgene
Corporation and subsidiaries' internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, or COSO, and our report dated March 18, 2005 expressed an
unqualified opinion on management's assessment of, and the effective operation
of, internal control over financial reporting.
As further discussed in Note 2 of the consolidated financial statements, the
consolidated financial statements for 2003 and 2002 have been restated.
/s/ KPMG LLP
Short Hills, New Jersey
March 18, 2005
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Celgene Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Celgene
Corporation and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO. Celgene Corporation's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Celgene Corporation and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2004, is fairly stated, in all material respects, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Also,
in our opinion, Celgene Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, or
COSO.
Celgene Corporation acquired Penn T Limited during 2004, and management excluded
from its assessment of the effectiveness of Celgene Corporation's internal
control over financial reporting as of December 31, 2004, Penn T Limited's
internal control over financial reporting associated with total assets of $9.6
million and total revenue of $2.3 million included in the consolidated financial
statements of
F-4
Celgene Corporation and subsidiaries as of and for the year ended December 31,
2004. Our audit of internal control over financial reporting of Celgene
Corporation also excluded an evaluation of the internal control over financial
reporting of Penn T Limited.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Celgene Corporation and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2004,
and the related financial statement schedule, and our report dated March 18,
2005 expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG LLP
Short Hills, New Jersey
March 18, 2005
F-5
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------------------------
December 31, 2004 2003
- --------------------------------------------------------------------------------------------------
(As Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 135,227 $ 60,328
Marketable securities available for sale 613,310 606,639
Accounts receivable, net of allowance of $2,208 and $1,530
at December 31, 2004 and December 31, 2003, respectively 46,074 35,495
Inventory 24,404 9,696
Deferred income taxes 4,082 --
Other current assets 26,783 17,941
- --------------------------------------------------------------------------------------------------
Total current assets 849,880 730,099
- --------------------------------------------------------------------------------------------------
Plant and equipment, net 47,319 22,546
Intangible assets, net 108,955 2,695
Goodwill 41,258 3,490
Deferred income taxes 14,613 --
Other assets 45,268 54,196
- --------------------------------------------------------------------------------------------------
Total assets $ 1,107,293 $ 813,026
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,650 $ 15,340
Accrued expenses 68,534 55,276
Income taxes payable 41,188 281
Current portion of deferred revenue 6,926 589
Current portion of capital leases and note obligation 8 30
Deferred income taxes 5,447 --
Other current liabilities 662 278
- --------------------------------------------------------------------------------------------------
Total current liabilities 141,415 71,794
- --------------------------------------------------------------------------------------------------
Long term convertible notes 400,000 400,000
Deferred revenue, net of current portion 73,992 1,122
Capitalized leases and note obligation, net of current portion 4 16
Other non-current liabilities 14,438 8,350
- --------------------------------------------------------------------------------------------------
Total liabilities 629,849 481,282
- --------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share, 5,000,000 shares
authorized; none outstanding at December 31, 2004 and 2003 -- --
Common stock, $.01 par value per share, 275,000,000 shares
authorized; issued 165,079,198 and 81,411,055 shares
at December 31, 2004 and December 31, 2003, respectively 1,651 814
Common stock in treasury, at cost; 10,564 shares at
December 31, 2004 and none at December 31, 2003 (306) --
Additional paid-in capital 641,907 607,484
Accumulated deficit (234,410) (287,166)
Accumulated other comprehensive income 68,602 10,612
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 477,444 331,744
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,107,293 $ 813,026
==================================================================================================
See accompanying Notes to Consolidated Financial Statements
F-6
CELGENE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------
Years ended December 31, 2004 2003 2002
- ------------------------------------------------------------------------------------------------
(As Restated) (As Restated)
Revenue:
Net product sales $ 330,571 $ 244,453 $ 122,921
Collaborative agreements and other revenue 20,012 15,174 8,115
Royalty revenue 26,919 11,848 4,710
- ------------------------------------------------------------------------------------------------
Total revenue 377,502 271,475 135,746
- ------------------------------------------------------------------------------------------------
Expenses:
Cost of goods sold 59,726 52,950 20,867
Research and development 160,852 122,700 84,924
Selling, general and administrative 114,196 98,474 66,172
Litigation settlement and related agreements -- -- 22,704
Acquired in-process research and development -- -- 55,700
- ------------------------------------------------------------------------------------------------
Total expenses 334,774 274,124 250,367
- ------------------------------------------------------------------------------------------------
Operating income (loss) 42,728 (2,649) (114,621)
Other income and expense:
Interest and other income 29,994 38,369 23,058
Equity in losses of associated company -- 4,392 --
Interest expense 9,551 5,667 27
- ------------------------------------------------------------------------------------------------
Income (loss) before income taxes 63,171 25,661 (91,590)
- ------------------------------------------------------------------------------------------------
Income tax provision (benefit) 10,415 718 (98)
- ------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 52,756 24,943 (91,492)
- ------------------------------------------------------------------------------------------------
Discontinued operations:
Gain on sale of chiral assets -- 750 1,000
- ------------------------------------------------------------------------------------------------
Net income (loss) $ 52,756 $ 25,693 $ (90,492)
================================================================================================
Income (loss) from continuing operations per
common share:
Basic $ 0.32 $ 0.15 $ (0.60)
Diluted $ 0.31 $ 0.14 $ (0.60)
Discontinued operations per common share:
Basic $ -- $ 0.01 $ 0.01
Diluted $ -- $ 0.01 $ 0.01
Net income (loss) per common share:
Basic $ 0.32 $ 0.16 $ (0.59)
Diluted $ 0.31 $ 0.15 $ (0.59)
Weighted average number of shares of common
stock utilized to calculate per share amounts:
Basic 163,869 161,774 154,674
========= ========= =========
Diluted 172,855 170,796 154,674
========= ========= =========
See accompanying Notes to Consolidated Financial Statements
F-7
CELGENE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------
(As Restated) (As Restated)
Cash flows from operating activities:
Income (loss) from continuing operations $ 52,756 $ 24,943 $ (91,492)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization of long-term assets 9,690 8,027 5,182
Provision for accounts receivable allowances 867 448 295
Realized gain on marketable securities available for sale (3,050) (7,355) (5,946)
Unrealized loss (gain) on value of EntreMed warrants 1,922 (16,574) --
Equity losses in associated companies -- 4,392 --
Non-cash write-off of acquired in-process research and
development -- -- 55,700
Non-cash stock-based compensation expense 449 704 467
Amortization of premium/discount on marketable
securities available for sale, net 2,085 1,238 367
Loss on sale of equipment -- 84 --
Amortization of debt issuance cost 2,443 1,422 --
Amortization of discount on note obligation 108 137 --
Shares issued for employee benefit plans 4,267 2,775 966
Change in current assets and liabilities, excluding the effect
of acquisition:
Increase in accounts receivable (5,603) (18,273) (4,166)
Increase in inventory (11,192) (4,891) (1,198)
Increase in other operating assets (19,869) (9,253) (2,917)
Increase in accounts payable, accrued expenses
and taxes payable 41,858 30,403 19,298
Increase (decrease) in deferred revenue 79,208 498 (4,866)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 155,939 18,725 (28,310)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (36,015) (11,227) (11,077)
Business acquisition, net of cash received (109,882) -- (10,299)
Proceeds from the sale of equipment -- 138 --
Proceeds from sales and maturities of marketable securities
available for sale 539,200 415,595 133,265
Purchases of marketable securities available for sale (478,939) (836,827) (40,116)
Investment in convertible notes -- (12,000) --
Purchase of investment securities (7,000) -- (9,508)
Proceeds from the sale of chiral intermediate assets -- 750 1,000
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (92,636) (443,571) 63,265
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of common stock options
and warrants 16,342 11,970 3,968
Proceeds from convertible notes -- 400,000 --
Debt issuance cost -- (12,212) --
Proceeds from notes receivable from stockholders -- 42 --
Purchase of treasury stock (306) -- (2)
Repayment of capital lease and note obligations (34) (101) (587)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,002 399,699 3,379
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Effect of currency rate changes on cash and cash equivalents (4,406) -- --
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 74,899 (25,147) 38,334
Cash and cash equivalents at beginning of period 60,328 85,475 47,141
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 135,227 $ 60,328 $ 85,475
==================================================================================================================
See accompanying Notes to Consolidated Financial Statements
F-8
CELGENE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------
Years Ended December 31, 2004 2003 2002
- ----------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and
financing activity:
Change in net unrealized gain (loss) on marketable
securities available for sale 53,312 (3,584) (377)
---------------------------------
Issuance of common stock upon the conversion of
convertible notes and accrued interest thereon, net -- -- 11,714
---------------------------------
Equipment acquisition on capital leases 110 --
---------------------------------
Deferred compensation relating to stock options -- -- (328)
---------------------------------
Issuance of common stock, options and warrants in
connection with acquisition of Anthrogenesis -- -- 47,441
---------------------------------
Supplemental disclosure of cash flow information:
Interest paid 7,000 3,584 27
---------------------------------
Cash paid for income taxes (received for tax benefit) 5,493 (653) --
---------------------------------
See accompanying Notes to Consolidated Financial Statements
F-9
CELGENE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Accu-
mulated
Notes Other
Receivable Compre-
Additional Accu- Deferred from hensive
Common Treasury Paid-in mulated Compen- Stock- Income
Years Ended December 31, 2004, 2003 and 2002 Stock Stock Capital Deficit sation holders (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001 $ 756 $ (3) $ 527,023 $ (222,367) $ (1,593) $ (42) $ 6,651 $ 310,425
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss (As Restated) (90,492) (90,492)
Other comprehensive income:
Net change in unrealized gain (loss) on
available for sale securities, net of tax 6,323 6,323
Less: reclassification adjustment for gain
included in net loss (5,946) (5,946)
---------
Comprehensive loss (As Restated) $ (90,115)
Exercise of stock options and warrants 12 3,956 3,968
Issuance of common stock for employee
benefit plans -- 5 961 966
Purchase of treasury stock (2) (2)
Conversion of long-term convertible notes 19 11,695 11,714
Shares issued pursuant to Anthrogenesis
acquisition 15 47,426 47,441
Reduction of deferred compensation
for terminations (328) 328 --
Amortization of deferred compensation 1,265 1,265
Expense related to non-employee stock options
and restricted stock granted to employees 467 467
Income tax benefit upon exercise of
stock options 77 77
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 (As Restated) $ 802 $ -- $ 591,277 $ (312,859) $ -- $ (42) $ 7,028 $ 286,206
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (As Restated) 25,693 25,693
Other comprehensive income:
Net change in unrealized gain (loss) on
available for sale securities, net of tax 10,939 10,939
Less: reclassification adjustment for gain
included in net income (7,355) (7,355)
---------
Comprehensive income (As Restated) $ 29,277
Exercise of stock options and warrants 11 11,959 11,970
Issuance of common stock for employee
benefit plans 1 2,774 2,775
Expense related to non-employee stock options
and restricted stock granted to employees 704 704
Income tax benefit upon exercise of
stock options 770 770
Collection of notes receivable from
stockholders 42 42
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2003 (As Restated) $ 814 $ -- $ 607,484 $ (287,166) $ -- $ -- $ 10,612 $ 331,744
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 52,756 52,756
Other comprehensive income:
Net change in unrealized gain (loss) on
available for sale securities, net of tax 56,362 56,362
Less: reclassification adjustment for gain
included in net income (3,050) (3,050)
Currency translation adjustments 4,678 4,678
---------
Comprehensive income $ 110,746
Purchase of treasury stock (306) (306)
Issuance of common stock related to the 2:1
stock split 823 (823) -
Exercise of stock options and warrants 13 16,329 16,342
Issuance of common stock for employee
benefit plans 1 4,266 4,267
Expense related to non-employee stock options
and restricted stock granted to employees 449 449
Income tax benefit upon exercise of
stock options 14,202 14,202
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2004 $ 1,651 $ (306) $ 641,907 $ (234,410) $ -- $ -- $ 68,602 $ 477,444
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
F-10
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION: Celgene Corporation and its
subsidiaries (collectively "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
immune-inflammatory diseases through regulation of cellular, genomic and
proteomic targets. The Company's commercial stage programs include
pharmaceutical sales of THALOMID(R) and ALKERAN(R), a licensing agreement with
Novartis for FOCALIN(R) and the entire RITALIN(R) family of drugs, as well as,
biotherapeutic products through Celgene Cellular Therapeutics, or CCT, a wholly
owned subsidiary. THALOMID(R) (thalidomide), the Company's lead product, was
approved in July 1998 for the treatment of erythema nodosum leprosum, or ENL, by
the U.S. Food and Drug Administration, or FDA. Net THALOMID(R) product sales
accounted for approximately 82%, 82% and 88% of total revenues in 2004, 2003 and
2002, respectively. In October 2004, the Company acquired all of the outstanding
shares of Penn T Limited, the UK based manufacturer of THALOMID(R). This
acquisition expanded the Company's corporate capabilities and enabled the
Company to control manufacturing for THALOMID(R) worldwide. In March 2003, the
Company entered into a three-year supply and distribution agreement with
GlaxoSmithKline, or GSK, to distribute, promote and sell ALKERAN(R) (melphalan)
in all dosage forms in the United States under Celgene's label. In November
2001, the Company received FDA approval for FOCALIN(R), its refined version of
RITALIN(R), for the treatment of attention deficit disorder/attention deficit
hyperactivity disorder. FOCALIN(R) is marketed by Novartis Pharma AG. Under the
agreement with Novartis, the Company receives royalty payments on the entire
RITALIN(R) family line of products. In December 2002, the Company acquired
Anthrogenesis Corp., or Celgene Cellular Therapeutics, a privately held New
Jersey based biotherapeutics company and cord blood banking business, which is
pioneering the recovery of stem cells from human placental tissues following the
completion of full-term, successful pregnancies. The portfolio of products in
the Company's preclinical and clinical-stage pipeline includes Immunomodulatory
Drugs, or IMiDs(TM), and PDE4 Inhibitors. The Company hopes to use its extensive
knowledge on THALOMID(R) as a blueprint to advance these next generation
compounds. Through a "bottom up" approach (target screening, bioinformatics,
assay development, libraries and cellular disease models) at its San Diego,
California subsidiary, Signal Pharmaceuticals LLP, the Company has also produced
such compounds as Benzopyrans and Selective Estrogen Receptor Modulators, or
SERMs, Kinases Inhibitors, Tubulin Inhibitors, and Ligase Modulators.
During 2004, the Company initiated a two-for-one common stock split increasing
the number of authorized shares to 275,000,000 with a par value of $.01 per
share, of which 165,068,634 shares were outstanding at December 31, 2004.
The consolidated financial statements include the accounts of Celgene
Corporation and its subsidiaries. All inter-company transactions and balances
have been eliminated. The equity method of accounting is used for the Company's
investment in EntreMed convertible voting preferred shares. Certain
reclassifications have been made to prior years' financial statements in order
to conform to the current year's presentation.
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect reported amounts and disclosures.
Actual results could differ from those estimates. The Company is subject to
certain risks and uncertainties such as uncertainty of product development,
uncertainties regarding regulatory approval, no assurance of market acceptance
of products, risk of product liability, uncertain scope of patent and
proprietary rights, intense competition, and rapid technological change.
CASH EQUIVALENTS: At December 31, 2004 and 2003, cash equivalents consisted
principally of highly liquid funds invested in commercial paper, money market
funds, and U.S. government securities such as
F-11
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
treasury bills and notes. These instruments have maturities of three months or
less when purchased and are stated at cost, which approximates market value
because of the short maturity of these investments.
FINANCIAL INSTRUMENTS: Certain financial instruments reflected in the
Consolidated Balance Sheets, (e.g., cash and cash equivalents, accounts
receivable, certain other assets, accounts payable and certain other
liabilities) are recorded at cost, which approximates fair value. The fair
values of financial instruments other than marketable securities, which includes
the EntreMed warrants that are classified in other non-current assets, are
determined through a combination of management estimates and information
obtained from third parties using the latest market data. The fair value of
marketable securities available for sale is based on quoted market prices.
MARKETABLE SECURITIES: The Company's marketable securities are all classified as
securities available for sale in current assets and are carried at fair value.
Such securities are held for an indefinite period of time and are intended to be
used to meet the ongoing liquidity needs of the Company. Unrealized gains and
losses (which are deemed to be temporary), if any, are reported in a separate
component of stockholders' equity. The cost of investments in 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
income. The cost of securities is based on the specific identification method.
A decline in the market value of any available-for-sale security below cost that
is deemed to be other than temporary results in a reduction in carrying amount
to fair value. The impairment would be charged to earnings and a new cost basis
for the security is established.
In September 2004, the Emerging Issues Task Force, or 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.
Premiums and discounts are amortized or accreted over the life of the related
available-for-sale security as an adjustment to yield using the
effective-interest method. Dividend and interest income are recognized when
earned.
The Company previously followed the common practice of classifying its
investments in auction rate notes as cash and cash equivalents on the
Consolidated Balance Sheet. It was determined that these instruments are not
cash equivalents and therefore, the Company has made a reclassification to its
Consolidated Balance Sheet as of December 31, 2003 in order to conform to the
current year's presentation. The reclassification resulted in a decrease in cash
and cash equivalents and a corresponding increase in marketable securities
available for sale as of December 31, 2003 of approximately $207.1 million. The
reclassification resulted in a net decrease of $207.1 million in net cash
provided by investing activities in 2003, which was comprised of the following
components; an increase in the proceeds from the sale of marketable securities
of $229.2 million and an increase in the purchase of marketable securities of
approximately $436.3 million. The Company did not hold such securities in 2002.
CONCENTRATION OF CREDIT RISK: Cash, cash equivalents, and marketable securities
are financial instruments that potentially subject the Company to concentration
of credit risk. The Company invests its excess cash primarily in U.S. government
agency securities and mortgage obligations and marketable debt securities of
financial institutions and corporations with strong credit ratings. In March
2004, the Company converted a
F-12
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
$12.0 million senior convertible note issued by Pharmion Corporation, plus
accrued interest of $0.7 million into 1,150,511 shares of Pharmion common stock.
Additionally, in September 2004, warrants to purchase 789,089 shares of Pharmion
common stock were exercised, resulting in a total investment of 1,939,600 shares
of Pharmion Corporation common stock. The Company has established guidelines
relative to diversification and maturities to maintain safety and liquidity.
These guidelines are reviewed periodically and may be modified to take advantage
of trends in yields and interest rates. The Company has the ability to sell
these investments before maturity and has therefore classified the investments
as available for sale. The Company has not experienced any significant losses on
its investments.
As is typical in the pharmaceutical industry, the Company sells its products
primarily through wholesale distributors and therefore, wholesale distributors
account for a large portion the Company's trade receivables and net product
revenues. In light of this concentration, the Company continuously monitors the
creditworthiness of its customers and has internal policies regarding customer
credit limits. The Company estimates an allowance for doubtful accounts based on
the creditworthiness of its customers as well as general economic conditions. An
adverse change in those factors could affect the Company's estimate of its bad
debts.
INVENTORY: Inventories are carried at the lower of cost or market using the
first-in, first-out, or FIFO, method.
PLANT AND EQUIPMENT: Plant and equipment are stated at cost. Depreciation of
plant and equipment is provided using the straight-line method. The estimated
useful lives of fixed assets are as follows:
Buildings 40 years
Leasehold improvements 10 years
Laboratory equipment and machinery 5 years
Furniture and fixtures 5 years
Computer Equipment 3 years
Maintenance and repairs are charged to operations as incurred, while renewals
and improvements are capitalized.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of cost of
an acquired entity over the fair value of identifiable assets acquired and
liabilities assumed in a business combination. Under Statement of Financial
Accounting Standards, or SFAS, No. 142, "Goodwill and Other Intangible Assets",
or SFAS 142, goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead are tested for impairment at least annually in accordance with the
provisions of SFAS 142. SFAS 142 also requires that intangible assets with
estimable useful lives be amortized to their estimated residual values over
their respective estimated useful lives, and reviewed for impairment in
accordance with SFAS No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets", or SFAS 144.
Intangible assets are categorized as either a) supply agreements, b) supplier
relationships, c) customer lists and d) technology. Amortization periods related
to these categories are 13 years, 5 years, 15 years and 10 years, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS: In accordance with SFAS No. 144, long-lived
assets, such as property, plant, and equipment, software costs and purchased
intangibles subject to amortization are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying
F-13
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
amount of an asset to the estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of would be separately presented in the consolidated
balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell, and are no longer depreciated. The assets and liabilities of
a disposed group classified as held for sale would be presented separately in
the appropriate asset and liability sections of the consolidated balance sheet.
BUSINESS COMBINATIONS: SFAS No. 141, "Business Combinations", or SFAS 141,
requires that all business combinations consummated after June 30, 2001 be
accounted for using the purchase method of accounting. Under SFAS 141, the
pooling-of-interests method of accounting for business combinations is no longer
permitted. The Company's acquisitions of Penn T Limited on October 21, 2004 and
Anthrogenesis Corp. on December 31, 2002, were accounted for using the purchase
method. The acquisition of Signal Pharmaceuticals, Inc., which was completed on
August 31, 2000, was accounted for using the pooling-of-interests method.
FOREIGN CURRENCY TRANSLATION: Operations in non-U. S. subsidiaries are generally
recorded in local currencies which are also the functional currencies for
financial reporting purposes. The results of operations for non-U. S.
subsidiaries are translated from local currencies into U. S. dollars using the
average currency rate during each period which approximates the results that
would be obtained using actual currency rates on the dates of individual
transactions. Assets and liabilities are translated using currency rates at the
end of the period with translation adjustments recorded in accumulated
translation adjustments and recognized as a component of other comprehensive
income. Transaction gains and losses are recorded as incurred in other income
(expense), net in the Consolidated Statements of Income.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT ("IPR&D"): The value assigned to
acquired in-process research and development is determined by identifying those
acquired specific in-process research and development projects that would be
continued and for which (a) technological feasibility has not been established
at the acquisition date, (b) there is no alternative future use, and (c) the
fair value is estimable with reasonable reliability. Amounts assigned to IPR&D
are charged to expense at the acquisition date.
RESEARCH AND DEVELOPMENT COSTS: All research and development costs are expensed
as incurred. These include all internal costs, external costs related to
services contracted by the Company and research services conducted for others.
Research and development costs consist primarily of salaries and benefits,
contractor fees, clinical drug supplies for preclinical and clinical development
programs, consumable research supplies and allocated facility and administrative
costs.
INCOME TAXES: The Company utilizes the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect for years in which the temporary differences are expected to reverse. A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax asset will not be realized. Research and
development tax credits will be recognized as a reduction of the provision for
income taxes when realized.
REVENUE RECOGNITION: Revenue from the sale of products is recognized upon
product shipment. Provisions for discounts for early payments, rebates and sales
returns under terms customary in the industry are provided for in the same
period the related sales are recorded. Provisions recorded in 2004, 2003 and
2002 totaled approximately $54.5 million, $38.8 million and $16.1 million,
respectively. Revenue under research contracts is recorded as earned under the
contracts, as services are provided. In accordance with SEC Staff Accounting
Bulletin ("SAB") No. 104 upfront nonrefundable fees associated with license and
development agreements where the Company has continuing involvement in the
agreement, are recorded as deferred
F-14
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
revenue and recognized over the estimated service period. If the estimated
service period is subsequently modified, the period over which the up-front fee
is recognized is modified accordingly on a prospective basis.
SAB No. 104 updates the guidance in SAB No. 101 and requires companies to
identify separate units of accounting based on the consensus reached on Emerging
Issues Task Force, or EITF, Issue No. 00-21, "REVENUE ARRANGEMENTS WITH MULTIPLE
DELIVERABLES", or EITF 00-21. EITF 00-21 provides guidance on how to determine
when an arrangement that involves multiple revenue-generating activities or
deliverables should be divided into separate units of accounting for revenue
recognition purposes, and if this division is required, how the arrangement
consideration should be allocated among the separate units of accounting. EITF
00-21 is effective for revenue arrangements entered into in quarters beginning
after June 15, 2003. If the deliverables in a revenue arrangement constitute
separate units of accounting according to the EITF's separation criteria, the
revenue-recognition policy must be determined for each identified unit. If the
arrangement is a single unit of accounting, the revenue-recognition policy must
be determined for the entire arrangement. Prior to the adoption of EITF 00-21,
revenues from the achievement of research and development milestones, which
represent the achievement of a significant step in the research and development
process, were recognized when and if the milestones were achieved.
Continuation of certain contracts and grants are dependent upon the Company
achieving specific contractual milestones; however, none of the payments
received to date are refundable regardless of the outcome of the project. Grant
revenue is recognized in accordance with the terms of the grant and as services
are performed, and generally equals the related research and development
expense.
STOCK-BASED COMPENSATION: The Company applies the intrinsic value-based method
of accounting prescribed by Accounting Principles Board, or 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. SFAS No. 123, "Accounting for Stock-Based
Compensation", or 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 No. 123, as
amended.
If the exercise price of employee or director stock options is less than the
fair value of the underlying stock on the grant date, the Company amortizes such
differences to expense over the vesting period of the options. Options or stock
awards issued to non-employees and consultants are recorded at fair value as
determined in accordance with SFAS 123 and EITF 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.
In December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 123R, "Share-Based
Payment", or SFAS 123R, 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. SFAS No. 123R addresses all forms of share-based
payment awards, including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. SFAS No. 123R
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, "Accounting for Stock Issued to Employees", that was
provided in Statement 123 as originally issued. Instead, under SFAS No. 123R
companies are required to record compensation expense for all share based
payment award transactions
F-15
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
measured at fair value. This statement is effective for quarters ending after
June 15, 2005. The Company is currently evaluating the impact of adopting this
statement
The following table illustrates the effect on net income (loss) and net income
(loss) per share as if the fair value-based method under SFAS 123 had been
applied.
- ------------------------------------------------------------------------------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------
As restated As restated
Net income (loss) $ 52,756 $ 25,693 $ (90,492)
Add stock-based employee compensation expense included in
reported net income (loss) 250 250 1,515
Deduct total stock-based employee compensation expense
determined under the fair value-based method for all
awards (26,027) (21,226) (19,616)
-----------------------------------------------
Pro forma $ 26,979 $ 4,717 $ (108,593)
===============================================
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share:
Basic $ 0.32 $ 0.16 $ (0.59)
Basic, pro forma 0.16 0.03 (0.70)
Diluted 0.31 0.15 (0.59)
Diluted, pro forma 0.16 0.03 (0.70)
- ------------------------------------------------------------------------------------------------------------------
The pro forma effects on net income (loss) and net income (loss) per common
share for 2004, 2003 and 2002 may not be representative of the pro forma effects
in future years.
The weighted-average fair value per share was $10.44, $7.27 and $4.07 for stock
options granted in 2004, 2003 and 2002, respectively. The company estimated the
fair values using the Black-Scholes option-pricing model based on the following
assumptions:
- --------------------------------------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Risk-free interest rate 3.05% 2.39% 2.02%
Expected stock price volatility 47.4% 52.5% 58%
Expected term until exercise (years) 3.70 3.50 2.89
Expected dividend yield 0% 0% 0%
EARNINGS PER SHARE: Basic earnings (loss) per common share is computed by
dividing net income (loss) by the weighted-average number of common shares
outstanding during the period. Diluted earnings per common share is computed by
dividing net income (loss) 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.
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss), which represents the
change in equity from non-owner sources, consists of net income (losses),
changes in currency translation adjustments and the change in net unrealized
gains (losses) on marketable securities classified as available for sale.
Comprehensive income (loss) is presented in the Consolidated Statements of
Stockholders' Equity.
F-16
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
CAPITALIZED SOFTWARE COSTS: Capitalized software costs are capitalized in
accordance with Statement of Position No. 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED AND OBTAINED FOR INTERNAL USE, are included in other
assets and are amortized over their estimated useful life of three years from
the date the systems are ready for their intended use.
ASSET RETIREMENT OBLIGATIONS: On January 1, 2003, the Company adopted SFAS No.
143, "Accounting for Asset Retirement Obligations", or SFAS 143. SFAS 143
addresses the financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS 143 applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal use of an asset. SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred. The fair value of the liability is added to the carrying
amount of the associated asset and is depreciated over the life of the asset.
The liability is accreted at the end of each period through charges to operating
expense. If the obligation is ultimately settled for an amount other than the
carrying amount of the liability, a gain or loss is recognized on settlement. In
connection with its adoption of SFAS 143, the Company recorded an asset
retirement liability of approximately $0.2 million relating to the Company's
obligation to remove certain leasehold improvements at its Warren, New Jersey
facility at the end of the lease-term. The Company did not recognize a
cumulative effect adjustment for this accounting change because the amount was
immaterial. At December 31, 2004 and 2003, the asset retirement liability was
approximately $0.2 million. Accretion and depreciation expense for both the
years ended December 31, 2004 and 2003 was immaterial.
NEW ACCOUNTING PRINCIPLES: Emerging Issues Task Force, or EITF, Issue No. 03-01,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," or EITF 03-01, was issued in February 2004. EITF 03-01 stipulates
disclosure requirements for investments with unrealized losses that have not
been recognized as other-than-temporary impairments. The provisions of EITF
03-01 are effective for fiscal years ending after December 15, 2003. We have
complied with the disclosure provisions of EITF 03-01. In September 2004, the
FASB staff issued two proposed FASB Staff Positions, or FSP: Proposed FSP EITF
Issue 03-1-a, which provides guidance for the application of paragraph 16 of
EITF Issue 03-1 to debt securities that are impaired because of interest rate
and/or sector spread increases, and Proposed FSP EITF Issue 03-1-b, which delays
the effective date of Issue 03-1 for debt securities that are impaired because
of interests rate and/or sector spread increases. We are currently monitoring
these developments to assess the potential impact on our financial position and
results of operations.
EITF Issue No. 03-6, "Participating Securities and the Two-Class Method Under
FASB Statement No. 128, Earnings Per Share." In April 2004, the EITF issued
Statement No. 03-6, "Participating Securities and the Two-Class Method Under
FASB Statement No. 128, Earnings Per Share." EITF 03-6 addresses a number of
questions regarding the computation of earnings per share by a company that has
issued securities other than common stock that contractually entitle the holder
to the right to participate in dividends when, and if, declared. The issue also
provides further guidance in applying the two-class method of calculating
earnings per share, clarifying the definition of a participating security and
how to apply the two-class method. EITF 03-6 was effective for fiscal periods
beginning after March 31, 2004 and was required to be retroactively applied. We
evaluated the terms of our convertible notes and debentures and determined that
none of these instruments qualified as participating securities under the
provisions of EITF 03-6. As a result, the adoption of EITF 03-6 had no impact on
the Company.
EITF Issue No. 02-14, "Whether an Investor Should Apply the Equity Method of
Accounting to Investments Other Than Common Stock," or EITF 02-14, is effective
in the fourth quarter of 2004. EITF 02-14 states that an investor should only
apply the equity method of accounting when it has investments in either common
stock or in-substance common stock. EITF 02-14 also provides characteristics to
be evaluated in determining whether an investment in other than common stock is
in-substance substantially similar to an investment in that entity's common
stock and thus, accounted for under the equity method. For investments that are
not common stock or in-substance common stock, but were accounted for under the
equity method, EITF 02-14 requires discontinued use of the equity method of
accounting prospectively for reporting periods beginning after September 15,
2004. Previously recognized equity method earnings and losses should not be
reversed.
Based on the above guidance, the Company concluded that its EntreMed preferred
stock investment, which had previously been written-down to zero under the
equity method of accounting, was not in-substance common stock as defined in
EITF 02-14 and therefore, discontinued use of the equity method of accounting
beginning on October 1, 2004. Prospectively, the Company will account for such
investment under the cost method since the preferred stock is not publicly
traded. This change does not impact the carrying value of the EntreMed preferred
stock investment and accordingly, did not have an impact on the Company's
consolidated financial statements.
(2) RESTATEMENT OF FINANCIAL STATEMENTS
Following a review in December 2004 of the Company's accounting treatment for
the convertible preferred shares and warrants the Company received in connection
with the December 31, 2002 litigation settlement and related agreements with
EntreMed, Inc. and the Children's Medical Center Corporation, or CMCC, it was
determined that an
F-17
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
adjustment to the Company's consolidated financial statements was required for
the years ended December 31, 2003 and 2002. The Company paid approximately $26.8
million in cash and acquired all related EntreMed thalidomide analog patents,
terminated the litigation and received preferred shares convertible into
16,750,000 shares of EntreMed common stock and warrants to purchase 7,000,000
shares of EntreMed common stock.
Based on what the Company believed was the appropriate accounting treatment
under generally accepted accounting principles, it wrote off the entire $26.8
million at December 31, 2002 which related to the convertible preferred shares,
the warrants and the litigation settlement, and did not recognize any gains or
losses on the warrants during 2003 and 2004. This accounting treatment was based
on multiple reasons including: (1) EntreMed's financial condition and its
continuing losses; (2) the fact that the Company included the warrants along
with the convertible preferred shares investment in applying the equity method
of accounting, under which it wrote off the entire investment in December 2002;
and (3) the Company's inability to place a reliable fair value on the warrants
given the significant number of shares underlying the warrants and, in its
opinion, the inability to convert the underlying shares into cash (even if the
warrants were to be net share settled) without significantly affecting
EntreMed's stock price.
Upon further review of the warrant terms, as well as the accounting treatment
prescribed under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", or SFAS 133, and related Derivative Implementation Group,
or DIG, interpretations, the Company has concluded that the warrants should be
accounted for as a derivative instrument and carried on the balance sheet at
fair value, with changes in fair value recorded through earnings.
In addition the Company reviewed the impairment of the investment in the
EntreMed preferred shares. The Company has concluded that the investment should
not have been written down as of the date of the transaction. Accordingly the
Company restored the investment of $4.4 million as of December 31, 2002 and
reduced the net loss by a like amount. Under the equity method of accounting,
the Company recorded its share of the EntreMed losses in 2003 until the
investment was written down to zero in the third quarter of 2003.
The Company has now restated its financial statements. The cumulative effect of
the restatement through December 31, 2003 is an increase in other assets of
$21.7 million and a decrease in accumulated deficit, of $21.7 million. Equity
losses in associated companies of $4.4 million were recorded for the year ended
December 31, 2003. Interest and other income increased by $16.6 million for the
year ended December 31, 2003 and litigation settlement and related agreements
expense decreased by $9.5 million for the year ended December 31, 2002.
Previously reported diluted earnings per share increased by $0.07 and $0.06 for
the years ended December 31, 2003 and 2002, respectively. The restatement did
not have any impact on previously reported total revenues, reported net cash
flows or 2003 operating loss.
The following is a summary of the impact of the Restatement on (i) the Company's
Consolidated Balance Sheet at December 31, 2003 and (ii) its Consolidated
Statement of Operations for the years ended December 31, 2003 and 2002. The
Company has not presented a summary of the restatement on the Consolidated
Statement of Cash Flows for any of the above-referenced years because there is
no net impact for any such year.
F-18
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
- ------------------------------------------------------------------------------------------------------
PREVIOUSLY
IN THOUSANDS, EXCEPT PER SHARE DATA REPORTED ADJUSTMENTS AS RESTATED
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003:
Consolidated Statement of Operations:
Interest and other income $ 21,795 $ 16,574 $ 38,369
Equity losses in associated companies -- 4,392 4,392
Income before income taxes 13,479 12,182 25,661
Income from continuing operations 12,761 12,182 24,943
Net income 13,511 12,182 25,693
Per share:
Income from continuing operations - Basic 0.08 0.07 0.15
Income from continuing operations - Diluted 0.07 0.07 0.14
Net income - Basic 0.08 0.08 0.16
Net income - Diluted 0.08 0.07 0.15
Consolidated Balance Sheet:
Other assets $ 32,506 $ 21,690 $ 54,196
Total assets 791,336 21,690 813,026
Accumulated deficit (308,856) 21,690 (287,166)
Total stockholders' equity 310,054 21,690 331,744
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002:
Consolidated Statement of Operations:
Litigation settlement and related agreements $ 32,212 $ (9,508) $ 22,704
Total expenses 259,875 (9,508) 250,367
Operating loss 124,129 (9,508) 114,621
Loss before income taxes (101,098) 9,508 (91,590)
Loss from continuing operations (101,000) 9,508 (91,492)
Net loss (100,000) 9,508 (90,492)
Per share:
Loss from continuing operations - Basic (0.65) 0.05 (0.60)
Loss from continuing operations - Diluted (0.65) 0.05 (0.60)
Net loss - Basic (0.65) 0.06 (0.59)
Net loss - Diluted (0.65) 0.06 (0.59)
- ------------------------------------------------------------------------------------------------------
Refer to Note 20 (unaudited) for the impact of the restatement on the 2004 and
2003 quarterly information. In addition, certain prior year amounts in Notes 1,
3, 4, 5, 9, 17, 19 and 20 have been restated to reflect the restatement
adjustments described above.
(3) ACQUISITIONS AND DISPOSITIONS
PENN T LIMITED: On October 21, 2004, the Company, through an indirect
wholly-owned subsidiary, acquired all of the outstanding shares of Penn T
Limited, or Penn T, a worldwide supplier of THALOMID(R), from a consortium of
private investors for a US dollar equivalency of approximately $117.4 million in
cash, net of cash acquired and including working capital adjustments and total
estimated transaction costs. The cash consideration was determined by the
parties in arms-length negotiations. As of December 31, 2004 approximately
$109.9 million of the total consideration had been paid utilizing existing cash
and cash
F-19
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
equivalents. The remaining $7.5 million, which relates to the working capital
adjustment payable to the former Penn T investors and additional transaction
costs, is expected to be paid in early 2005. Penn T was subsequently renamed
Celgene UK Manufacturing II, Limited, or CUK II. The results of CUK II after
October 21, 2004 are included in the consolidated financial statements.
Prior to the acquisition, Celgene and Penn T were parties to a manufacturing
agreement pursuant to which Penn T manufactured THALOMID(R) for Celgene. Through
a manufacturing agreement entered into in connection with the acquisition, the
Company is able to control manufacturing for THALOMID(R) worldwide and increases
its participation in the potential growth of THALOMID(R) opportunities in key
international markets. This acquisition was accounted for using the purchase
method of accounting for business combinations. The purchase price allocation
resulted in the following amounts being allocated to the assets received and
liabilities assumed at the acquisition date based upon their respective fair
values.
(THOUSANDS) October 21, 2004
-----------------------------------------------------------------------
Current assets $ 16,855
Intangible assets 99,841
Goodwill 35,812
-----------------------------------------------------------------------
Assets Acquired 152,508
-----------------------------------------------------------------------
Current liabilities 1,983
Deferred taxes 33,144
-----------------------------------------------------------------------
Liabilities assumed 35,127
-----------------------------------------------------------------------
Net assets acquired $117,381
=======================================================================
The initial purchase price allocations may be adjusted within one year of the
purchase date for changes in the estimated fair value of assets acquired and
liabilities assumed. The intangible assets consist of supply agreements that are
being amortized over their useful lives, which are primarily 13 years. The
resulting goodwill and intangible assets have been assigned to the Company's
Human Pharmaceuticals operating segment. The intangible assets consists
primarily of a product supply agreement that Penn T has with a third party.
The following unaudited pro forma information presents a summary of consolidated
results of operations for the years ended December 31, 2004 and 2003 as if the
acquisition of Penn T had occurred on January 1, 2004 and January 1, 2003,
respectively. The unaudited pro forma results of operations is presented for
illustrative purposes only and is not necessarily indicative of the operating
results that would have occurred if the transaction had been consummated at the
date indicated, nor is it necessarily indicative of future operating results of
the combined companies and should not be construed as representative of these
amounts for any future dates or periods.
-----------------------------------------------------------------------
Pro forma (UNAUDITED) 2004 2003
-----------------------------------------------------------------------
Total revenues $ 394,097 $ 283,162
Net income 56,661 25,673
Net income per diluted share $ 0.33 $ 0.15
-----------------------------------------------------------------------
The unaudited pro forma information for both years excludes adjustments relating
to the inventory step-up to fair value of $3.2 million and a receivable of $7.4
million attributable to the pre-acquisition period for inventory already shipped
for which the Company will now receive an additional payment. The unaudited pro
forma information for both years also includes adjustments to reflect the
amortization of intangible assets resulting from the acquisition.
F-20
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
ANTHROGENESIS ACQUISITION: On December 31, 2002, the Company completed its
acquisition of Anthrogenesis Corp. for an aggregate purchase price of
approximately $60.0 million. Anthrogenesis is a biotherapeutics company
developing processes for the recovery of stem cells from human placental tissue
following the completion of a successful full-term pregnancy that now operates
as Celgene Cellular Therapeutics, or CCT. In the transaction, the Company issued
1,455,381 shares of common stock on a pre October 2004 stock split basis valued
at $31.2 million and 1,247,203 stock options, also on a pre stock split basis
and warrants valued at $16.7 million in exchange for all the outstanding shares,
options and warrants of Anthrogenesis. The share conversion equated to an
exchange ratio of 0.4545 of a share of Celgene common stock for each share of
Anthrogenesis common stock outstanding. The Anthrogenesis stock options and
warrants were converted at the same exchange ratio. Also included in the
purchase price was an outstanding convertible loan of $8.5 million due to the
Company from Anthrogenesis, bearing interest at prime plus 2%, and $3.6 million
of acquisition related costs, which consisted of transaction fees for financial
advisors, attorneys, accountants and other related charges
The acquisition of Anthrogenesis was structured as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code and was accounted for using
the purchase method of accounting for business combinations. The Company's
Consolidated Financial Statements as of December 31, 2002 include the net assets
and liabilities of Anthrogenesis. In-process research and development activities
totaling approximately $55.7, were charged to operations at the acquisition
date.
The following unaudited pro forma information presents a summary of consolidated
results of operations for the year ended December 31, 2002 as if the acquisition
of Anthrogenesis had occurred on January 1, 2002. The unaudited pro forma net
loss and net loss per share amounts include a charge for in-process research and
development of approximately $55.7 million, which was expensed at the
acquisition date and also includes an adjustment to reflect amortization of
intangibles recorded in conjunction with the acquisition. The unaudited pro
forma results of operations is presented for illustrative purposes only and is
not necessarily indicative of the operating results that would have occurred if
the transaction had been consummated at the date indicated, nor is it
necessarily indicative of future operating results of the combined companies and
should not be construed as representative of these amounts for any future dates
or periods. Anthrogenesis' results of operations included in the following pro
forma financial information are derived from their unaudited financial
statements for the year ended December 31, 2002.
----------------------------------------------------------------
Pro forma (UNAUDITED) 2002
----------------------------------------------------------------
Total revenues $ 138,000
Net loss (108,505)
Net loss per share $ (0.70)
DISPOSITION OF CHIRAL INTERMEDIATES BUSINESS: In January 1998, the Company
completed the sale of its chiral intermediate business to Cambrex Corporation.
The Company received $7.5 million upon the closing of the transaction and is
entitled to future royalties, with a present value not exceeding $7.5 million
and certain minimum royalty payments due in 2000 through 2003. Included in the
transaction were the rights to Celgene's enzymatic technology for the production
of chirally pure intermediates for the pharmaceutical industry, including the
pipeline of third party products and the equipment and personnel associated with
the business. Pursuant to the minimum royalty provision of the agreement, the
Company received approximately $0.8 million and $1.0 million during 2003 and
2002, respectively.
F-21
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(4) EARNINGS PER SHARE (EPS)
- -------------------------------------------------------------------------------------------------------------
2004 2003 2002
- -------------------------------------------------------------------------------------------------------------
As restated As restated
INCOME (NUMERATOR):
Income (loss) from continuing operations $ 52,756 $ 24,943 $ (91,492)
Discontinued Operations - gain on sale of chiral assets -- 750 1,000
-------------------------------------
Net income (loss) $ 52,756 $ 25,693 $ (90,492)
=====================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DENOMINATOR):
Basic: 163,869 161,774 154,674
Effect of dilutive securities:
Options 8,531 8,740 --
Warrants 218 186 --
Restricted shares and other long-term incentives 237 96 --
-------------------------------------
Diluted: 172,855 170,796 154,674
=====================================
EARNINGS PER SHARE:
Income (loss) from continuing operations
Basic $ 0.32 $ 0.15 $ (0.60)
Diluted $ 0.31 $ 0.14 $ (0.60)
Discontinued Operations - gain on sale of chiral assets
Basic $ -- $ 0.01 $ 0.01
Diluted $ -- $ 0.01 $ 0.01
Net income (loss)
Basic $ 0.32 $ 0.16 $ (0.59)
Diluted $ 0.31 $ 0.15 $ (0.59)
- -------------------------------------------------------------------------------------------------------------
The assumed conversion or exercise of all potentially dilutive common shares is
not included in the diluted loss per share computation for 2002 since the
Company recognized a net loss for that period and including potentially dilutive
common shares in the diluted earnings per share computation when there is a net
loss will result in an anti-dilutive per share amount. The potential common
shares related to the convertible notes issued June 3, 2003 (see Note 10) were
anti-dilutive and were excluded from the diluted earnings per share computation
for the years 2004 and 2003. The total number of potential common shares
excluded from the diluted earnings per share computation because their inclusion
would have been anti-dilutive was 20,843,378, 21,128,720 and 22,092,542 in 2004,
2003 and 2002, respectively.
(5) LITIGATION SETTLEMENT AND RELATED AGREEMENTS
On December 31, 2002, the Company entered into a series of agreements with
EntreMed, Inc. and Children's Medical Center Corporation, or CMCC, terminating
ongoing litigation relating to patents for thalidomide analogs and directly
granting to the Company, an exclusive license issued by CMCC for the rights to
those patents. Under the terms of an asset purchase agreement with EntreMed, the
Company paid EntreMed $10.0 million for all thalidomide analog patents and
associated clinical data and records, and the termination of any litigation
surrounding those patents. Under the terms of a securities purchase agreement
with EntreMed, the Company acquired from EntreMed 3,350,000 shares of Series A
Convertible Preferred Stock and warrants to purchase an additional 7,000,000
common shares for an aggregate cash consideration of approximately $16.8
million. The Series A
F-22
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
Convertible Preferred Stock is convertible, at the option of the Company, into
an aggregate of 16,750,000 shares of common stock at an initial conversion price
of $1.00 per share provided, however, that the conversion price in effect from
time to time shall be subject to certain adjustments. Dividends are payable
prior and in preference to the declaration or payment of any dividend or
distribution to the holders of common stock. The Company shall have the right to
one vote for each share of Common Stock into which such share of Series A
Convertible Preferred Stock could then be converted and with respect to such
vote the Company shall have full voting rights and powers equal to the voting
rights and powers of the holders of shares of Common Stock. The Company
completed an assessment of the estimated realizable value of the investment.
After assessing the level of the Company's ownership interest in EntreMed, its
history of operating losses and the fact that EntreMed is a clinical-stage
biopharmaceutical company engaged primarily in research and development
activities with proposed products and research programs in the early stage of
clinical development, the entire amount of such Preferred Stock was written
down. As restated, the Company ascribed a value of $11.6 million to the
convertible preferred stock.
The Company signed an exclusive license agreement with CMCC that terminated any
existing thalidomide analog agreements between CMCC and EntreMed and directly
granted to Celgene an exclusive worldwide license for the analog patents. The
Company paid CMCC $2.5 million in December 2002 and $0.5 million in January 2004
under the agreement. Another $2.0 million is payable between 2005 and 2006. The
present value of these payments totaled $4.7 million and was expensed in 2002.
Additionally, the Company entered into a five year sponsored research agreement
with CMCC whereby the Company has committed $0.3 million per year in funding.
Additional payments are possible under the agreement depending on the successful
development and commercialization of thalidomide analogs.
Prior to the restatement, Celgene recorded a charge to earnings for the cost of
these agreements and related expenses of $32.2 million in 2002 including the
write-down of the EntreMed Convertible Preferred Stock and certain legal
expenses incurred in connection with the settlement.
The warrants have an exercise price of $1.50 per share, vest after six months
from the date of grant and expire after seven years from the date of grant. The
warrants also include a net settlement feature and as discussed in Note 2, it
was subsequently determined that they should be accounted for as a derivative.
The Company has ascribed a value of $5.1 million to the warrants as of December
31, 2002, which represents their fair value at such date.
F-23
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(6) MARKETABLE SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and estimated fair value of available-for-sale securities by major
security type and class of security at December 31, 2004 and 2003, was as
follows:
- ----------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2004 COST GAIN LOSS VALUE
- ----------------------------------------------------------------------------------------------------------
Government agencies mortgage obligations $ 166,959 $ 1,107 $ (904) $ 167,162
Government agency bonds and notes 798 -- (7) 791
Corporate debt securities 147,864 2,723 (650) 149,937
Auction rate notes 213,550 -- -- 213,550
Marketable equity securities 20,212 61,658 -- 81,870
-----------------------------------------------------------
$ 549,383 $ 65,488 $ (1,561) $ 613,310
===========================================================
- ----------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2003 COST GAIN LOSS VALUE
- ----------------------------------------------------------------------------------------------------------
Government agencies mortgage obligations $ 188,319 $ 1,053 $ (186) $ 189,186
Government agency bonds and notes 650 1 (5) 646
Auction rate notes 207,125 -- -- 207,125
Corporate debt securities 199,933 9,977 (228) 209,682
-----------------------------------------------------------
$ 596,027 $ 11,031 $ (419) $ 606,639
===========================================================
The fair value of available-for-sale securities with unrealized losses at
December 31, 2004 was as follows:
- ----------------------------------------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------- ------------------- -----
ESTIMATED GROSS ESTIMATED GROSS ESTIMATED GROSS
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DECEMBER 31, 2004 VALUE LOSS VALUE LOSS VALUE LOSS
- ----------------------------------------------------------------------------------------------------------------------
Government agencies mortgage
obligations $ 55,279 $ (648) $ 16,635 $ (256) $ 71,914 $ (904)
Government agency bonds
and notes 641 (7) 641 (7)
Corporate debt securities 26,595 (650) 26,595 (650)
-----------------------------------------------------------------------------------
$ 82,515 $ (1,305) $ 16,635 $ (256) $ 99,150 $ (1,561)
===================================================================================
Unrealized losses were due to changes in interest rates and are deemed to be
temporary.
F-24
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
Maturities of debt securities classified as available-for-sale were as follows
at December 31, 2004:
---------------------------------------------------------------------------
AMORTIZED FAIR
COST VALUE
---------------------------------------------------------------------------
Due within one year $ 288,320 $ 288,542
Due after one year through three years 111,063 112,424
Due after three years through five years 31,778 31,895
Due after five years through seven years 80,717 80,862
Due after seven years 17,293 17,717
---------------------------
$ 529,171 $ 531,440
===========================
(7) INVENTORY
Inventory at December 31, 2004 and 2003 consisted of the following:
---------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------
Raw materials $ 4,081 $ 3,009
Work in process 4,356 2,537
Finished goods 15,967 4,150
---------------------------
$ 24,404 $ 9,696
===========================
(8) PLANT AND EQUIPMENT
Plant and equipment at December 31, 2004 and 2003 consisted of the following:
----------------------------------------------------------------------------
2004 2003
----------------------------------------------------------------------------
Land $ 9,884 $ --
Buildings 15,474 --
Laboratory equipment and machinery 22,955 18,977
Leasehold improvements 13,659 11,688
Computer equipment 5,570 4,986
Furniture and fixtures 3,865 3,124
Leased equipment 696 696
Construction in progress 63 1,017
------------------------
72,166 40,488
Less: accumulated depreciation and
Amortization 24,847 17,942
------------------------
$47,319 $22,546
========================
In November 2004, the Company purchased 45 acres of land and several buildings
located in Summit, New Jersey at a cost of approximately $25.0 million. The
purchase of this site enables the Company to consolidate four New Jersey
locations into one corporate headquarters and provide the room to accommodate
the Company's expected growth.
F-25
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(9) OTHER FINANCIAL INFORMATION
Accrued expenses at December 31, 2004 and 2003 consisted of the following:
---------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------
Professional and consulting fees $ 2,026 $ 2,451
Accrued compensation 15,783 18,383
Accrued interest, royalties and license fees 12,840 9,470
Accrued sales returns 9,600 8,368
Accrued rebates and chargebacks 9,255 5,089
Accrued acquisition related costs 8,010 --
Accrued clinical trial costs 7,440 9,182
Accrued insurance and taxes 1,882 1,227
Other 1,698 1,106
----------------------
$68,534 $55,276
======================
Other assets at December 31, 2004 and 2003 consisted of the following:
---------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------
As restated
EntreMed warrants $19,768 $21,690
Pharmion convertible note -- 12,000
Debt issuance costs 8,347 10,790
Long-term investments 7,000 --
Capitalized software costs, net 6,420 4,490
Long-term deposits 1,495 2,293
Patent rights and licensed technology, net 669 765
Other 1,569 2,168
----------------------
$45,268 $54,196
======================
Included in interest and other income are unrealized gains (losses) relating to
the EntreMed warrants of $(1.9) million and $16.6 million for the years ended
December 31, 2004 and 2003, respectively. Equity in losses of associated
companies was $4.4 million in 2003, which represented the company's share of
EntreMed losses. As of December 31, 2003, the EntreMed convertible preferred
stock investment had a value of zero.
(10) CONVERTIBLE DEBT
In June 2003, the Company issued an aggregate principal amount of $400.0 million
of unsecured convertible notes to qualified institutional investors. The 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 of $16.15, after adjusting prices for the two-for-one
stock split effected on October 22, 2004, on May 28, 2003. The debt issuance
costs related to these convertible notes, which totaled approximately $12.2
million, are 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. In addition, the
noteholders 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 of
the notes 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
F-26
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
indenture governing the notes, the Company may not merge or transfer
substantially all of its assets, as defined, unless certain conditions are met.
At December 31, 2004, the fair value of the Company's convertible notes exceeded
the carrying value of $400.0 million by approximately $117.0 million.
During 2002, the remaining notes outstanding related to the Company's January
1999 and July 1999 convertible debt issuances, which had an aggregate carrying
value of $11.7 million were converted into 3,729,098 shares of the Company's
common stock.
(11) GOODWILL AND INTANGIBLE ASSETS
GOODWILL: At December 31, 2004, goodwill was approximately $41.3 million of
which approximately $35.8 million related to the October 21, 2004 acquisition of
Penn T Limited, $2.5 million resulted from foreign currency translation of the
Penn T related goodwill amounts and $3.0 million related to the December 31,
2002 acquisition of Anthrogenesis Corp. At December 31, 2003, goodwill was
approximately $3.5 million all of which related to the December 31, 2002
acquisition of Anthrogenesis Corp.
INTANGIBLE ASSETS: The Company's intangible assets by major asset class at
December 31, 2004 and 2003 were as follows:
- ---------------------------------------------------------------------------------------------------------------------------
2004 2003
- ------------------------------------------------------------------------------ ----------------------------------------
Gross Cumulative Intangible Gross Intangible
carrying Accumulated translation assets, carrying Accumulated assets,
value amortization Adjustment net value amortization net
- ---------------------------------------------------------------------------------------------------------------------------
Penn T
ACQUISITION:
Supply
agreements $ 99,841 $ (75) $ 6,802 $106,568 $ -- $ -- $ --
Anthrogenesis
ACQUISITION:
Supplier
relationships 710 (284) -- 426 710 (142) 568
Customer
lists 1,700 (227) -- 1,473 1,700 (113) 1,587
Technology 609 (121) -- 488 600 (60) 540
- --------------------------------------------------------------------------------------------------------------------------
Total $102,860 $ (707) $ 6,802 $108,955 $ 3,010 $ (315) $ 2,695
==========================================================================================================================
Amortization of intangible assets for the year ended December 31, 2004 was
approximately $0.4 million. 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 $8.9 million for the years 2005
and 2006, $8.6 million for $2007 and $8.4 million for 2008 and 2009.
Goodwill and intangible assets from the Penn T and Anthrogenesis acquisitions
have been allocated to the Company's Human Pharmaceuticals and Stem Cell Therapy
segments, respectively.
F-27
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(12) RELATED PARTY TRANSACTIONS
Prior to the Company's acquisition of Anthrogenesis on December 31, 2002, two
senior executives of the Company served on the Board of Directors of
Anthrogenesis. In December 2001, the Company entered into a development
agreement with Anthrogenesis for a period of one year which required
Anthrogenesis to perform certain development work on several of the Company's
compounds. The Company recorded a development fee of $0.3 million, which was
amortized over the term of the agreement.
(13) STOCKHOLDERS' EQUITY
PREFERRED STOCK: The Board of Directors is authorized to issue, at any time,
without further stockholder approval, up to 5,000,000 shares of preferred stock,
and to determine the price, rights, privileges, and preferences of such shares.
COMMON STOCK: During 2004, the Company initiated a two-for-one common stock
split effected on October 22, 2004, which increased the number of authorized
shares of common stock to 275,000,000 with a par value of $.01 per share, of
which 165,068,634 shares were outstanding at December 31, 2004.
TREASURY STOCK: During 2004, the Company repurchased 10,564 shares of its common
stock adjusted for the two-for-one stock split at a cost of $0.3 million.
F-28
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
A summary of changes in common stock issued and treasury stock is presented
below:
- ------------------------------------------------------------------------------------------------------------------
Common Stock
Balance December 31, Common Stock in Treasury
- ------------------------------------------------------------------------------------------------------------------
2001 75,574,785 (282)
- ------------------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants 1,246,600
Issuance of common stock for employee
benefit plans 35,398 1,160
Purchase of treasury stock (878)
Conversion of long-term convertible notes 1,864,549
Shares issued pursuant to Anthrogenesis
Acquisition 1,455,381
- ------------------------------------------------------------------------------------------------------------------
2002 80,176,713 --
- ------------------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants 1,105,074
Issuance of common stock for employee
benefit plans 129,268
- ------------------------------------------------------------------------------------------------------------------
2003 81,411,055 --
- ------------------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants 1,300,297
Issuance of common stock for employee
benefit plans 98,215
Purchase of treasury stock (5,282)
Issuance of common stock related to 2:1 stock split 82,269,631 (5,282)
- ------------------------------------------------------------------------------------------------------------------
2004 165,079,198 (10,564)
==================================================================================================================
RIGHTS PLAN: During 1996, the Company adopted a shareholder rights plan, or
Rights Plan. The Rights Plan involves the distribution of one Right as a
dividend on each outstanding share of the Company's common stock to each holder
of record on September 26, 1996. Each Right shall entitle the holder to purchase
one-tenth of a share of common stock. The Rights trade in tandem with the common
stock until, and are exercisable upon, certain triggering events, and the
exercise price is based on the estimated long-term value of the Company's common
stock. In certain circumstances, the Rights Plan permits the holders to purchase
shares of the Company's common stock at a discounted rate. The Company's Board
of Directors retains the right at all times prior to acquisition of 15% of the
Company's voting common stock by an acquiror, to discontinue the Rights Plan
through the redemption of all rights or to amend the Rights Plan in any respect.
On February 17, 2000, the Company's Board of Directors approved an amendment to
the Rights Plan changing the initial exercise price thereunder from $100.00 per
Right (as defined in the original Rights Plan agreement) to $700.00 per Right
and extending the final expiration date of the Rights Plan to February 17, 2010.
On August 13, 2003, the Rights Plan was amended to permit a qualified
institutional investor to beneficially own up to 17% of the Company's common
stock outstanding without being deemed an "acquiring person," if such
institutional investor meets certain requirements.
(14) STOCK-BASED COMPENSATION
STOCK OPTIONS AND RESTRICTED STOCK AWARDS: The Company has two equity incentive
plans, or the Incentive Plans, that provide for the granting of options,
restricted stock awards, stock appreciation rights, performance awards and other
stock-based awards to employees and officers of the Company to purchase not more
than an aggregate of 8,400,000 shares of common stock under the 1992 plan and
25,000,000 shares of
F-29
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
common stock under the 1998 plan, as amended, subject to adjustment under
certain circumstances. The Management Compensation and Development Committee of
the Board of Directors, or the Compensation Committee, determines the type,
amount and terms, including vesting, of any awards made under the Incentive
Plans. The 1992 Plan terminated in 2002 and the 1998 Plan will terminate in
2008.
With respect to options granted under the Incentive Plans, the exercise price
may not be less than the market price of the common stock on the date of grant.
In general, options granted under the Incentive Plans vest over periods ranging
from immediate vesting to four-year vesting and expire ten years from the date
of grant, subject to earlier expiration in case of termination of employment.
The vesting period for options and restricted stock awards granted under the
Plans is subject to certain acceleration provisions if a change in control, as
defined in the Plans, occurs.
As a result of the Signal acquisition, the Company assumed the former Signal
stock option plans. The options issued pursuant to the former Signal plans
converted into Celgene options upon consummation of the transaction at a
..1257-for-1 exchange ratio, on a pre-October 2004 stock split basis. No
additional options will be granted from the former Signal plans.
As a result of the acquisition of Anthrogenesis, the Company assumed the former
Anthrogenesis Qualified Employee Incentive Stock Option Plan and the
Anthrogenesis Non-Qualified Recruiting and Retention Stock Option Plan. Options
granted under the Anthrogenesis plans prior to Celgene's acquisition of
Anthrogenesis generally vested immediately and expire ten years from the date of
grant. The Anthrogenesis options converted into Celgene options at an exchange
ratio of .4545 on a pre-October 2004 stock split basis. No future awards will be
granted under the Non-Qualified Plan. The Qualified Plan authorizes the award of
incentive stock options, which are stock options that qualify for special
federal income tax treatment. The exercise price of any stock options granted
under the Qualified Plan may not be less than the fair market value of the
common stock on the date of grant. In general, options granted under the
Qualified Plan vest evenly over a four-year period and expire ten years from the
date of grant, subject to earlier expiration in case of termination of
employment. The vesting period is subject to certain acceleration provisions if
a change in control occurs. No award will be granted under the Qualified Plan on
or after December 31, 2008.
Stock options granted to executives at the vice-president level and above, after
September 18, 2000, contain a reload feature which provides that if (1) the
optionee exercises all or any portion of the stock option (a) at least six
months prior to the expiration of the stock option, (b) while employed by the
Company and (c) prior to the expiration date of the 1998 Incentive Plan and (2)
the optionee pays the exercise price for the portion of the stock option
exercised or pays applicable withholding taxes by using common stock owned by
the optionee for at least six months prior to the date of exercise, the optionee
shall be granted a new stock option under the 1998 Incentive Plan on the date
all or any portion of the stock option is exercised to purchase the number of
shares of common stock equal to the number of shares of common stock exchanged
by the optionee to exercise the stock option or to pay withholding taxes
thereon. The reload stock option will be exercisable on the same terms and
conditions as apply to the original stock option except that (x) the reload
stock option will become exercisable in full on the day which is six months
after the date the original stock option is exercised, (y) the exercise price
shall be the fair market value (as defined in the 1998 Incentive Plan) of the
common stock on the date the reload stock option is granted and (z) the
expiration of the reload stock option will be the date of expiration of the
original stock option. An optionee may not reload the reload stock option unless
otherwise permitted by the Company's Compensation Committee. As of December 31,
2004, the Company has issued 5,438,150 stock options to executives that contain
the reload features noted above, of which 5,059,526 are still outstanding.
In June 1995, the stockholders of the Company approved the 1995 Non-Employee
Directors' Incentive Plan, which, as amended, provides for the granting of
non-qualified stock options to purchase an aggregate of not more than 1,800,000
shares of common stock (subject to adjustment under certain circumstances) to
directors
F-30
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
of the Company who are not officers or employees of the Company, or Non-Employee
Directors. Each new Non-Employee Director, upon the date of election or
appointment, receives an option to purchase 20,000 shares of common stock, which
vest in four equal annual installments commencing on the first anniversary of
the date of grant. Additionally, upon the date of each annual meeting of
stockholders, each continuing Non-Employee Director receives an option to
purchase 10,000 shares of common stock (or a pro rata portion thereof for
service less than one year), which vest in full on the date of the first annual
meeting of stockholders held following the date of grant. As amended in 2003,
continuing Non-Employee Directors receive quarterly grants of 2,500 options
aggregating 10,000 options annually, instead of receiving one annual grant of
10,000 options and vesting occurs one year from the date of grant instead of on
the date of the first annual meeting of stockholders held following the date of
grant. The 1995 Non-Employee Directors' Incentive Plan also provides for a
discretionary grant upon the date of each annual meeting of an additional option
to purchase up to 5,000 shares to a non-employee director who serves as a member
(but not a chairman) of a committee of the Board of Directors and up to 10,000
shares to a non-employee director who serves as the chairman of a committee of
the Board of Directors. All options are granted at an exercise price that equals
the fair market value of the Company's common stock at the grant date and expire
ten years after the date of grant. This plan terminates in 2005.
The following table summarizes the stock option activity for the aforementioned
Plans:
- ----------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING
--------------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE EXERCISE
Balance December 31, FOR GRANT SHARES PRICE PER SHARE
- ----------------------------------------------------------------------------------------------------------------
2001 3,877,934 7,296,928 $22.80
- ----------------------------------------------------------------------------------------------------------------
Expired (73,706) --- ---
Granted (3,204,884) 3,204,884 21.13
Exercised --- (279,117) 5.58
Cancelled 423,627 (423,627) 30.19
Repurchases 721 --- ---
Assumed on acquisition 137,031 1,030,364 11.37
- ----------------------------------------------------------------------------------------------------------------
2002 1,160,723 10,829,432 $21.37
- ----------------------------------------------------------------------------------------------------------------
Authorized 4,000,000 --- ---
Expired (308,857) --- ---
Granted (2,424,027) 2,424,027 36.60
Exercised --- (1,041,618) 10.69
Cancelled 172,826 (200,092) 26.78
- ----------------------------------------------------------------------------------------------------------------
2003 2,600,665 12,011,749 $25.28
- ----------------------------------------------------------------------------------------------------------------
Stock Split Impact on 2003 2,600,665 11,324,297 ---
Granted (4,073,768) 4,073,768 27.36
Exercised --- (1,300,297) 7.99
Cancelled 793,837 (844,799) 19.27
- ----------------------------------------------------------------------------------------------------------------
2004 1,921,399 25,264,718 $15.15
================================================================================================================
F-31
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The following table summarizes information concerning options outstanding under
the Incentive Plans at December 31, 2004:
- ------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ --------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE REMAINING NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING PRICE TERM (YRS.) EXERCISABLE PRICE
- ------------------------------------------------------------------------------------------------------------------------
$ 0.07 - 1.75 953,542 $ 1.11 3.0 953,542 $ 1.11
1.76 - 3.00 3,664,840 2.60 3.5 3,664,840 2.60
3.01 - 12.00 4,752,642 8.72 7.2 4,633,542 8.66
12.01 - 15.00 5,401,240 12.99 6.2 5,139,878 13.01
15.01 - 24.75 5,117,064 19.62 8.4 5,007,339 19.60
24.76 - 35.00 5,375,390 29.78 8.0 5,000,240 29.80
----------------------------------------------------------------------------------------
25,264,718 $ 15.15 6.7 24,399,381 $ 14.95
========================================================================================
The Company recorded compensation expense of $1.3 million in 2002 related to
options granted under the former Signal plans at exercise prices below the
market price of the underlying stock at the date of grant.
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. The Company recorded compensation
expense relating to these restricted stock awards of $0.3 million during each of
2004, 2003 and 2002, which was classified as selling, general and administrative
expenses.
Former non-employee directors of Signal, who entered into consulting agreements
with Celgene effective August 31, 2000, held unvested stock options to purchase
an aggregate of 72,914 shares of the Company's common stock. As a result, the
Company recorded compensation expense based on the fair value of such options,
which is being recognized over the remaining vesting period for such options.
During 2004, 2003 and 2002 the Company recorded compensation expense relating to
stock, stock options or warrants issued to consultants, advisors or financial
institutions of $0.1 million, $0.5 million and $0.2 million, respectively.
WARRANTS: In connection with its acquisition of Anthrogenesis, the Company
assumed the Anthrogenesis warrants outstanding, which were converted into
warrants to purchase 433,678 shares of the Company's common stock. Anthrogenesis
had issued warrants to investors at exercise prices equivalent to the per share
price of their investment. As of December 31, 2004, Celgene had 212,042 warrants
outstanding to acquire an equivalent number of shares of Celgene common stock at
an average exercise price of $5.90 per warrant.
In connection with the placement of the Series B Convertible Preferred Stock in
June 1997, the Company issued warrants to purchase 3,115,380 shares of common
stock at an exercise price of $1.250 per share with a term of four years from
the issuance date, which ended on June 1, 2002. In May 2002, the remaining
1,935,386 warrants were exercised and the equivalent number of common shares
were issued. As of December 31, 2002, there were no warrants outstanding.
F-32
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(15) EMPLOYEE BENEFIT PLANS
The Company sponsors an investment savings plan, which qualifies under Section
401(k) of the Internal Revenue Code, as amended. The Company's contributions to
the savings plan are discretionary and have historically been made in the form
of the Company's common stock. Such contributions are based on specified
percentages of employee contributions and aggregated a total expense charged to
operations of $3.5 million in 2004, $4.2 million in 2003 and $2.9 million in
2002.
During 2000, the Company's Board of Directors approved a deferred compensation
plan effective September 1, 2000. Eligible participants, which include certain
top-level executives of the Company as specified by the plan, can elect to defer
up to 25% of the participant's base salary, 100% of cash bonuses and restricted
stock and stock options gains (both subject to a minimum deferral of 50% of each
award of restricted stock or stock option gain approved by the Committee for
deferral). Company contributions to the deferred compensation plan represent a
100% match of the participant's deferral up to a specified percentage (ranging
from 10% to 25%, depending on the employee's position as specified in the plan)
of the participant's base salary. The Company recorded expense of $0.8 million,
$0.6 million and $0.3 million associated with the matching of the deferral of
compensation in 2004, 2003 and 2002, respectively. All amounts are 100% vested
at all times, except with respect to restricted stock, which will not be vested
until the date the applicable restrictions lapse. At December 31, 2004 and 2003,
the Company had a deferred compensation liability included in other non-current
liabilities in the consolidated balance sheets of approximately $8.8 million and
$5.5 million, respectively, which included the participant's elected deferral of
salaries and bonuses, the Company's matching contribution and earnings on
deferred amounts as of that date. The plan provides participants eight
investment options for amounts they elect to defer. Such options include a
combination of funds that offer the investor the option to spread their risk
across a diverse group of investments. These investment choices include an
equity and equity index fund, a bond fund, a fund that is balanced between
equities and bonds, a fund that invests worldwide, a growth fund and a fund that
invests in mid to large cap companies and seeks capital appreciation.
In 2003, the Company adopted a Long-Term Incentive Plan, or 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, or the 2005 Plan. The 2004 performance cycle began on January
1, 2004 and will end on December 31, 2006, or 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 for
the 2005 Plan and 150% level for the 2006 Plan are $6.1 million and $4.9 million
for the 2005 Plan and 2006 Plan, respectively. 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. For the years ended December 31, 2004
and 2003, the Company recognized expense related to the 2005 Plan and 2006 Plan
of $3.4 million and $0.5 million, respectively.
In February 2005, the Company adopted the 2007 performance cycle, or the 2007
Plan, which begins on January 1, 2005 and will end on December 31, 2007. Payouts
may be in the range of 0% to 200% of the participant's salary and the maximum
potential payout, assuming objectives are achieved at the 200% level for the
2007 Plan is $7.1 million.
The American Jobs Creation Act of 2004, which added new Section 409A to the
Internal Revenue Code, changed the income tax treatment and impacts the design
and administration of certain plans that provide for the deferral of
compensation, such as the Company's 2000 deferred compensation plan. In
February, 2005, the Company's Board of Directors adopted the Celgene Corporation
2005 Deferred Compensation Plan, effective as of January 1, 2005, which will
operate as the Company's ongoing deferred compensation plan and which is
intended to comply with Section 409A. The terms of the 2005 deferred
compensation plan are substantially similar to the terms of the 2000 deferred
compensation plan, except that the timing of deferral elections and distribution
events were modified to comply with the new rules. The Company's Board of
Directors also froze the 2000 deferred compensation plan, effective as of
December 31, 2004, so that no additional contributions or deferrals can be made
to that plan. Accrued benefits under the frozen plan will continue to be
governed by the terms of the frozen plan under the tax laws in effect prior to
the enactment of Section 409A.
F-33
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(16) SPONSORED RESEARCH, LICENSE AND OTHER AGREEMENTS
GELCLAIRTM CO-PROMOTION AGREEMENT: In October 2002, the Company entered into an
agreement with Cell Pathways, Inc. for the co-promotion of GELCLAIRTM, primarily
in the U.S. oncology market. Subsequently, on June 12, 2003, the Company entered
into an agreement with OSI Pharmaceuticals Inc., which acquired Cell Pathways,
Inc. in June 2003, to terminate the aforementioned agreement. The effective date
of the termination agreement is July 1, 2003 and, under that agreement, the
Company received $3.0 million in July 2003, upon the transfer of promotional
materials as specified in the agreement, and received an additional $3.0 million
on July 1, 2004 based on the Company's successful completion of certain
transitional services through December 31, 2003, as defined in the agreement.
The aggregate revenue of $6.0 million was recognized as collaborative agreement
revenue on a straight-line basis over the six-month service period ended
December 31, 2003.
PHARMION: In November 2001, the Company entered into a license agreement with
Pharmion Corporation and Pharmion GmbH, or Pharmion, in which the Company
granted an exclusive royalty-bearing license for its intellectual property
covering thalidomide and S.T.E.P.S.(R) in all countries outside of North
America, Japan, China, Taiwan and Korea in exchange for licensing payments and
upon regulatory approvals royalties based on commercial sales. The agreement
terminates upon the tenth anniversary of the regulatory approval of thalidomide
in the United Kingdom and pursuant to the agreement, the Company is entitled to
receive $0.3 million on a quarterly basis beginning in December 2001, until the
regulatory approval in the United Kingdom is received. In April 2003, the
Company entered into an amendment to the aforementioned agreement whereby
Pharmion has agreed to provide the Company an aggregate of $8.0 million in
research funding for the further clinical development of THALOMID(R) during the
period commencing on the date of the amendment and ending December 31, 2005. The
research funding consists of three installments of $1.0 million each, payable
upon execution of the agreement, September 30, 2003 and December 31, 2003, four
quarterly installments of approximately $0.8 million each payable in 2004 and
four quarterly installments of $0.5 million each payable in 2005. The Company
received four installments totaling $3.0 million in 2004 and three installments
totaling $3.0 million in 2003, which was recognized as collaborative agreement
revenue.
In April 2003, the Company entered into a Securities Purchase Agreement with
Pharmion whereby Celgene purchased for $12.0 million a Senior Convertible
Promissory Note, or the Note, with a principal amount of $12.0 million, and a
warrant with a five year term to purchase up to 363,636 shares of Pharmion's
common stock at a purchase price of $11.00 per share, adjusted for Pharmion's
four-for-one reverse stock split. The Note had a term of five years with an
annual interest rate of 6% compounded semi-annually. The Note had a conversion
price of $11.00 per share of Common Stock and was automatically convertible into
common stock under certain conditions. The Note was classified under "Other
Assets" in the Company's consolidated balance sheet at December 31, 2003. In
March 2004, the Company converted the $12.0 million Pharmion Senior Convertible
Promissory Note with accrued interest of approximately $0.7 million into
1,150,511 shares of Pharmion common stock. 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 December 31,
2004, the Company held 1,939,600 shares of Pharmion common stock which had a
fair value of $81.9 million and was classified as Marketable Securities
Available for Sale. The related unrealized gain of approximately $61.7 million
was included in Accumulated Other Comprehensive Income in the Stockholders'
Equity section of the Consolidated Balance Sheet.
F-34
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
In December 2004, following the acquisition of Penn T, the Company revised the
product supply agreement with Pharmion (which was acquired in the Penn T
acquisition). Under the modified agreement, Pharmion paid us a one-time payment
of $77.0 million in return for a reduction in their total product supply
purchase price, from 28.0 percent of Pharmion's thalidomide net sales, including
cost of goods to 15.5 percent of net sales. The collaboration also entails
Pharmion paying us an additional $8.0 million over the next three years to
support the two companies' existing thalidomide research and development efforts
and a one-time payment of $3.0 million for granting Pharmion license rights to
develop and market thalidomide in three additional Asian territories (Hong Kong,
Korea and Taiwan), as well as eliminating termination rights held by Celgene
tied to the regulatory approval of thalidomide in Europe in November 2006. The
Company recorded deferred revenue of $80 million related to the payments
received to date. Revenue will be recognized over the estimated supply agreement
period of 13 years on a straight line basis.
NOVARTIS PHARMA AG: In April 2000, the Company granted Novartis Pharma AG an
exclusive worldwide license to develop and market d-methylphenidate (d-MPH), a
chirally pure version of RITALIN(R). The Company also granted Novartis rights to
all its related intellectual property and patents, including new formulations of
the currently marketed RITALIN(R). In November 2001, the Company received FDA
approval to market d-MPH that entitled the Company to receive from Novartis
royalties on the entire family of RITALIN(R) drugs.
In December 2000, the Company signed a collaborative research and license
agreement with Novartis for joint research of selective estrogen receptor
modulator compounds, or SERMs, for the treatment and prevention of osteoporosis.
The Company received a nonrefundable, upfront payment of $10.0 million and may
be entitled to receive additional milestone payments for specific preclinical,
clinical and regulatory endpoints, as well as royalties upon commercialization
of products receiving FDA marketing approval. The upfront payment was amortized
over the two-year research period. The Company incurred costs of approximately
$0.4 million and $1.8 million in 2003 and 2002, respectively, related to this
agreement and extension.
SERONO: In late 2004, the Company assumed co-exclusive rights with Serono SA to
discover and develop therapeutics that modulate the NFkB pathway utilizing
technology and know-how previously licensed to Serono SA. Celgene made a
one-time payment of $6 million to Serono SA, which was recorded as research and
development expense since this relates to undeveloped technology, and will make
milestone and royalty payments on the sales on any resulting products. Serono SA
will have reciprocal milestone payment and royalty obligations to Celgene for
any products Serono SA discovers, develops and commercializes utilizing the
technology and know-how. Celgene's research group has significant expertise in
NFkB biology as well as considerable intellectual property in this area.
S.T.E.P.S. LICENSE AGREEMENTS: In late 2004, the Company entered into an
agreement providing manufacturers of isotretinoin (Acutane(R)) with a
non-exclusive license to its patent portfolio directed to methods for safely
delivering isotretinoin (Acutane(R)) in potentially high-risk patient
populations in exchange for $0.5 million. The manufacturers of isotretinoin have
licensed these patents with the intention of implementing a new pregnancy risk
management system to safely deliver isotretinoin in potentially high-risk
patient populations. The Company is entitled to future royalties under these
agreements.
F-35
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(17) INCOME TAXES
The provision/(benefit) for taxes on income from continuing operations is as
follows:
- -------------------------------------------------------------------------------------------------------------
2004 2003 2002
- -------------------------------------------------------------------------------------------------------------
United States:
Taxes currently payable:
Federal $ 6,429
State and local $ 4,067 $ 718 $ (98)
- -------------------------------------------------------------------------------------------------------------
Total U.S. tax provision $ 10,496 $ 718 $ (98)
- -------------------------------------------------------------------------------------------------------------
International:
Taxes currently payable $ 23,486
Deferred income taxes $(23,567)
- -------------------------------------------------------------------------------------------------------------
Total international tax provision $ (81) $ -- $ --
- -------------------------------------------------------------------------------------------------------------
Total provision $ 10,415 $ 718 $ (98)
=============================================================================================================
At December 31, 2004, 2003 and 2002 the tax effects of temporary differences
that give rise to deferred tax assets were as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
AS RESTATED AS RESTATED
----------- -----------
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ ----------- ------ -----------
Federal and state net operating loss
carryforwards $ 53,477 $ -- $ 141,379 $ -- $ 143,720 $ --
Prepaid/deferred items 29,863 -- -- -- -- --
Deferred Revenue 24,174 -- -- -- -- --
Capitalized research expenses 8,971 -- 16,774 -- 7,012 --
Research and experimentation tax 17,431 -- 9,154 -- -- --
Deferred Revenue -- -- -- -- -- --
credit carryforwards -- -- -- -- 7,686 --
Plant and equipment, principally due 2,307 (295) 1,524 -- 1,880 --
to differences in depreciation
Inventory 1,362 (928) -- -- -- --
Other Assets -- (2,230) -- -- -- --
Intangibles 3,182 (29,761) 5,615 -- 5,615 --
Accrued and other expenses 14,590 6,686 -- 4,802 --
Unrealized losses/(gains) on securities -- (33,385) 4,188 (8,893) 6,686 (3,862)
- ---------------------------------------------------------------------------------------------------------------------------------
Subtotal 155,357 (66,599) 185,320 (8,893) 177,401 (3,862)
Valuation allowance (75,510) -- (176,427) -- (173,539) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Deferred Taxes $ 79,847 $ (66,599) $ 8,893 $ (8,893) $ 3,862 $ (3,862)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Deferred Tax Asset $ 13,248 $ -- $ -- $ -- $ -- $ --
=================================================================================================================================
The Company restated its results for 2003 and 2002. The effect of this
restatement was to record a deferred tax liability of $ 8.9 million and $3.9
million, respectively. The restatement had no tax impact on the 2003 and 2002
results of operations.
F-36
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
Recent legislation in certain states has placed a temporary suspension on the
full usage of state net operating losses to offset state income.
Reconciliation of the U.S. statutory income tax rate to our effective tax rate
for continuing operations is as follows:
- -------------------------------------------------------------------------------
PERCENTAGES 2004 2003 2002
- -------------------------------------------------------------------------------
US statutory rate 35.0% 35.0% 35.0%
Earnings taxed at other than US statutory rate 50.5 -- --
State taxes, net of federal benefit 4.3 3.3 0.6
Other 1.7 -- --
Change in valuation allowance (75.0) (35.5) (35.5)
- -------------------------------------------------------------------------------
Effective income tax rate 16.5% 2.8% 0.1%
===============================================================================
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. At December 31,
2004, the Company had federal net operating loss carryforwards of approximately
$122.2 million and combined state net operating loss carryforwards of
approximately $ 178.2 million that will expire in the years 2005 through 2023.
The Company also has research and experimentation credit carryforwards of
approximately $17.4 million that expire in the years 2005 through 2023. Ultimate
utilization/availability of such net operating losses and credits may be
curtailed if a significant change in ownership occurs. Signal and Anthrogenesis
experienced an ownership change, as that term is defined in section 382 of the
Internal Revenue Code, when acquired by Celgene, as such, there is an annual
limitation on the use of these net operating losses in the amount of
approximately $11.6 million and $3.4 million respectively. Approximately $8.1
million of deferred tax assets acquired in the Anthrogenesis acquisition at
December 31, 2002 consisted primarily of net operating losses; as such there may
be an annual limitation on the Company's ability to utilize the acquired net
operating losses in the future. Upon realization of the Anthrogenesis acquired
tax assets, the Company will credit the benefit to the related acquired goodwill
and other intangibles.
The deferred tax asset related to the Federal and State net operating loss
carryforwards relates to a tax deduction attributable to stock options. The
Company will increase paid in capital if these benefits are realized for tax
purposes. The Company realized stock option deduction benefits in 2004, 2003,
and 2002 for income tax purposes and has increased paid in capital in the amount
of approximately $14.2 million, $0.8 million, and $0.1 million respectively.
Included in other comprehensive income is an unrealized gain on marketable
equity securities of $61.7 million with a corresponding deferred tax liability
of $25.3 million offset by a deferred tax asset of $25.3 million.
(18) COMMITMENTS AND CONTINGENCIES
LEASES: The Company leases office and research facilities under several
operating lease agreements. The minimum annual rents may be subject to specified
annual rental increases. At December 31, 2004, the non-cancelable lease terms
for the operating leases expire at various dates between 2005 and 2012 and each
agreement includes renewal options ranging from one or two additional three or
five-year terms. In general, the Company is also required to reimburse the
lessors for real estate taxes, insurance, utilities, maintenance and other
operating costs associated with the leases. In December 2001, the Company
entered into a lease arrangement to consolidate the Signal San Diego, California
operations into one building. Signal completed the occupation of the new
facility during the fourth quarter of 2002. The lease obligation relating to the
remaining term of the old lease arrangements, which expired on December 31,
2003, aggregating approximately $1.0 million, was recognized as an expense in
2002 and the net book value with respect to related leasehold improvements and
other unamortized assets aggregating $1.1 million was written off during the
same period.
F-37
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
In November 2004, the Company purchased land and several buildings in Summit,
New Jersey which will enable it to consolidate four New Jersey locations into
one corporate headquarters and provide the room to accommodate the Company's
expected growth. As a result, the Company is currently exploring available
options to reduce or eliminate the financial impact of existing lease
commitments on redundant facilities.
The Company leases certain laboratory equipment and machinery under capital
lease arrangements. Assets held under capital leases are included in plant and
equipment and the amortization of these assets is included in depreciation
expense.
Future minimum lease payments under noncancelable operating leases (with initial
or remaining lease terms in excess of one year) and future minimum capital lease
payments as of December 31, 2004 are:
- --------------------------------------------------------------------------------
OPERATING CAPITAL
LEASES LEASES
- --------------------------------------------------------------------------------
2005 $ 3,574 $ 9
2006 3,462 2
2007 3,256 2
2008 2,979 --
2009 2,596 --
Thereafter 6,350 --
-----------------------------
Total minimum lease payments $ 22,217 $ 13
===========
Less amount representing interest 1
-------
Present value of net minimum
capital lease payments 12
Less current installments of obligations
under capital leases 8
-------
Obligations under capital leases,
excluding current installments $ 4
=======
Total facilities rental expense under operating leases was approximately $4.3
million in 2004, $3.9 million in 2003 and $3.0 million in 2002, excluding the
write-off of the lease obligation for the old Signal facilities
EMPLOYMENT AGREEMENTS: The Company has employment agreements with certain
officers and employees. Employment contracts provide for base compensation and
an annual target bonus based upon achievement of Company performance measures
and annual increases in base compensation reflecting annual reviews and related
salary adjustments. Base compensation expense subject to employment agreements
aggregated $2.6 million and $2.5 million in 2004 and 2003, respectively. The
outstanding future commitment for base compensation related to employment
contracts as of December 31, 2004 is approximately $3.3 million, including $2.6
million in 2005 and $0.7 million in 2006 (excluding any change in control
provisions). Employees covered under employment contracts who are terminated
upon the occurrence of a change in control may among other things be entitled to
receive from the Company a lump sum equal to three times such officer's and
employee's base salary and bonus, payment by the Company of such officer's and
employee's benefit premiums for three years and full and immediate vesting of
all stock options and equity awards held by such officer and employee.
CONTRACTS: On October 21, 2004, the Company, through an indirect wholly owned
subsidiary, acquired all of the outstanding shares of Penn T Limited ("Penn T"),
a worldwide supplier of THALOMID(R), from a consortium of private investors for
a US dollar equivalency of approximately $117.4 million in cash, net of
F-38
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
cash acquired and including working capital adjustments and total estimated
transaction costs. Penn T was subsequently renamed Celgene UK Manufacturing II,
Limited, or CUK II. In connection with the acquisition, the Company and CUK II
entered into a Technical Services Agreement with Penn Pharmaceutical Services
Limited, or PPSL, and Penn Pharmaceutical Holding Limited pursuant to which PPSL
provides the services and facilities necessary for the manufacture of
THALOMID(R) and other thalidomide formulations. The total cost to be incurred
over the five-year minimum agreement period is approximately $11.0 million.
On March 31, 2003, the Company entered into a three-year supply and distribution
agreement with GlaxoSmithKline, or GSK, to distribute, promote and sell
ALKERAN(R) (melphalan), a therapy approved by the FDA for the palliative
treatment of multiple myeloma and for palliation of carcinoma of the ovary.
Under the terms of the agreement, Celgene purchases ALKERAN(R) tablets and
ALKERAN(R) for injection from GlaxoSmithKline 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 an initial three-year term
under a take-or-pay arrangement aggregating $56.6 million over such period. The
remaining minimum purchase requirements at December 31, 2004 were $25.0 million.
As discussed in Note 5, the Company signed an exclusive license agreement with
CMCC, which terminated any existing thalidomide analog agreements between CMCC
and EntreMed and directly granted to Celgene an exclusive worldwide license for
the analog patents. Under the agreement, the Company is required to pay CMCC
$2.0 million between 2005 and 2006, the present value of which was expensed in
2002. Additional payments are possible under the agreement depending on the
successful development and commercialization of thalidomide analogs.
In October 2003, the Company signed an agreement with Institute of Drug
Technology Australia Limited, or IDT, for the manufacture of finished dosage
form of THALOMID(R) capsules. The agreement requires minimum purchases of
THALOMID(R) capsules of $4.7 million for the three-year term commencing with the
FDA's approval of IDT as an alternate supplier. This agreement provides the
Company with additional capacity and reduces its dependency on one manufacturer
for the production of THALOMID(R).
The Company has entered into various service agreements with Contract Research
Organizations, or CROs, to provide services in the management of certain pivotal
clinical trials. Management services provided by CROs typically include but are
not limited to; assistance with clinical monitoring activities, assistance with
study enrollment and other management oversight activities. Pivotal clinical
trials are currently being conducted with the following CROs; PharmaNet, Inc.,
Icon Clinical Research, PPD Development LLC, Research Pharmaceuticals Services
Inc., Kendle International and Harrison Clinical Research. Service agreements
with these CROs provide that either party may early terminate such agreement by
written notice to the other party. Payments made related to services provided by
the above CROs were $30.4 million, $22.5 million and $3.8 million in 2004, 2003
and 2002 respectively. and are included in research and development expenses.
CONTINGENCIES: The Company believes it maintains insurance coverage adequate for
its current needs. The Company's operations are subject to environmental laws
and regulations, which impose limitations on the discharge of pollutants into
the air and water and establish standards for the treatment, storage and
disposal of solid and hazardous wastes. The Company reviews the effects of such
laws and regulations on its operations and modifies its operations as
appropriate. The Company believes it is in substantial compliance with all
applicable environmental laws and regulations.
F-39
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(19) SEGMENTS AND RELATED INFORMATION
The Company operates in two business segments - Human Pharmaceuticals and Stem
Cell Therapies. The accounting policies of the segments are the same as
described in the summary of significant accounting policies.
HUMAN PHARMACEUTICALS: The Human Pharmaceutical segment is engaged in the
discovery, development and commercialization of innovative therapies designed to
treat cancer and immuno-inflammatory diseases through regulation of cellular,
genomic and proteomic targets. This segment includes Signal Pharmaceuticals,
LLC. (Celgene Research & Development), a privately held San Diego-based
biopharmaceutical company focused on the discovery and development of drugs that
regulate genes and proteins associated with diseases.
CELLULAR THERAPEUTICS: With the acquisition of Anthrogenesis Corp. in December
2002, the Company acquired a biotherapeutics company pioneering the development
of stem cell therapies and biomaterials derived from human placental tissue that
now operates as Celgene Cellular Therapeutics, or CCT. CCT has organized its
business into three main units: (1) stem cells banking for transplantation, (2)
private stem cell banking and (3) the development of biomaterials for organ and
tissue repair. CCT has developed proprietary methods for producing biomaterials
for organ and tissue repair (i.e. BIOVANCE(TM), AMBIODRY(TM)). Additionally, CCT
has developed proprietary technology for collecting, processing and storing
placental stem cells with potentially broad therapeutic applications in cancer,
as well as autoimmune, cardiovascular, neurological, and degenerative diseases
Summarized segment information is as follows:
- -------------------------------------------------------------------------------------------
Human Stem Cell
Pharmaceuticals Therapies Unallocated(2) Total
- -------------------------------------------------------------------------------------------
2004
Total assets $ 334,932 $ 23,824 $ 748,537 $1,107,293
Total revenues 372,957 4,545 377,502
Income before income taxes(1) 78,810 (15,639) 63,171
- -------------------------------------------------------------------------------------------
2003
Total assets (as restated) $ 135,123 $ 10,936 $ 666,967 $ 813,026
Total revenues 267,980 3,495 271,475
Income (loss) before income taxes
(as restated)(1) 42,279 (16,618) 25,661
- -------------------------------------------------------------------------------------------
2002
Total assets (as restated) $ 66,301 $ 9,312 $ 261,182 $ 336,795
- -------------------------------------------------------------------------------------------
(1) Expenses incurred at the consolidated level are included in the results of
the Human Pharmaceuticals segment.
(2) Unallocated corporate assets consist of cash and cash equivalents and
marketable securities available for sale.
F-40
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
OPERATIONS BY GEOGRAPHIC AREA: Prior to the Company's October 21, 2004
acquisition of Penn T, the Company marketed and sold its products exclusively in
the United States and Canada. Furthermore, all of the Company's customers were
also located in North America. Penn T sells THALOMID(R) in Europe to Pharmion,
who in turn sells to customers located in countries outside of North America,
Japan and China. Also, the Company receives royalties from Novartis on their
international sales of RITALIN(R) and RITALIN(R) LA.
- --------------------------------------------------------------------------------
GEOGRAPHIC REVENUES 2004 2003 2002
- --------------------------------------------------------------------------------
North America $ 374,686 $ 271,475 $ 135,746
All Other 2,816
-----------------------------------------
Total Revenues $ 377,502 $ 271,475 $ 135,746
=========================================
- ----------------------------------------------------------------
LONG LIVED ASSETS 2004 2003
- ----------------------------------------------------------------
North America $ 52,712 $ 28,731
All Other 144,820
-------------------------
Total Long Lived Assets $ 197,532 $ 28,731
=========================
MAJOR CUSTOMERS: As is typical in the pharmaceutical industry, the Company sells
its products primarily through wholesale distributors and therefore, wholesale
distributors account for a large portion of the Company's net product revenues.
In 2004, 2003 and 2002, there were three customers that each accounted for more
than 10% of the Company's total revenue. Sales to each such customer in 2004,
2003 and 2002 were as follows: Cardinal Health 29.5%, 32.5% and 30.9%; McKesson
Corp. 18.6%, 17.4% and 17.1%; and Amerisource Bergen Corp. 17.9%, 23.7% and
8.0%. In 2002, Bergen Brusnwig Drug Company accounted for 16.2% of consolidated
total revenue. Sales to such customers were included in the results of the Human
Pharmaceuticals segment.
F-41
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(20) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
1Q 2Q 3Q 4Q YEAR
AS RESTATED(5) AS RESTATED(5) AS RESTATED(5)
- --------------------------------------------------------------------------------------------------------------------------
2004
Total revenue $ 82,873 $ 87,753 $ 101,468 $ 105,408 $ 377,502
Gross profit(2) 61,726 64,916 68,637 75,566 270,845
Income tax benefit (provision) (801) (1,156) (1,974) (6,484) (10,415)
Net income 8,914 2,595 19,008 22,239 52,756
Net earnings per common share -
basic(3) $ 0.05 $ 0.02 $ 0.12 $ 0.13 $ 0.32
diluted(3) $ 0.05 $ 0.02 $ 0.11 $ 0.13 $ 0.31
Weighted average number of shares of common
stock outstanding -
basic 162,950 163,674 164,091 164,749 163,869
diluted 174,526 176,854 177,064 173,669 172,855
- --------------------------------------------------------------------------------------------------------------------------
AS ORIGINALLY REPORTED 1Q 2Q 3Q 4Q YEAR
- --------------------------------------------------------------------------------------------------------------------------
2004
Total revenue $ 82,873 $ 87,753 $ 101,468 $ 105,408 $ 377,502
Gross profit(2) 61,726 64,916 68,637 75,566 270,845
Income tax benefit (provision) (801) (1,156) (1,974) (6,484) (10,415)
Net income 8,620 12,444 21,254 12,360 54,678
Net earnings per common share -
basic(3) $ 0.05 $ 0.08 $ 0.13 $ 0.08 $ 0.33
diluted(3) $ 0.05 $ 0.07 $ 0.12 $ 0.07 $ 0.32
Weighted average number of shares of common
stock outstanding -
basic 162,950 163,674 164,091 164,749 163,869
diluted 174,526 176,854 177,064 173,669 172,855
- --------------------------------------------------------------------------------------------------------------------------
F-42
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
- --------------------------------------------------------------------------------------------------------------------------
AS RESTATED(5) 1Q 2Q 3Q 4Q YEAR
- --------------------------------------------------------------------------------------------------------------------------
2003(1)
Total revenue $ 49,089 $ 67,286 $ 74,332 $ 80,768 $ 271,475
Gross profit(2) 39,251 48,623 49,513 54,116 191,503
Income tax benefit (provision) (135) (210) (378) 5 (718)
Net income 323 22,399 7,290 (4,319) 25,693
Net earnings per common share -
basic(3) -- $ 0.14 $ 0.05 $ (0.03) $ 0.16
diluted(3) -- $ 0.13 $ 0.04 $ (0.03) $ 0.15
Weighted average number of shares of common
stock outstanding -
basic(4) 160,768 161,678 162,094 162,524 161,774
diluted(4) 167,880 170,268 172,658 162,524 170,796
- --------------------------------------------------------------------------------------------------------------------------
AS ORIGINALLY REPORTED 1Q 2Q 3Q 4Q YEAR
- --------------------------------------------------------------------------------------------------------------------------
2003(1)
Total revenue $ 49,089 $ 67,286 $ 74,332 $ 80,768 $ 271,475
Gross profit(2) 39,251 48,623 49,513 54,116 191,503
Income tax benefit (provision) (135) (210) (378) (718)
5
Net income 952 2,894 4,293 5,372 13,511
Net earnings per common share -
basic(3) $ 0.01 $ 0.02 $ 0.03 $ 0.03 $ 0.08
diluted(3) $ 0.01 $ 0.02 $ 0.02 $ 0.03 $ 0.08
Weighted average number of shares of common
stock outstanding -
basic(4) 160,768 161,678 162,094 162,524 161,774
diluted(4) 167,880 170,268 172,658 174,244 170,796
- --------------------------------------------------------------------------------------------------------------------------
(1) Certain reclassifications have been made to the quarterly and full year
periods for 2003 in order to conform to the presentation for the year
ended December 2004.
(2) Gross profit is computed by subtracting cost of goods sold from net
product sales.
(3) The sum of the quarters may not equal the full year basic and diluted
earnings per share since each period is calculated separately.
(4) The weighted average number of shares outstanding for 2003 has been
adjusted to reflect the two- for- one stock split.
(5) The Company restated its consolidated financial statements related to the
accounting treatment for a warrant received in connection with the
December 31, 2002 litigation settlement and related agreements with
EntreMed, Inc. and CMCC. See footnote 2 for further details.
F-43
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CELGENE CORPORATION
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
Balance at Additions charged
beginning of to expense or Balance at
Year ended December 31, year sales Deductions end of year
- ---------------------------------------------------------------------------------------------------------------------
2004
Allowance for doubtful accounts $ 873 $ 867 $ 370 $ 1,370
Allowance for sales returns 8,368 1,805 (1) 578 9,595
Allowance for customer discounts 657 7,448 (1) 7,267 838
---------------------------------------------------------------
$ 9,898 $ 10,120 $ 8,215 $ 11,803
===============================================================
- ---------------------------------------------------------------------------------------------------------------------
2003
Allowance for doubtful accounts $ 729 $ 448 $ 304 $ 873
Allowance for sales returns 2,783 12,592 (1) 7,007 8,368
Allowance for customer discounts 291 5,503 (1) 5,137 657
---------------------------------------------------------------
$ 3,803 $ 18,543 $ 12,448 $ 9,898
===============================================================
- ---------------------------------------------------------------------------------------------------------------------
2002
Allowance for doubtful accounts $ 708 $ 295 $ 274 $ 729
Allowance for sales returns 857 4,777 (1) 2,851 2,783
Allowance for customer discounts 291 2,412 (1) 2,412 291
---------------------------------------------------------------
$ 1,856 $ 7,484 $ 5,537 $ 3,803
===============================================================
- ---------------------------------------------------------------------------------------------------------------------
(1) Amounts are a reduction from gross sales.
F-44