FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark one)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 0-16132
CELGENE CORPORATION
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2711928
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
86 Morris Avenue, Summit, NJ 07901
---------------------------- -----
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (908) 673-9000.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes _X_ No ___
At May 6, 2005, 166,840,127 shares of Common Stock par value $.01 per share,
were outstanding.
CELGENE CORPORATION
INDEX TO FORM 10-Q
Page No.
PART I FINANCIAL INFORMATION
Item 1 Unaudited Consolidated Financial Statements
Consolidated Statements of Operations -
Three-Month Periods Ended March 31, 2005 and 2004 3
Consolidated Balance Sheets -
As of March 31, 2005 and December 31, 2004 4
Consolidated Statements of Cash Flows -
Three-Month Periods Ended March 31, 2005 and 2004 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 31
Item 4 Controls and Procedures 34
PART II OTHER INFORMATION 35
Item 1 Legal Proceedings 35
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds 35
Item 3 Defaults Upon Senior Securities 35
Item 4 Submission of Matters to a Vote of Security Holders 35
Item 5 Other Information 35
Item 6 Exhibits 35
Signatures 36
2
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Month Period Ended
March 31,
----------------------------
2005 2004
------------- -------------
As Restated
(See Note 2)
Revenue:
Net product sales $ 97,645 $ 76,120
Collaborative agreements and other revenue 5,229 2,133
Royalty revenue 9,522 4,620
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Total revenue 112,396 82,873
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Expenses:
Cost of goods sold 12,604 14,395
Research and development 40,037 37,728
Selling, general and administrative 37,806 25,936
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Total expenses 90,447 78,059
------------- -------------
Operating income 21,949 4,814
Other income and expense:
Interest income and other income (expense), net (1,178) 7,289
Equity in losses of affiliated company 4,355 -
Interest expense 2,374 2,388
------------- -------------
Income before income taxes 14,042 9,715
Income tax provision (benefit) (34,172) 801
------------- -------------
Net income $ 48,214 $ 8,914
============= =============
Net income per common share:
Basic $ 0.29 $ 0.05
============= =============
Diluted $ 0.26 $ 0.05
============= =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
MARCH 31, DECEMBER 31,
2005 2004
------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 72,345 $ 135,227
Marketable securities available for sale 628,939 613,310
Accounts receivable, net of allowance of
$2,830 and $2,208 at March 31, 2005 and
December 31, 2004, respectively 49,207 46,074
Inventory 33,497 24,404
Deferred income taxes 54,225 4,082
Other current assets 27,412 26,783
------------- -------------
Total current assets 865,625 849,880
Property, plant and equipment, net 53,284 52,039
Investment in affiliated company 19,038 -
Intangible assets, net 103,742 108,955
Goodwill 36,917 41,258
Deferred income taxes 26,448 14,613
Other assets 20,582 40,548
------------- -------------
Total assets $ 1,125,636 $ 1,107,293
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 18,308 $ 18,650
Accrued expenses 53,143 68,534
Income taxes payable 22,851 41,188
Current portion of deferred revenue 7,500 6,926
Current portion of capital leases
and note obligation 6 8
Deferred income taxes - 5,447
Other current liabilities 2,498 662
------------- -------------
Total current liabilities 104,306 141,415
Long-term convertible notes 400,000 400,000
Deferred revenue, net of current portion 70,804 73,992
Capitalized leases and note obligation,
net of current portion 3 4
Other non-current liabilities 15,816 14,438
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Total liabilities 590,929 629,849
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value per
share, 5,000,000 authorized; none
outstanding at March 31, 2005 and
December 31, 2004 - -
Common stock, $.01 par value per share,
275,000,000 shares authorized;
issued 166,659,864 and 165,079,198
shares at March 31, 2005 and
December 31, 2004, respectively. 1,667 1,651
Common stock in treasury, at cost;
13,317 and 10,564 shares at March 31,
2005 and December 31, 2004,
respectively. (399) (306)
Additional paid-in capital 699,399 641,907
Accumulated deficit (186,195) (234,410)
Accumulated other comprehensive income 20,235 68,602
------------- -------------
Total stockholders' equity 534,707 477,444
------------- -------------
Total liabilities and stockholders' equity $ 1,125,636 $ 1,107,293
============= =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Month Period Ended
March 31,
-------------------------
2005 2004
---------- ----------
Cash flows from operating activities: As Restated
(See Note 2)
Net income $ 48,214 $ 8,914
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization of
long-term assets 3,191 2,008
Provision for accounts receivable
allowances 622 171
Realized gain on marketable
securities available for sale (209) (764)
Unrealized loss (gain) on value of
EntreMed warrants 6,875 (294)
Equity in losses of affiliated
company 4,355 -
Non-cash stock-based compensation
expense 62 100
Amortization of premium/discount on
marketable securities available
for sale, net 505 541
Amortization of debt issuance cost 611 611
Shares issued for employee benefit
plans - 4,267
Deferred income taxes (42,664) (936)
Change in current assets and liabilities,
excluding the effect of acquisition:
Increase in accounts receivable (3,798) (2,843)
Increase in inventory (9,140) (3,369)
(Increase) decrease in other
operating assets 75 (580)
Decrease in accounts payable and
accrued expenses (5,159) (2,643)
Increase (decrease) in income taxes
payable (7,954) 1,512
Increase (decrease) in deferred
revenue (688) 161
---------- ----------
Net cash (used in) provided by operating
activities (5,102) 6,856
---------- ----------
Cash flows from investing activities:
Capital expenditures (4,151) (2,238)
Business acquisition (8,429) -
Proceeds from sales and maturities of
marketable securities available for
sale 39,827 51,422
Purchases of marketable securities
available for sale (86,806) (74,089)
Purchase of investment securities - (7,000)
Investment in affiliated company (10,500) -
---------- ----------
Net cash used in investing activities (70,059) (31,905)
---------- ----------
Cash flows from financing activities:
Proceeds from exercise of common stock
options and warrants 13,976 3,323
Purchase of treasury stock (93) -
Repayment of capital lease and note
obligations (3) (7)
---------- ----------
Net cash provided by financing activities 13,880 3,316
---------- ----------
Effect of currency rate changes on cash
and cash equivalents (1,601) -
Net decrease in cash and cash equivalents (62,882) (21,733)
Cash and cash equivalents at beginning
of period 135,227 60,328
---------- ----------
Cash and cash equivalents at end of period $ 72,345 $ 38,595
========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(Dollars in thousands)
Three Month Period Ended
March 31,
-----------------------
2005 2004
As Restated
(See Note 2)
---------- ----------
Supplemental schedule of non-cash investing
and financing activity:
Change in net unrealized gain on
marketable securities available for sale $ (30,845) $ 15,299
========== ==========
Conversion of convertible notes and accrued
interest thereon $ - $ 12,656
========== ==========
Supplemental disclosure of cash flow
information:
Interest paid $ 1,750 $ 1,750
========== ==========
Cash paid for income taxes (received for
tax benefit) $ 17,532 $ (337)
========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
Notes to Unaudited Consolidated Financial Statements
March 31, 2005
(Thousands of dollars, except per share amounts, unless otherwise indicated)
1. ORGANIZATION 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 unaudited consolidated financial statements included herein have been
prepared from the books and records of the Company pursuant to the rules and
regulations of the Securities and Exchange Commission for reporting on Form
10-Q. Certain information and footnote disclosures normally included in complete
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. Certain
reclassifications have been made to the prior period's consolidated financial
statements in order to conform to the current period's presentation. The interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
latest annual report on Form 10-K, as amended.
Interim results may not be indicative of the results that may be expected for
the year. In the opinion of management, all adjustments considered necessary for
a fair presentation of these interim statements have been included and are of a
normal and recurring nature.
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 Statement of Cash Flows as of March 31, 2004 in order to conform to
the current year's presentation. The reclassification resulted in a net increase
of $7.0 million in the proceeds from the sale of marketable securities (included
in investing activities) for the three-month period ended March 31, 2004.
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 adjustment to the Company's consolidated financial statements
was required. The Company restated its financial statements in its 2004 Annual
Report on Form 10-K. For more information on the restatement see Note 2 of the
Notes to the Consolidated Financial Statements included in the Company's 2004
Annual Report on Form 10-K. The Company has now restated its Consolidated
Statements of Operations and Cash Flows for the three-month period ended March
31, 2004 and, as a result, interest income and other income (expense), net,
income before income taxes and net income increased approximately $0.3 million.
The restatement did not have any impact on previously reported total revenues,
earnings per
7
Notes to Unaudited Consolidated Financial Statements
March 31, 2005
(Thousands of dollars, except per share amounts, unless otherwise indicated)
share or reported net cash flows for the three-month period ended March 31,
2004.
3. NEW ACCOUNTING PRINCIPLES
In December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards 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 Accounting
Principles Board, or APB Opinion No. 25, "Accounting for Stock Issued to
Employees," or APB 25, 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.
The effective date for this statement has been delayed to the first quarter of
2006 for calendar year companies. The Company is currently evaluating the method
of adoption and impact of adopting this statement and has not determined if
adoption of SFAS No. 123R will result in amounts that are similar to the current
proforma disclosures in Note 9 to these unaudited consolidated financial
statements.
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. The Company has
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 interest rate and/or sector spread increases. The Company is currently
monitoring these developments to assess the potential impact on its financial
position and results of operations.
4. ACQUISITION
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 $118.3 million in cash, net of cash acquired and
including working capital adjustments and transaction costs paid during the
three-month period ended March 31, 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.
8
Notes to Unaudited Consolidated Financial Statements
March 31, 2005
(Thousands of dollars, except per share amounts, unless otherwise indicated)
The preliminary purchase price allocation resulted in the following amounts
being allocated to the assets received and liabilities assumed based upon their
respective fair values.
(Thousands)
------------------------------------------------------
Current assets $ 18,133
Intangible assets 99,841
Goodwill 35,418
------------------------------------------------------
Assets acquired 153,392
------------------------------------------------------
Current liabilities 1,983
Deferred taxes 33,144
------------------------------------------------------
Liabilities assumed 35,127
------------------------------------------------------
Net assets acquired $118,265
======================================================
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 following unaudited pro forma information presents a summary of consolidated
results of operations for the period ended March 31, 2004 as if the acquisition
of Penn T had occurred on January 1, 2004. 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.
----------------------------------------------------------------------
Three Month
Period Ended
Pro forma (unaudited) March 31, 2004
----------------------------------------------------------------------
Total revenues $ 86,443
Net income 9,441
Net income per diluted share $ 0.05
----------------------------------------------------------------------
5. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per common share is computed by dividing net
income adjusted to add back the after-tax amount of interest recognized in the
period associated with any convertible debt issuance that may be dilutive by the
weighted-average number of common shares outstanding during the period increased
to include all additional common shares that would have been outstanding
assuming potentially dilutive common shares had been issued and any proceeds
thereof used to repurchase common stock at the average market price during the
period. The proceeds used to repurchase common stock are assumed to be the sum
of the amount to be paid to the Company upon exercise of options, the amount of
compensation cost attributed to future services and not yet recognized and, if
applicable, the amount of income taxes that would be credited to or deducted
from capital upon exercise. The potential common shares related to the June 2003
convertible note issuance were included in the earnings per share calculation
for the three-month period ended March 31, 2005 and determined to be
anti-dilutive and therefore excluded from the diluted earnings per share
computation for the three-month period ended March 31, 2004.
9
Notes to Unaudited Consolidated Financial Statements
March 31, 2005
(Thousands of dollars, except per share amounts, unless otherwise indicated)
The total number of potential common shares excluded from the diluted earnings
per share computation because their inclusion would have been anti-dilutive was
2,839,000 and 21,235,000 for the three-month periods ended March 31, 2005 and
2004, respectively.
The following represents the reconciliation of the basic and diluted earnings
per share computations for the three-month periods ended March 31, 2005 and
2004:
-----------------------------------------------------------------------
Three month period ended
March 31,
2005 2004
As Restated
(See Note 2)
-----------------------------------------------------------------------
Income available to common stockholders:
Net income $ 48,214 $ 8,914
Interest expense on convertible debt,
net of tax 1,393 -
-----------------------------
Net income available to common
stockholders $ 49,607 $ 8,914
Weighted average number of common shares
outstanding (in thousands):
Basic 165,613 162,950
Effect of dilutive securities:
Options 8,568 11,238
Warrants 166 208
Convertible debt 16,512 -
Restricted shares and other
long-term incentives 249 130
-----------------------------------------------------------------------
Diluted 191,108 174,526
Earnings per share:
Basic $ 0.29 $ 0.05
Diluted $ 0.26 $ 0.05
-----------------------------------------------------------------------
6. CONVERTIBLE DEBT
In June 2003, the Company issued an aggregate principal amount of $400 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 on May
28, 2003 of the Company's common stock of $16.15 per share, after adjusting
prices for the two-for-one stock split effected on October 22, 2004. 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,
10
Notes to Unaudited Consolidated Financial Statements
March 31, 2005
(Thousands of dollars, except per share amounts, unless otherwise indicated)
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 indenture governing
the notes, the Company may not merge or transfer substantially all of its
assets, as defined, unless certain conditions are met.
7. 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 March 31, 2005 and December 31, 2004 were
as follows:
- ---------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 2005 Cost Gain Loss Value
- ---------------------------------------------------------------------------------------------------------------
Government agency
mortgage obligations $ 162,227 $ 673 $ (1,630) $ 161,270
Government agency bonds and notes 645 - (12) 633
Corporate debt securities 157,232 603 (2,798) 155,037
Auction rate notes 255,750 - - 255,750
Marketable equity securities 20,212 36,037 - 56,249
------------------------------------------------------------------
Total $ 596,066 $ 37,313 $ (4,440) $ 628,939
------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2004 Cost Gain Loss Value
- ---------------------------------------------------------------------------------------------------------------
Government agency
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
------------------------------------------------------------------
Total $ 549,383 $ 65,488 $ (1,561) $ 613,310
------------------------------------------------------------------
As of March 31, 2005, the duration of the Company's debt securities classified
as marketable securities available for sale were as follows:
------------------------------------------------------------------------
Amortized Fair
Cost Value
------------------------------------------------------------------------
Due in one year or less $ 320,036 $ 320,026
Due after one through three years 106,137 105,293
Due after three through five years 18,263 17,696
Due after five through seven years 65,625 65,518
Due after seven years 65,793 64,157
-----------------------------------
Total $ 575,854 $ 572,690
-----------------------------------
11
Notes to Unaudited Consolidated Financial Statements
March 31, 2005
(Thousands of dollars, except per share amounts, unless otherwise indicated)
8. INVENTORY
Inventory at March 31, 2005 and December 31, 2004 consisted of the following:
-------------------------------------------------------------
March 31, December 31,
2005 2004
-------------------------------------------------------------
Raw materials $ 7,370 $ 4,081
Work in process 3,705 4,356
Finished goods 22,422 15,967
---------------------------------------
Total $ 33,497 $ 24,404
---------------------------------------
9. STOCK-BASED COMPENSATION
The Company applies the intrinsic-value-based method of accounting prescribed by
previously defined APB 25 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 or service period.
12
Notes to Unaudited Consolidated Financial Statements
March 31, 2005
(Thousands of dollars, except per share amounts, unless otherwise indicated)
The following table illustrates the effect on net income and net income per
share as if the fair-value-based method under SFAS 123 had been applied:
----------------------------------------------------------------------------------------------
Three Month Period Ended
March 31,
2005 2004
As Restated
----------------------------------------------------------------------------------------------
Net income as reported $ 48,214 $ 8,914
Add: stock-based employee compensation expense
included in reported net income, net of income tax 25 62
Deduct: stock-based employee compensation expense
determined under fair-value-based method,
net of income tax (4,612) (7,054)
--------------------------------------
Basic pro forma net income 43,627 1,922
Interest expense on convertible debt, net of tax 1,393 -
--------------------------------------
Diluted, pro forma net income $ 45,020 $ 1,922
--------------------------------------
Net income per common share:
Basic, as reported $ 0.29 $ 0.05
Basic, pro forma $ 0.26 $ 0.01
Diluted, as reported $ 0.26 $ 0.05
Diluted, pro forma $ 0.24 $ 0.01
----------------------------------------------------------------------------------------------
The pro forma effects on net income applicable to common stockholders and net
income per common share for the three-month periods ended March 31, 2005 and
2004 may not be representative of the pro forma effects in future years.
The weighted-average fair value per share was $10.62 and $8.54 for stock options
granted in the three-month periods ended March 31, 2005 and 2004, respectively.
The Company estimated the fair values of options granted using a Black-Scholes
option pricing model with the following assumptions:
----------------------------------------------------------------------
Three Month Period
Ended March 31,
2005 2004
----------------------------------------------------------------------
Risk-free interest rate 4.17% 2.21%
Expected stock price volatility 41% 51%
Expected term until exercise (years) 4.5 3.5
Expected dividend yield 0% 0%
----------------------------------------------------------------------
Restricted Stock Awards: During 2001, the Company issued to certain employees an
aggregate of 105,000 restricted stock awards. Such restricted stock awards will
vest on September 19, 2006, unless certain conditions that would trigger
accelerated vesting are otherwise met prior to such date. The fair value of
these restricted stock awards at the grant date was $1.4 million, which is being
amortized as compensation expense over the contractual vesting period and
classified in selling, general and administrative expenses. Compensation expense
relating to these restricted stock awards was approximately $0.1 million for
each of the three-month periods ended March 31, 2005 and 2004.
13
Notes to Unaudited Consolidated Financial Statements
March 31, 2005
(Thousands of dollars, except per share amounts, unless otherwise indicated)
10. INVESTMENT IN AFFILIATED COMPANY
On March 31, 2005 the Company exercised warrants to purchase 7,000,000 shares of
EntreMed common stock (approximately 14.05% of the outstanding common shares) at
an aggregate cost of $10.5 million. The fair value of the warrants at the time
of exercise was estimated to be approximately $12.9 million. The fair value of
the warrants decreased by approximately $6.9 million during the three-month
period ended March 31, 2005 and such loss is reflected in other expense on the
Consolidated Statement of Operations for the three-month period ended March 31,
2005. As a result, the total value ascribed to the Company's investment was
$23.4 million. Since the Company also holds 3,350,000 shares of EntreMed voting
preferred shares convertible into 16,750,000 shares of common stock, the Company
determined that it has significant influence over its investee and is applying
the equity method of accounting to its common stock investment. Based on a
preliminary valuation, which is subject to changes that may be significant,
approximately $4.4 million of the value was ascribed to in-process research and
development and written off as of March 31, 2005; the charge is included in
equity losses of affiliated company. The residual investment of approximately
$19.0 million exceeded the Company's proportionate share of the EntreMed net
assets by approximately $13.4 million, which based on a preliminary valuation
consists of goodwill and intangible assets of approximately $12.5 million and
$0.9 million, respectively. As prescribed under the equity method of accounting,
the Company will record its share of future EntreMed gains and losses based on
the Company's common stock ownership percentage and will review the investment
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the investment may not be recoverable. Future financial
results will be included in the human pharmaceuticals segment. A summary of the
unaudited historical balance sheet for EntreMed as of March 31, 2005 follows:
March 31,
2005
--------------------------------------------------------------
Current assets $ 44,292
Noncurrent assets 1,042
-----------------
Total assets 45,334
--------------------------------------------------------------
Current liabilities 4,771
Noncurrent liabilities 319
Minority interest 17
Total equity 40,227
-----------------
Total liabilities and equity $ 45,334
--------------------------------------------------------------
Interest in EntreMed equity at 14.05% $ 5,652
Excess of investment over share of
EntreMed equity 13,386
-----------------
Total Investment $ 19,038
--------------------------------------------------------------
Based on the closing share price of EntreMed common stock on March 31, 2005, the
estimated fair value of the Company's common stock investment in EntreMed was
approximately $14.7 million as of March 31, 2005. The investment will be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the investment may not be recoverable.
14
Notes to Unaudited Consolidated Financial Statements
March 31, 2005
(Thousands of dollars, except per share amounts, unless otherwise indicated)
11. GOODWILL AND INTANGIBLE ASSETS
At March 31, 2005, the Company's recorded intangible assets related to the
acquisition of Penn T Limited on October 21, 2004 and are being amortized over
their estimated useful lives. Intangible asset balances related to the
acquisition of Anthrogenesis Corp. were eliminated during the quarter as
prescribed by SFAS 109 "Accounting for Income Taxes" due to reversal of the
valuation allowance for deferred tax assets recorded at time of acquisition. At
March 31, 2005 and December 31, 2004, the gross carrying value and accumulated
amortization, by major intangible asset class were as follows:
-----------------------------------------------------------------------------------------------------
Gross Cumulative Intangible
Carrying Accumulated Translation Assets,
March 31, 2005 Value Amortization Adjustment Net
-----------------------------------------------------------------------------------------------------
Supplier agreements $ 99,841 $ (279) $ 4,180 $ 103,742
-------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Gross Cumulative Intangible
Carrying Accumulated Translation Assets,
December 31, 2004 Value Amortization Adjustment Net
-----------------------------------------------------------------------------------------------------
Supplier agreements $ 99,841 $ (75) $ 6,802 $ 106,568
Supplier relationships 710 (284) - 426
Customer lists 1,700 (227) - 1,473
Technology 609 (121) - 488
-------------------------------------------------------------------
Total $ 102,860 $ (707) $ 6,802 $ 108,955
-------------------------------------------------------------------
Amortization of acquired intangible assets was approximately $0.3 million and
$0.1 million for the three-month periods ended March 31, 2005 and 2004,
respectively. Assuming no changes in the gross carrying amount of intangible
assets, the amortization of intangible assets for the next five fiscal years is
estimated to be approximately $6.6 million for 2005, $8.6 million for 2006 and
$8.2 million for each of the years 2007 through 2009.
15
Notes to Unaudited Consolidated Financial Statements
March 31, 2005
(Thousands of dollars, except per share amounts, unless otherwise indicated)
At March 31, 2005, the Company's recorded goodwill relates to the acquisition of
Penn T Limited on October 21, 2004 and has been allocated to the Company's human
pharmaceuticals segment. Goodwill related to the acquisition of Anthrogenesis
Corp. was eliminated during the quarter as prescribed by SFAS 109 "Accounting
for Income Taxes" due to reversal of the valuation allowance for deferred tax
assets recorded at time of acquisition. The carrying value of goodwill was $36.9
million and $41.3 million at March 31, 2005 and December 31, 2004, respectively,
and is summarized as follows:
------------------------------------------------------------------------------------------
Human Stem Cell
Pharmaceuticals Therapy Total
------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ 38,252 $ 3,006 $ 41,258
Anthrogenesis elimination - (3,006) (3,006)
Purchase accounting adjustments (347) - (347)
Foreign currency translation (988) - (988)
-----------------------------------------------------
Balance, March 31, 2005 $ 36,917 $ - $ 36,917
-----------------------------------------------------
In accordance with SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS,"
goodwill is not amortized, but rather is reviewed at least annually for
impairment.
12. COMPREHENSIVE INCOME
The components of comprehensive income, 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. A summary of
comprehensive income for the three-month periods ended March 31, 2005 and 2004
follows:
16
Notes to Unaudited Consolidated Financial Statements
March 31, 2005
(Thousands of dollars, except per share amounts, unless otherwise indicated)
- --------------------------------------------------------------------------------
Three Month Period Ended
March 31,
2005 2004
Restated
(See Note 2)
- --------------------------------------------------------------------------------
Net income $ 48,214 $ 8,914
------------------------------
Other comprehensive income (loss):
Net unrealized gains (losses) on marketable
securities available for sale (30,845) 15,299
Less: reclassification adjustment for gains
included in net income (209) (764)
------------------------------
Net unrealized gains (losses) on marketable
securities available for sale (31,054) 14,535
Deferred income tax (14,775) -
Currency translation adjustments (2,538) -
------------------------------
Total other comprehensive income (loss) (48,367) 14,535
------------------------------
Comprehensive income (loss) $ (153) $ 23,449
- --------------------------------------------------------------------------------
The unrealized loss on marketable securities available for sale for the
three-months ended March 31, 2005 included a decrease in fair value of $25.6
million related to the shares of Pharmion common stock. The unrealized gain on
marketable securities available for sale for the three months ended March 31,
2004 included a $13.3 million increase in fair value of Pharmion common stock.
13. INCOME TAXES (Awaiting Tax Department Review)
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. The Company provides a
valuation allowance when it is more likely than not that deferred tax assets
will not be realized.
At March 31, 2005, the Company determined it was more likely than not that the
benefits of its deferred tax assets would be realized based on favorable
clinical data related to REVLIMID(R) during the quarter in concert with the
Company's nine consecutive quarters of profitability. This led to the conclusion
that it was more likely than not that the Company will generate sufficient
taxable income to realize the benefits of its deferred tax assets. The income
tax benefit from elimination of the valuation allowances totaled $42.6 million.
The elimination of valuation allowances of approximately $3.0 million and $2.3
million related to certain deferred tax affects of historical acquisitions has
been offset first to reduce related goodwill and intangibles, respectively, with
the balance to reduce income tax expense. The elimination of valuation
allowances of approximately $30.2 million related to tax deductions that arose
in connection with stock option exercises has been offset against additional
paid in capital. The effect of elimination of the valuation allowances of
approximately $14.8 million related to certain deferred tax affects of
unrealized gains and losses on marketable securities available for sale has been
offset against accumulated other comprehensive income. Deferred tax account
balances at March 31, 2005 included deferred current and non-current assets of
$74.7 million and $62.8 million, respectively, and deferred current and
non-current liabilities of $20.5 million and $36.3 million, respectively.
Deferred tax asset and liability balances have been presented net on the
accompanying balance sheet.
17
Notes to Unaudited Consolidated Financial Statements
March 31, 2005
(Thousands of dollars, except per share amounts, unless otherwise indicated)
14. SEGMENTS
The Company operates in two business segments - Human Pharmaceuticals and Stem
Cell Therapies. Revenues and income before taxes by segment for the three-month
periods ended March 31, 2005 and 2004 were as follows:
-------------------------------------------------------------------------
Three Month Period Ended March 31,
2005 2004
As Restated
(See Note 2)
-------------------------------------------------------------------------
Revenues:
Human Pharmaceuticals $ 111,118 $ 81,962
Stem Cell Therapies 1,278 911
-------------------------------------
Total $ 112,396 $ 82,873
-------------------------------------
Income (loss) before income taxes:
Human Pharmaceuticals $ 20,375 $ 13,375
Stem Cell Therapies (6,333) (3,660)
-------------------------------------
Total $ 14,042 $ 9,715
-------------------------------------
Expenses incurred at the consolidated level are included in the results of the
human pharmaceuticals segment.
Total assets by segment as of March 31, 2005 and December 31, 2004 were as
follows:
- --------------------------------------------------------------------------------
March 31, December 31,
2005 2004
- --------------------------------------------------------------------------------
Human Pharmaceuticals $ 400,860 $ 334,932
Stem Cell Therapies 23,493 23,824
Unallocated 701,283 748,537
---------------------------
Total $1,125,636 $1,107,293
---------------------------
Unallocated corporate assets consist of cash and cash equivalents and marketable
securities available for sale.
15. AGREEMENTS
In connection with the Company's acquisition of Penn T Limited, the Company
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.
Following the Penn T acquisition, in December 2004 the Company amended the
Pharmion product supply agreement acquired in the Penn T acquisition. Under the
amended agreement, Pharmion paid the Company 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 the Company
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 the United Kingdom in November 2006.
Amounts under the agreement are recorded as deferred revenue and will be
recognized on a straight-line basis over 13 years.
18
Notes to Unaudited Consolidated Financial Statements
March 31, 2005
(Thousands of dollars, except per share amounts, unless otherwise indicated)
In late 2004, the Company entered into agreements providing manufacturers of
isotretinoin a non-exclusive license to its System for Thalidomide Education and
Prescribing Safety, or S.T.E.P.S., patent portfolio. Revenues will be recognized
as received under the agreements. 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.
In March 2003, the Company entered into a three-year supply and distribution
agreement with GlaxoSmithKline ("GSK") to distribute, promote and sell
ALKERAN(R) (melphalan), a therapy approved by the U.S. Food and Drug
Administration for the palliative treatment of multiple myeloma and carcinoma of
the ovary. Under the terms of the agreement, the Company purchases ALKERAN
tablets and ALKERAN for infusion from GSK and distributes the products in the
United States under the Celgene label. The agreement requires the Company to
purchase certain minimum quantities each year for 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 March 31, 2005, the remaining minimum
purchase requirements under the agreement totaled $45.0 million, consisting of
$25.0 million from the initial agreement and $20.0 million from a twelve-month
extension effective to March 2007.
19
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FACTORS AFFECTING FUTURE RESULTS
Future operating results will depend on many factors, including demand for our
products, regulatory approvals of our products, the timing and market acceptance
of new products launched by us or competing companies, the timing of research
and development milestones, challenges to our intellectual property and our
ability to control costs. The most salient factors are, in the near term,
competition with THALOMID(R), including generic competition, and delays in the
introduction of REVLIMID(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 as well as
changes in dosing regimen 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 and other
therapeutic areas. 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.
Such factors include 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 U.S. Food, Drug and Cosmetic Act, which would
then, in turn, entitle us to 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.
20
DELAY IN THE INTRODUCTION OF REVLIMID(R): While we believe that we have made
significant progress toward regulatory approval of REVLIMID(R), a delay in its
introduction or 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 could impact the market's acceptance of
REVLIMID(R). Progress made toward regulatory approval of REVLIMID(R) includes:
1) the findings of an Independent Data Monitoring Committee that evaluated both
Phase III Special Protocol Assessment (SPA) multiple myeloma trials and found a
statistically significant improvement in time to disease progression in patients
receiving REVLIMID plus dexamethasone versus patients receiving dexamethasone
alone. As a result of these findings, the trials were unblinded to give patients
currently not on REVLIMID(R) the opportunity to add REVLIMID to their regimen
and we have initiated discussions with the FDA and international regulatory
authorities regarding the submission of this data for potential approval and 2)
the completion of a rolling submission of a New Drug Application, or NDA, for
REVLIMID(R) to the FDA for review. Our NDA seeks approval to market REVLIMID(R)
as a treatment for transfusion-dependent patients with myelodysplastic
syndromes, or, MDS, and MDS patients with a deletion 5q chromosomal abnormality.
While the submission of the NDA could result in an earlier regulatory approval
if the data were to be sufficiently compelling, it should be noted that the NDA
is based on Phase II open label data and that the FDA does not often grant
approvals based on such 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.
ACQUISITIONS
On October 21, 2004, 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 $118.3 million in
cash, net of cash acquired and including working capital adjustments and total
transaction costs. For more information see Note 4 of the Notes to the unaudited
Consolidated Financial Statements.
21
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED MARCH 31, 2005 VS.
THREE-MONTH PERIOD ENDED MARCH 31, 2004
TOTAL REVENUE: Total revenue and related percentages for the three-month periods
ended March 31, 2005 and 2004 were as follows:
- --------------------------------------------------------------------------------
Three-month period ended
March 31,
(In thousands $) 2005 2004 % Change
- --------------------------------------------------------------------------------
Net product sales:
THALOMID(R) $ 88,391 $ 69,202 27.7%
Focalin(R) 1,226 1,029 19.1%
ALKERAN(R) 7,739 5,770 34.1%
Other 289 119 142.9%
----------------------------------
Total net product sales $ 97,645 $ 76,120 28.3%
Collaborative agreements
and other revenue 5,229 2,133 145.1%
Royalty revenue 9,522 4,620 106.1%
----------------------------------
Total revenue $ 112,396 $ 82,873 35.6%
- --------------------------------------------------------------------------------
THALOMID(R) net sales were higher in the three-month period ended March 31, 2005
primarily due to price increases implemented since the end of the first quarter
of 2004. The total number of prescriptions, which increased approximately 5.2%
percent from the prior year period, was offset by lower average daily doses.
Focalin(R) net sales were higher in the three-month period ended March 31, 2005
due to the timing of shipments to Novartis for their commercial distribution.
ALKERAN(R) net sales were higher in the three-month period ended March 31, 2005
due to price increases implemented since the end of the first quarter of 2004 as
well as the resolution of supply disruptions experienced in 2004, which led to
inconsistent supplies of Alkeran IV and consequently inconsistent end-market
buying patterns.
Revenues from collaborative agreements and other sources for the three-month
period ended March 31, 2005 included approximately $3.6 million related to our
sponsored research, license and other agreements with Pharmion Corporation;
approximately $1.0 million from umbilical cord blood enrollment, collection and
storage fees generated through our LifeBankUSA business; $0.5 million related to
the agreements providing manufacturers of isotretinoin, a non-exclusive license
to our System for Thalidomide Education and Prescribing Safety, or
S.T.E.P.S.(R), patent portfolio; and $0.1 from other miscellaneous research and
development agreements. The 2004 period included approximately $1.3 million
related to our sponsored research, license and other agreements with Pharmion
Corporation and approximately $0.8 million from umbilical cord blood enrollment,
22
collection and storage fees generated through our LifeBankUSA business.
Royalty revenue for the three-month period ended March 31, 2005 included
approximately $9.3 million of royalties received from Novartis on sales of their
entire family of Ritalin(R) drugs; approximately $0.1 million of royalties
received from Pharmion on their commercial sales of THALOMID(R); and
approximately $0.1 million of miscellaneous other royalties. The three-month
period ended March 31, 2004 included approximately $4.6 million of royalties
received from Novartis on sales of their entire family of Ritalin(R) drugs. The
increase in Ritalin(R) royalty revenue was due to increases in the royalty rate
on both Ritalin(R) and Ritalin(R) LA as well as an increase in Ritalin(R) LA
sales by Novartis.
COST OF GOODS SOLD: Cost of goods sold and related percentages for the
three-month periods ended March 31, 2005 and 2004 were as follows:
- ------------------------------------------------------------------------------
Three-month period ended
March 31,
(In thousands $) 2005 2004
- ------------------------------------------------- ----------------------------
Cost of goods sold $ 12,604 $ 14,395
Increase (Decrease) from prior year $ (1,791) N/A
Percentage increase (decrease) from prior year (12.4)% N/A
Percentage of net product sales 12.9% 18.9%
- ------------------------------------------------- ----------------------------
Cost of goods sold and cost of goods sold as a percentage of net product sales
decreased from the prior year period primarily due to lower ALKERAN(R) costs,
partially offset by higher THALOMID(R) costs. The decrease in ALKERAN(R) costs
were due to lower unit costs, while the increase in THALOMID(R) costs were due
to higher royalties resulting from higher sales.
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.
23
Research and development expenses and related percentages for the three-month
periods ended March 31, 2005 and 2004 were as follows:
- -------------------------------------------------------------------
Three-month period ended
March 31,
(In thousands $) 2005 2004
- -------------------------------------------------------------------
Research and development expenses $ 40,037 $ 37,728
Increase from prior year $ 2,309 N/A
Percentage increase from prior year 6.1% N/A
Percentage of total revenue 35.6% 45.5%
- -------------------------------------------------------------------
Research and development expenses increased from the prior year period primarily
due to higher clinical drug supply and personnel costs in support of REVLIMID(R)
Phase II regulatory programs for MDS and pivotal Phase III SPA trials for
multiple myeloma, or MM.
Research and development expenses in the three-month period ended March 31, 2005
consisted of approximately $17.7 million spent on human pharmaceutical clinical
programs; $10.5 million spent on other human pharmaceutical programs, including
toxicology, analytical research and development, drug discovery, quality and
regulatory affairs; $8.9 million spent on biopharmaceutical discovery and
development programs; and $2.9 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,
benzopyranones, and ligase inhibitors and placental and cord blood derived stem
cell programs. In the prior year period, approximately $20.6 million was spent
on human pharmaceutical clinical programs; $7.1 million was spent on other human
pharmaceutical programs, including toxicology, analytical research and
development, drug discovery, quality and regulatory affairs; $8.5 million was
spent on biopharmaceutical discovery and development programs; and $1.5 million
was spent on placental stem cell and biomaterials programs.
As total revenue increases, research and development expense may continue to
decrease as a percentage of total revenue, however the actual dollar amount may
continue to increase as earlier stage compounds are moved through the
preclinical and clinical stages. Generally, the time to completion of each phase
is estimated as follows:
Phase I ----- 1-2 years
Phase II ---- 2-3 years
Phase III --- 2-3 years
Due to the significant risk factors and uncertainties inherent in preclinical
tests and clinical trials associated with each of our research and development
projects, the cost to complete such projects is not reasonably estimable. The
data obtained from these tests and
24
trials may be susceptible to varying interpretation that could delay, limit or
prevent a project's advancement through the various stages of clinical
development, which would significantly impact the costs incurred to bring a
project to completion.
SELLING, GENERAL AND ADMINISTRATIVE: Selling expenses consisted 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 consisted 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
three-month periods ended March 31, 2005 and 2004 were as follows:
- ------------------------------------------------------------------------------
Three-month period ended
March 31,
(In thousands $) 2005 2004
- ------------------------------------------------------------------------------
Selling, general and administrative expenses $ 37,806 $ 25,936
Increase from prior year $ 11,870 N/A
Percentage increase from prior year 45.8% N/A
Percentage of total revenue 33.6% 31.3%
- ------------------------------------------------------------------------------
Selling, general and administrative expenses increased from the prior year
period primarily due to an increase of approximately $6.5 million in general
administrative and medical affair expenses primarily due to higher
headcount-related expenses, an increase of approximately $5.5 million in
commercial expenses primarily due to higher marketing and salesforce expenses
and approximately $1.2 million related to accelerated depreciation of leasehold
improvements at four New Jersey locations being consolidated into our new
corporate headquarters.
INTEREST AND OTHER INCOME (EXPENSE), NET: Included in interest and other income
(expense) for the three-month period ended March 31, 2005 was expense of
approximately $6.9 million and included in the prior year period was income of
approximately $0.3 million related to changes in the value of our investment in
EntreMed, Inc. warrants. Excluding these amounts, adjusted interest and other
income was $5.7 million for the three-month period ended March 31, 2005 compared
to $7.0 million for the three-month period ended March 31, 2004. The decrease on
an adjusted basis of $1.3 million was primarily due to lower returns on our cash
and marketable securities portfolio and to a lesser extent foreign exchange
losses.
EQUITY IN LOSSES OF AFFILIATED COMPANY: On March 31, 2005 we exercised warrants
to purchase 7,000,000 shares of EntreMed common stock (approximately 14% of the
outstanding common shares) at an aggregate cost of $10.5 million. The fair value
of the warrants at the time of exercise was estimated to be approximately $12.9
million.
25
The fair value of the warrants decreased by approximately $6.9 million during
the three-month period ended March 31, 2005 and such loss is reflected in
interest income and other income (expense), net on the Consolidated Statement of
Operations for the three-month period ended March 31, 2005. As a result, the
total value ascribed to our investment was $23.4 million. Since we also hold
3,350,000 shares of EntreMed voting preferred shares convertible into 16,750,000
shares of common stock, we determined that we had significant influence over our
investee and we are applying the equity method of accounting to our common stock
investment. Based on a preliminary valuation, approximately $4.4 million of the
value was ascribed to in-process research and development and written off as of
March 31, 2005 (the charge is included in equity losses of affiliated company).
The residual investment of approximately $19.0 million exceeded our
proportionate share of the EntreMed net assets by approximately $13.4 million,
which based on a preliminary valuation consists of goodwill and intangible
assets of approximately $12.5 million and $0.9 million, respectively. We will
record our share of future gains and losses from EntreMed as prescribed under
the equity method of accounting based on our common stock ownership. Future
financial results will be included in the human pharmaceuticals segment.
INTEREST EXPENSE: Interest expense was approximately $2.4 million for each of
the three-month periods ended March 31, 2005 and 2004 and primarily reflects
three months of interest expense and amortization of debt issuance costs on the
$400 million convertible notes issued on June 3, 2003.
INCOME TAX PROVISION (BENEFIT): At March 31, 2005, we determined it was more
likely than not that the benefits of our deferred tax assets would be realized.
This determination was based upon the external Independent Data Monitoring
Committee's ("IMDC") analyses of two Phase III Special Protocol Assessment (SPA)
multiple myeloma trials and the conclusion that these trials exceeded the
pre-specified stopping for the trials. The IDMC found a statistically
significant improvement in time to disease progression -- the primary endpoint
of these Phase III trials -- in patients receiving REVLIMID plus dexamethasone
compared to patients receiving dexamethasone alone. This, in concert with our
nine consecutive quarters of profitability led to the conclusion that is was
more likely than not that we will generate sufficient taxable income to realize
the benefits of our deferred tax assets. The income tax benefit from elimination
of the valuation allowances totaled $42.6 million. The elimination of valuation
allowances relating to certain deferred tax affects that relate to historical
acquisitions have been offset first to reduce related goodwill and intangibles
with the balance to reduce income tax expense. The elimination of valuation
allowances relating to tax deductions that arose in connection with stock option
exercises have been offset against additional paid in capital. We estimate a
projected book tax rate of 60 percent and a cash tax rate of 28 percent for the
remainder of 2005. Income tax provision for the three-month period ended March
31, 2004 was $0.8 million.
NET INCOME: Net income and per common share amounts for the three-month periods
ended March 31, 2005 and 2004 were as follows:
- -------------------------------------------------------------------------------
Three-month period ended
March 31,
(In thousands, except per share amounts) 2005 2004
As Restated
- -------------------------------------------------------------------------------
Net income $ 48,214 $ 8,914
Per common share amounts:
Basic $ 0.29 $ 0.05
Diluted $ 0.26 $ 0.05
Weighted average number of shares of
common stock utilized to calculate per
common share amounts:
Basic 165,613 162,950
Diluted 191,108 174,526
- -------------------------------------------------------------------------------
26
Net income for the three-month period ended March 31, 2005 included: 1) expense
of approximately $1.2 million, or $0.5 million net of tax, related to
accelerated depreciation of leasehold improvements at four New Jersey locations
being consolidated into our new corporate headquarters; 2) expense of
approximately $4.4 million, or $1.7 million net of tax, for the write-off of
in-process research and development related to our equity method investment in
EntreMed, Inc.; 3) expense of approximately $6.9 million, or $2.8 million net of
tax, related to changes in the estimated value of our investment in EntreMed,
Inc. warrants prior to their exercise; and 4) a tax benefit of $42.6 million
related to the elimination of deferred tax valuation allowances. Net income for
the three-month period ended March 31, 2004 included income (on a pre- and
after-tax basis) of approximately $0.3 million related to changes in the value
of our investment in EntreMed, Inc. warrants. Adjusted for these items, net
income for the three-month period ended March 31, 2005 was approximately $10.6
million, or $0.06 per diluted share compared to $8.6 million, or $0.5 per
diluted share. The period-over-period increase in net income on an adjusted
basis was primarily due to an increase in total revenues of approximately $29.5
million (driven primarily by an increase in THALOMID net sales of $19.2 million
and an increase in collaborative, royalty and other revenues) offset by higher
operating expenses of approximately $11.2 million, lower interest and other
income expense of approximately $1.3 million, and an increase in the effective
tax rate resulting in a higher tax provision. On a diluted per share basis,
approximately $0.02 unfavorable impact resulted from utilizing a greater number
of weighted average diluted shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $5.1 million for the
three-month period ended March 31, 2005, compared to net cash provided by
operating activities of approximately $6.9 million in the prior year period. The
decrease was primarily due to taxes paid of approximately $17.5 million
partially offset by lower net assets, excluding the effects of acquisitions and
higher net earnings.
Net cash used in investing activities was approximately $70.1 million for the
three-month period ended March 31, 2005 compared to $31.9 million in the prior
year period. Included in the 2005 activities were cash outflows of $4.2 million
for capital expenditures, $8.4 million for working capital adjustments and
acquisition costs related to the October 2004 acquisition of Penn T, $46.9
million for net purchases of marketable securities available for sale and $10.5
million for the exercise of warrants to purchase 7,000,000 shares of EntreMed
common stock. Included in the 2004 activities were cash outflows of $2.2 million
for capital expenditures, $22.7 million for net purchases of marketable
securities available for sale and $7.0 million for an
27
investment made in Royalty Pharma Strategic Partners, LP, which is classified in
other assets on the consolidated balance sheet.
Net cash provided by financing activities was approximately $13.9 million for
the three-month period ended March 31, 2005 compared to $3.3 million in the
prior year period. Included in financing activities were proceeds from the
exercise of common stock and warrants of approximately $14.0 million and $3.3
million in the 2005 and 2004 periods, respectively.
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
Our major outstanding contractual obligations relate primarily to our
convertible note obligation, operating leases, ALKERAN supply and distribution
agreement, Penn Pharmaceutical Holding Limited technical services agreement,
employment agreements and certain other contract commitments. The following
table sets forth our contractual obligations as of March 31, 2005 by contractual
due dates:
- ----------------------------------------------------------------------------------------------------------------
Contractual Due Dates
Less Than 1-3 3-5 More Than
(IN MILLIONS $) 1 Year Years Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------
Convertible notes obligation $ - $ - $ 400.0 $ - $ 400.0
Operating leases 3.5 6.6 5.5 5.7 21.3
ALKERAN agreements 20.6 20.0 - - 40.6
Employment agreements 2.4 0.2 - - 2.6
Other contract commitments 4.8 7.5 3.8 - 16.1
-----------------------------------------------------------------------
Total $ 31.3 $ 34.3 $ 409.3 $ 5.7 $ 480.6
-----------------------------------------------------------------------
In 2003, we adopted a Long-Term Incentive Plan, or LTIP, designed to provide key
officers and executives with long-term performance based incentive opportunities
contingent upon achievement of pre-established corporate performance objectives,
and payable only if the officer or executive is employed at the end of the
performance cycle. The performance cycle for the 2005 Plan began on May 1, 2003
and will end on December 31, 2005. The performance cycle for the 2006 Plan began
on January 1, 2004 and will end on December 31, 2006. The performance cycle for
the 2007 Plan began 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
28
for the 2005 and 2007 Plans 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 and 2007 Plans and 150% level for the 2006 Plan are $6.1
million, $4.9 million and $7.1 million for the 2005 Plan, 2006 Plan and 2007
Plan, respectively. Such awards are payable in cash or, at our discretion, we
can elect to pay the same value in our common stock based upon the fair value of
our common stock at the payout date. Upon a change in control, participants will
be entitled to an immediate payment equal to their target awards, or, if
greater, an award based on actual performance through the date of the change in
control.
2005 FINANCIAL OUTLOOK
In our April 28, 2005 earnings press release, we affirmed our 2005 financial
targets. The 2005 financial guidance anticipates total revenue in a $525 million
range, with THALOMID(R) revenue targeted to reach the $400 million range. We are
maintaining our revenue forecast for the Ritalin(R) family of drugs at
approximately $60 million in 2005, which includes a significant milestone
payment for the anticipated approval of FOCALIN XR TM. Research and development
expenses are expected to be in the range of $190 million, and selling, general
and administrative expenses are targeted to reach a range of $140 million.
Adjusted diluted earnings per share for fiscal year 2005 are expected to be in
the $0.55 range. Although management believes that the April 28, 2005 guidance
continues to reflect the current thinking of management, there can be no
assurance that revenues or earnings will develop in the manner projected or if
the analysis, on which the projections were based, were to be redone on the date
hereof that there would be no change in the guidance.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one which is both important to the portrayal our
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. Our
significant accounting policies are fully described in Note 1 of the Notes to
the Consolidated Financial Statements included in our 2004 Annual Report on Form
10-K, as amended. Our critical accounting policies are disclosed in the
Management's Discussion and Analysis of Financial Condition and Results of
Operation section of our 2004 Annual Report on Form 10-K. The only significant
change as it pertains to such accounting policies relates to our investment in
EntreMed, Inc.
On March 31, 2005 we exercised warrants to purchase 7,000,000 shares of EntreMed
common stock (approximately 14% of the outstanding common shares) at an
aggregate cost of $10.5 million. The fair value of the warrants at the time of
exercise was estimated to be approximately
29
$12.9 million. The fair value of the warrants decreased by approximately $6.9
million during the three-month period ended March 31, 2005 and such loss is
reflected in other expense on the Consolidated Statement of Operations for the
three-month period ended March 31, 2005. As a result, the total value ascribed
to our investment was $23.4 million. Since we also hold 3,350,000 shares of
EntreMed voting preferred shares convertible into 16,750,000 shares of common
stock, we determined that we have significant influence over our investee and we
are applying the equity method of accounting to our common stock investment.
Based on a preliminary valuation, approximately $4.4 million of the value was
ascribed to in-process research and development and written off as of March 31,
2005. The residual investment of approximately $19.0 million exceeded our
proportionate share of the EntreMed net assets by approximately $13.4 million,
which based on a preliminary valuation consists of goodwill and intangible
assets of approximately $12.5 million and $0.9 million, respectively. Based on
the closing share price of EntreMed common stock on March 31, 2005, the
estimated fair value of our common stock investment in EntreMed was
approximately $14.7 million as of March 31, 2005.
We will record our share of future gains and losses from EntreMed as prescribed
under the equity method of accounting based on our common stock ownership.
Future financial results will be included in the human pharmaceuticals segment.
The investment will be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the investment may not be
recoverable. One such circumstance would be if the fair value of EntreMed's
common stock was below our carrying value and we determined this to be other
than temporary. All significant intercompany transactions from this affiliates
will be eliminated.
RECENT DEVELOPMENTS
We currently are dependent on ChemSyn Laboratories, a Division of Eagle-Picher
Technologies, L.L.C., for the supply of the raw material for THALOMID(R).
ChemSyn Laboratories operates a cGMP, or current Good Manufacturing Practices,
compliant, FDA-approved facility for the manufacture of the bulk active
pharmaceutical ingredient, or API, for THALOMID(R). On April 11, 2005,
Eagle-Picher filed to reorganize under Chapter 11 of the Bankruptcy Code.
Eagle-Picher plans to continue to operate while it seeks to divest a number of
its operating units. In papers filed with the U.S. Bankruptcy Court in the
Southern District of Ohio in Cincinnati, Eagle-Picher indicated that it has
received a commitment for up to $50 million in debtor-in-possession financing
from a group of lenders led by Harris Trust and Savings Bank, subject to certain
limitations and conditions. We currently have adequate supplies of API on hand
to support long-term requirements. Although we do not believe that the
Eagle-Picher's Chapter 11 bankruptcy
30
filing will result in any supply disruptions, we will continue to monitor the
status of the proceeding.
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
The Management's Discussion and Analysis of Financial Condition and Results of
Operations provided above contains certain forward-looking statements which
involve known and unknown risks, delays, uncertainties and other factors not
under our control which may cause actual results, performance and achievements
to be materially different from the results, performance or other expectations
implied by these forward-looking statements. These factors include the results
of current or pending clinical trials, our products failure to demonstrate
efficacy or an acceptable safety profile, actions by the FDA, the financial
condition of suppliers including their solvency and ability to supply product
and other factors detailed herein and in the Company's other filings with the
Securities and Exchange Commission.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion provides forward-looking quantitative and qualitative
information about our potential exposure to market risk. Market risk represents
the potential loss arising from adverse changes in the value of financial
instruments. The risk of loss is assessed based on the likelihood of adverse
changes in fair values, cash flows or future earnings.
We have established guidelines relative to the diversification and maturities of
investments to maintain safety and liquidity. These guidelines are reviewed
periodically and may be modified depending on market conditions. Although
investments may be subject to credit risk, our investment policy specifies
credit quality standards for our investments and limits the amount of credit
exposure from any single issue, issuer or type of investment. Our investments
are also subject to interest rate risk and will decrease in value if market
interest rates increase. We do not use derivative instruments for trading
purposes. At March 31, 2005, our market risk sensitive instruments consisted of
marketable securities available for sale and unsecured convertible notes issued
by the Company.
MARKETABLE SECURITIES AVAILABLE FOR SALE: At March 31, 2005 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
31
premiums and accretion of discounts to maturity. The amortization, along with
realized gains and losses, is included in interest income and other income
(expense), net.
As of March 31, 2005, the principal amounts, fair values and related weighted
average interest rates of our investments in debt securities classified as
marketable securities available-for-sale were as follows:
-----------------------------------------------------------------------------------------------------------------------
Fixed rate securities
Duration
Less Variable
Than 1-3 3-5 5-7 Rate
(IN THOUSANDS $) 1 Year Years Years Years Securities Total
------------------------------------------------------------------------------------------------------------------------
Principal amount $319,420 $103,304 $17,907 $68,425 $70,513 $579,569
Fair value $320,026 $105,293 $17,696 $65,518 $64,157 $572,690
Average Interest Rate 3.4% 4.2% 6.0% 5.9% 5.4% 4.2%
------------------------------------------------------------------------------------------------------------------------
PHARMION COMMON STOCK: At March 31, 2005, we held a total of 1,939,600 shares of
Pharmion Corporation common stock, which had an estimated fair value of
approximately $56.2 million (based on the closing price reported by the National
Association of Securities Dealers Automated Quotations, or NASDQ system, and
which exceeded the cost by approximately $36.0 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 the investment.
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
conversion price of
32
$24.225 per share (for more information see Note 6 of the Notes to the unaudited
Consolidated Financial Statements).
At March 31, 2005, the fair value of our convertible notes exceeded the carrying
value of $400.0 million by approximately $199.8 million, which we believe
reflects the increase in the market price of our common stock to $34.05 per
share as of March 31, 2005. 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 our stock price generally results in an increase in the fair value
of convertible debt, but does not impact the carrying value.
33
Item 4 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. As of the
end of the period covered by this quarterly 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.
(b) Changes in Internal Control Over Financial Reporting. There
have not been any changes in our internal control over
financial reporting during the fiscal quarter, except for
internal controls implemented related to the equity method
investment in EntreMed, Inc., to which this report relates
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
34
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits
10.1 Amendment Number Three to the Celgene Corporation 1995
Non-Employee Directors' Incentive Plan.
31.1 Certification by the Company's Chief Executive Officer dated
May 10, 2005.
31.2 Certification by the Company's Chief Financial Officer dated
May 10, 2005.
32.1 Certification by the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350 dated May 10, 2005.
32.2 Certification by the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 dated May 10, 2005.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELGENE CORPORATION
DATE May 10, 2005 BY /s/ Robert J. Hugin
-------------------- --------------------------------------------
Robert J. Hugin
Senior Vice President
Chief Financial Officer
DATE May 10, 2005 BY /s/ James R. Swenson
-------------------- --------------------------------------------
James R. Swenson
Controller
(Chief Accounting Officer)
36