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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required) For the fiscal year ended December 31, 1995
|_| 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
(Exact name of registrant as specified in its charter)
Delaware 22-2711928
(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
7 Powder Horn Drive
Warren, New Jersey 07059
(Address of principal executive offices) (Zip Code)
(908) 271-1001
(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: None
Common Stock, par value $.01 per share
(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.[ ]
Aggregate market value of voting stock held by non-affiliates of registrant as
of March 1, 1995: $145,294,006.
Number of shares of Common Stock outstanding as of March 1, 1996: 9,044,981
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement pursuant to Regulation
14A, which statement will be filed not later than 120 days after the end of the
fiscal year covered by this Report, are incorporated by reference in Part III
hereof.
CELGENE CORPORATION
ANNUAL REPORT ON FORM 10-K
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TABLE OF CONTENTS
Item No. Page
- -------- ----
Part I
1. Business ......................................................................3
2. Properties....................................................................17
3. Legal Proceedings.............................................................17
4. Submission of Matters to a Vote of
Security Holders............................................................17
Part II
5. Market for Registrant's Common Equity
and Related Stockholder Matters.............................................18
6. Selected Financial Data.......................................................19
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations...........................20
8. Financial Statements and Supplementary Data...................................23
9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure..........................23
Part III
10. Directors and Executive Officers of the
Registrant..................................................................23
11. Executive Compensation........................................................23
12. Security Ownership of Certain Beneficial
Owners and Management.......................................................23
13. Certain Relationships and Related
Transactions................................................................24
Part IV
14. Exhibits, Financial Statements, and
Reports on Form 8-K.........................................................24
PART I
ITEM 1. BUSINESS
Celgene Corporation, a Delaware corporation (the "Company"), attempts to
develop and produce innovative products addressing two major markets: high
purity chiral chemical intermediates for use in the production of
pharmaceuticals, food additives, and agricultural chemicals; and therapeutics
for treatment of certain severe inflammatory and degenerative conditions
associated with an over-response of the immune system.
Recent Developments
JOHN W. JACKSON NAMED CHAIRMAN AND CEO
In January, 1996, the Company named John W. Jackson Chairman and Chief
Executive Officer, following the retirement of Richard G. Wright at the end of
1995.
Mr. Jackson began his career in the pharmaceutical industry in 1971 at
Merck & Company where he held human health marketing positions of increasing
responsibility in several European countries and at Merck's U.S. headquarters.
In 1978 he joined American Cyanamid Company with various Far East, Latin
American and Canadian duties until being named vice president-international,
which included responsibilities for operations of Lederle Laboratories and Davis
& Geck, two Cyanamid units. In 1986 Mr. Jackson was promoted to president of
American Cyanamid's worldwide Medical Device Division. In 1991 he founded Gemini
Medical, a consulting firm which specialized in services to start-up drug and
biotechnology companies and investment advice. A graduate of the Gordonstoun
School and Yale University, Mr. Jackson earned his MBA at INSEAD in France. A
former USMC officer, he served as an infantry platoon and company commander in
Vietnam and with the Sixth Fleet in the Mediterranean.
SYNOVIR'tm' EXPANDED ACCESS PROGRAM
On December 14, 1995, the Company announced that it launched a U.S. Food
and Drug Administration (the "FDA") approved program for expanded access to its
thalidomide drug, trade named SYNOVIR, for AIDS patients suffering from
cachexia, a severe weight loss condition. Prior to the announcement, the drug
had been available to the AIDS community only through an emergency
investigational exemption for a new drug ("IND") or through unregulated
procurement from unknown sources. The FDA previously granted the Company
permission to dispense the drug legally to physicians treating AIDS patients and
approved a request by the Company to recover costs for supplying the drug and
related clinical expenses. It is estimated that roughly 100,000 U.S. AIDS
patients suffer from severe weight loss.
The cost of SYNOVIR under this program will be about $550 for a 12-week
supply. The price of SYNOVIR was established under FDA guidelines and enables
the Company to recover costs of manufacture, R&D and handling of the expanded
access program. A portion of the SYNOVIR distributed will be provided free of
charge to needy patients.
3
The protocol for the expanded access trial of SYNOVIR is complementary
to the Company's placebo-controlled HIV wasting trial and provides patients who
fail to meet admission criteria of that study access to the drug. The broad
entry criteria, coupled with greater physician access, substantially increases
the availability of SYNOVIR to patients who may benefit from therapy.
SYNOVIR PRODUCTION TO BE INCREASED
On December 18, 1995, the Company announced that it is increasing supply
capabilities for SYNOVIR. Under a new agreement, Penn Pharmaceuticals Ltd. of
Tredegar, UK, will build a special facility devoted exclusively to SYNOVIR with
a first phase capacity of more than 10 million capsules annually, with potential
for expansion. The new facility will help fill demand for SYNOVIR during the
special expanded access program currently underway and set the stage for
commercial quantities.
Penn, a closely-held contract pharmaceutical manufacturer, has been
supplying clinical quantities of SYNOVIR to Celgene for two years and is
expanding output at its current facility. It has extensive experience with
thalidomide and specializes in the development of a wide range of novel dosage
forms. The new facility Penn is constructing for SYNOVIR is expected to be fully
operational in the second half of 1996.
ADDITIONAL SYNOVIR PATENT ISSUED
On December 1, 1995, the Company announced that it was issued US Patent
No. 5,463,063 for a scaleable process to make high purity thalidomide. The
patent covers a new method to manufacture the Company's version of the drug,
trade named SYNOVIR. The process is especially suitable for large scale
manufacture and has been scaled to commercial batch size. This new method has
already been used by the Company to prepare several hundred thousand capsules.
1996 PRIVATE PLACEMENT
At December 31, 1995, the Company had cash and marketable securities
totaling $11,713,000. In March, 1996, the Company realized net proceeds of
approximately $23,800,000 from the sale of shares of Series A Convertible
Preferred Stock. The Company anticipates that its current resources, income
derived from investments plus limited revenue from chiral product sales,
research contracts and potential recoveries under the FDA-approved SYNOVIR cost
recovery program will be sufficient to meet the Company's operating and capital
requirements for the balance of 1996 and 1997.
4
General
The Company's core chiral technology is based on biocatalysis, which
involves the identification and manipulation of microorganisms, or enzymes
isolated from these microorganisms, to perform specialized chemical reactions.
These chemical reactions are difficult, and in some cases impossible, to
duplicate using conventional technology, especially on a commercial scale.
The Company initially has applied its chiral technology to a large
category of chemical compounds known as amines, which are used in the
manufacture of a broad spectrum of pharmaceuticals. In 1990, the Company was
issued a United States process patent covering its chiral amine technology and
commenced a marketing program for chiral chemical intermediates for existing
pharmaceutical products and products under development. The Company believes
that its technology in many cases can produce chiral chemicals having a higher
chiral purity level and a lower cost than products manufactured through
conventional processes. In 1995, the Company sold such intermediates in
developmental quantities for testing purposes to a number of pharmaceutical
companies, and received research and development funding under contracts from
other customers interested in the application of the Company's chiral technology
to their manufacturing needs.
The Company's patented chiral amine technology can be applied to a wide
range of pharmaceutical, food, and agricultural products and, as a result, the
Company expects that it will not be dependent upon the success of any one of its
customers' products. In addition, the Company has filed applications for patents
or is developing technologies to produce certain amino acids, carboxylic acids,
esters, and phenylserine derivatives, and other important categories of chiral
compounds.
The Company's primary marketing strategy in its chiral business is to
produce and sell high purity chemical intermediates. In certain instances, based
on a customer's manufacturing needs, the Company will sell the biocatalysts and
license to its customers the related process technology necessary to produce
such chemical intermediates, on a large scale.
The Company is also developing proprietary pharmaceutical products. In
August 1992, the Company entered into a two-year research and development
agreement with The Rockefeller University to test the effectiveness of certain
small molecule compounds and their derivatives in reducing symptoms associated
with elevated Tumor Necrosis Factor Alpha ("TNF[A]") levels in patients. Under
the terms of the agreement, the Company has the world-wide exclusive license to
manufacture and market any drugs which may result from the research performed at
The Rockefeller University. The agreement has been extended through July, 1998.
In July 1993, results were published from investigator clinical trials
managed by The Rockefeller University which suggested that the lead compound of
interest, thalidomide, might be effective in inhibiting the progression of
HIV-1. In the fourth quarter of 1993, the Company began pre-clinical testing of
new compounds, or new chemical entities (NCEs), from which it believed it might
select and develop drugs with greater efficacy and fewer side effects than
thalidomide. At that time, the Company filed a composition of matter patent
application covering such compounds. In 1995, the Company continued to design,
make and test improved NCEs and filed several additional patent applications. In
January 1994, the Company filed an Investigational New Drug Application (an
"IND") with the FDA to enter Phase II clinical trials related to the use of
thalidomide in the treatment of AIDS-related cachexia, or wasting. The Phase II
clinical trial evaluating thalidomide in the treatment of wasting syndrome
associated with HIV/AIDS was initiated during the fourth quarter of 1994.
Enrollment for this controlled
5
study has been slow but steps have been taken to accelerate the process,
including the addition of several new investigator sites throughout the U.S. At
the request of the FDA, the Company agreed to initiate an expanded access
program for patients with the wasting syndrome associated with AIDS. This
program will make SYNOVIR available to a broader spectrum of patients. In an
unusual event, the FDA granted the Company the right to recover costs associated
with this program by charging for the drug supply. The Company began shipping
SYNOVIR under this program in the first quarter of 1996. Additionally, in
February 1994, the National Institute of Allergy and Infectious Diseases (NIAID)
accepted a proposal by the Company to run clinical trials to determine the
safety and effectiveness of SYNOVIR in inhibiting the progression of HIV. The
NIAID initiated the Phase I clinical trial in the first quarter of 1995. The
Company is pursuing the clinical evaluation of SYNOVIR for the treatment of
other diseases and conditions, including leprosy, rheumatoid arthritis, chronic
diarrhea associated with AIDS, and wasting syndrome associated with cancer.
The Company also had been engaged in the development of biotreatment
systems to detoxify certain chemical process waste streams before release by a
manufacturing plant into the environment. Although the Company's biotreatment
systems were successfully demonstrated in a number of field tests, no commercial
installations were ordered. In November 1993, the Company decided to concentrate
its resources on its chiral intermediates and immunotherapeutics programs. On
June 16, 1994, the Company entered into an agreement with Sybron Chemicals, Inc.
("Sybron Chemicals") pursuant to which the Company has exclusively licensed its
biotreatment technology and sold its biotreatment laboratory and field
demonstration equipment to Sybron Chemicals. Under the terms of the agreement,
Sybron Chemicals has the exclusive rights to commercialize the Company's
biocatalysis technology for the removal of hazardous wastes from manufacturing
and process waste streams. Under the terms of the agreement, the Company will
receive royalty payments based on a percentage of any commercial net sales of
biotreatment systems. No such royalty payments have been received to date.
The Company was incorporated in Delaware in 1986 to commercialize
technology developed during a six-year research and development effort by
Hoechst Celanese Corporation ("Hoechst Celanese"). Hoechst Celanese transferred
and assigned to the Company the associated microbial technology and know-how,
research contracts, certain equipment, patents, and patent applications relating
to these earlier research efforts.
The Company's principal executive offices and laboratory facilities are
located at 7 Powder Horn Drive, Warren, New Jersey 07059. The Company's
telephone number is (908) 271-1001.
Forward Looking Statements
Certain information contained in this Annual Report on Form 10-K,
including, without limitation, information appearing under Item 1, "Business"
and Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," are forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934). Factors set forth under Item 1, "Business - Risk
Factors," together with other factors that appear with the forward-looking
statements, or in the Company's other Securities and Exchange Commission
filings, could affect the Company's actual results and could cause the Company's
actual results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company in this Annual Report on Form
10-K.
6
Technology
The Company's core chiral technology involves the identification and
manipulation of microorganisms, or enzymes isolated from these microorganisms,
to produce biocatalysts. Biocatalysis is the use of biocatalysts to perform
specialized chemical reactions.
Unlike traditional chemical catalysis, biocatalysis can be highly
selective and enables a scientist both to custom design chemicals and, in many
cases, eliminate unwanted by-products. Biocatalysis, therefore, can be important
to markets such as pharmaceuticals, food additives, and agricultural chemicals,
where increased regulation and expense is being directed toward eliminating
impurities which often result from traditional chemical processing or when
marketing differentiation is important for drugs whose patents have expired.
Many chemicals, when produced using conventional synthesis, come in two
different forms, or isomers. Although both isomers are very similar or identical
in chemical properties, their molecular structures differ in that they are
mirror images of one another. These are called "chiral" chemicals or compounds.
When a compound contains both isomers, it is called a "racemate" or a "racemic
mixture;" when it contains only one isomer, it is called "chirally pure." One
isomer of a particular chiral chemical may produce a desired biological effect,
while the other isomer either produces the same desired biological effect, no
biological effect, or a negative biological effect. For example, one isomer of a
major artificial sweetener tastes sweet, while the other isomer tastes bitter.
The Company's technology, in the field of biocatalysis, involves the use
of enzymes, (in concert with advanced chemistry) to synthesize or separate only
the "good" isomer in cost-effective processes. This approach can provide major
improvements in purity and economics. A further dimension of the Company's
technology is its ability to design and develop processes using biocatalyst
systems for use on a commercial scale in equipment commonly used by the chemical
processing industries. The use of such conventional equipment can eliminate the
need to make additional capital expenditures for specialized process equipment
or to adopt new operating practices, thereby minimizing production costs.
An important feature of the Company's biocatalysis is the use of new
molecular biology techniques, developed by the Company, to modify and adapt the
biocatalysts to specific products and customer requirements. This flexibility
and sophistication is available only for biocatalysts and is not possible for
conventional chemical catalysts. These molecular biology techniques have allowed
the Company to tailor "off-the-shelf enzymes," or biocatalysts, to access new
target molecules presented by its customers. These techniques not only could
broaden the product range of each biocatalyst, but also could shorten the
lead-time from inquiry by a customer to first supply, which ultimately may
provide higher quality product more cost effectively to the Company's customers.
For certain information concerning expenditures for research and development
programs, see the Note 11(c) in the Notes to Financial Statements appearing
elsewhere herein.
Chiral Chemicals
Markets - The pharmaceutical and agricultural chemical industries have
recognized that different chiral isomers may have different biological effects.
The Company has chosen to focus its efforts in
7
developing and marketing products primarily for the pharmaceutical industry and
secondarily for the food additive and agricultural chemical industries. There
are a number of driving forces behind the anticipated growth in the market for
the Company's chiral technology, including therapeutic, regulatory, product
differentiation, and cost reduction.
Therapeutic - Mirror-image isomers often have different therapeutic
effects. Pharmaceutical companies recognize that the ability to synthesize the
desired isomers may provide additional flexibility in designing and improving
certain of their pharmaceuticals and may be useful in developing pharmaceuticals
that otherwise would be unacceptable.
Regulatory - The FDA, which is responsible for monitoring efficacy and
safety of drugs, has taken the position that it will not mandate chiral purity
in new drugs. However, any company submitting a new drug application for a drug
based on a racemate incurs a risk that the FDA may require additional clinical
testing on the chirally pure form of such drug. As a result of work with its
customers, the Company believes that all leading pharmaceutical companies have
instituted "chirally pure only" guidelines for developing new pharmaceuticals
and will develop "racemic-based" drugs only on an exception basis.
Product Differentiation - When the patent covering a particular
pharmaceutical expires, such pharmaceutical then can be produced in generic
form. If a pharmaceutical is made chirally pure, such product potentially may
enhance a manufacturer's market franchise for a pharmaceutical previously sold
based on a racemate, because the chirally pure pharmaceutical is not only a
chemically differentiated entity but also may be one with improved efficacy and
reduced side effects.
Cost Reduction - The Company has demonstrated that often its technology
can produce chiral chemical intermediates at a lower cost than products
manufactured through conventional chemical processes. The Company is initially
focused on the portion of the pharmaceutical intermediates industry where
chirality is an important factor in the development of new drugs and in cost
improvement of processes for existing drugs, including drugs for which patents
are expiring. Such areas include anti-diabetic/obesity medications,
cardiovascular medications, and neurological therapeutics. The Company believes
that the chiral intermediate market will expand significantly because of the
factors highlighted above.
Products - The majority of synthetic pharmaceuticals sold today which
have chiral centers are sold as racemates (i.e., mixtures); however, there is a
clear trend toward the development and sale of new drugs as chirally pure
products. The Company initially has applied its chiral technology to a large
category of chemical compounds known as amines, which are used in the
manufacture of a broad spectrum of pharmaceuticals. A United States patent was
issued to the Company in August 1990 covering the Company's technology for the
enzymatic separation of chiral amine chemicals. The Company believes that within
the pharmaceutical industry, there are a large number of drugs now under
development which are chiral amines. The Company has demonstrated in its
laboratory the application of its technology on over 100 chiral amine
intermediates.
In December 1990 the Company commenced a marketing program for chiral
amine intermediates. In 1995, the Company sold such intermediates in
developmental quantities for testing purposes to, or entered into process
development agreements with, a number of pharmaceutical and agrochemical
companies. The primary target of these compounds is for use in pharmaceuticals
and agrochemicals which have not yet been approved. The Company has been advised
that some of its chiral intermediates
8
are incorporated in pharmaceutical products currently undergoing clinical
testing and believes that others will be incorporated in pharmaceutical products
on which the manufacturers in the near term will commence clinical testing. The
Company believes that the inclusion of its products in the early, pre-approval
stages of testing will make it more likely that such products will be included
in the final pharmaceutical products, if and when approved. Because the
Company's technology can be applied to a wide range of pharmaceutical and
agrochemical products, the Company can spread the risk of having to rely on the
success of one product to achieve sales. Many of these products, however, may
require approval by the FDA or the Environmental Protection Agency, and it is
difficult to predict how long such approvals will take and whether any such
approvals will be granted.
Chiral Pharmaceuticals
The Company is also applying its expertise in chiral technologies
towards the development and commercialization of proprietary improved
pharmaceuticals. Individual isomers of racemic drugs often have different
pharmacological activities, receptor site specificities, pharmacokinetics, and
toxicological profiles. Based on this, the Company believes it may be possible
to develop single isomer versions of these racemic drugs as improved
pharmaceuticals with one or more benefits such as reduced dosage and
side-effects, improved therapeutic window, enhanced specificity with reduced
side-effects, or potentially new indications.
The Company's strategy is to identify, patent, and develop single isomer
versions of approved racemic drugs either as improved therapies for existing
indications, or for new indications. When appropriate (and in collaboration with
other companies having proprietary positions and expertise in controlled release
technologies) the Company plans to develop these single isomer drugs as
controlled release dosage forms.
The Company considers its approach to the development of proprietary
improved pharmaceuticals to be attractive, since it believes it can develop
these single isomer versions of already approved racemic drugs in less time and
at lower cost than would be required for a completely new substance. This is
because a significant body of information regarding safety and efficacy profiles
of these compounds has accumulated through the extensive use of the racemates
which might be available to the company. Additionally, the time required for the
regulatory approval for these improved single isomer drugs could be reduced
since the parent racemic compound already has been approved and marketed.
The Company has filed and continues to file patent applications covering
the use of these improved single isomer pharmaceuticals for specific
indications, and for process technologies to be used in the manufacture of these
improved single isomer pharmaceuticals.
Except for selected indications where the Company believes it can
develop and market these improved single isomer pharmaceuticals, the Company
plans to seek partners, with marketing and distribution strengths for the
indication, in the development and commercialization of its improved single
isomer pharmaceuticals.
Immunotherapeutics
Over the longer term, the Company intends to use its expertise to
synthesize and develop pharmaceutical products with distinct therapeutic
advantages. In August 1992, the Company entered into a two-year research and
development agreement with The Rockefeller University ("Rockefeller") to prove
the effectiveness of certain compounds in reducing symptoms associated with
elevated TNF[A] levels in patients. This agreement has been extended through
July, 1998. Elevated TNF[A] levels have been associated with a variety of
symptoms, including those associated with cachexia, rheumatoid arthritis,
inflammatory bowel disease, and septic shock. Rockefeller had initiated limited
clinical trials on its first compound, thalidomide, to determine its effect on
weight loss associated with AIDS and tuberculosis. Under the agreement with
Rockefeller, the Company will synthesize new compounds and together with
Rockefeller, jointly perform biological testing. For those compounds showing
promising results, the Company will perform structure activity analysis. As
warranted by subsequent test results, the Company
9
will apply for INDs and conduct clinical testing. Under the terms of the
agreement with Rockefeller, the Company also has the world-wide exclusive
license to manufacture and market any drugs, including SYNOVIR, which may result
from the research performed at Rockefeller. Rockefeller is entitled to receive
royalties based on commercial sales of any such drugs.
The Company is sponsoring and managing a Phase II, double-blind,
placebo-controlled study evaluating the utility of SYNOVIR for controlling
wasting syndrome or cachexia associated with HIV/AIDS. The trial was initiated
in the fourth quarter of 1994 and it is anticipated that at least thirteen U.S.
centers will be involved. The main clinical endpoint is weight gain, and two
doses of SYNOVIR will be evaluated. Assuming patient enrollment is in accordance
with the Company's plan (of which there can be no assurance), it is now
anticipated that the treatment phase of the study will be completed by the end
of 1996. Initial patient enrollment has been slower than anticipated. The
Company addressed this by redelineating certain entry criteria which the Company
believes will aid in patient enrollment. In addition, the Company has opened
additional clinical sites to increase patient enrollment.
Scientific Rationale - Cytokines are proteins which act as chemical
messengers throughout the body. They are similar in function to hormones but are
made by many kinds of cells as opposed to specific organs. In addition to
regulating cellular immunity and inflammation, cytokines have an essential role
in the control of cell proliferation and differentiation. One cytokine,
TNF[A], is recognized as a primary mediator of an inflammatory response, i.e.
it initiates the cascade of events, and hence is vital for an effective
immune/inflammatory response. However, when TNF[A] is overproduced it can
cause debilitating localized and systemic symptoms and even death. Elevated
levels of TNF[A] are observed during the progression of many disease states,
including mycobacterial infections, HIV/AIDS, sepsis, and rheumatoid arthritis.
Therefore, it could be of significant therapeutic benefit selectively to control
elevated TNF[A] levels.
Research activities at Rockefeller have shown that thalidomide can
modulate elevated levels of TNF[A] selectively, i.e. it modulates the level of
TNF[A] to a more normal physiological level while having no direct effect on
the levels of other cytokines. In addition to this initial in vitro work,
clinical symptoms associated with elevated TNF[A] in tuberculosis and leprosy
have been reduced or relieved in patients treated with thalidomide. Preliminary
clinical and in vitro evidence in HIV-infected individuals suggests that
thalidomide may delay the progression of the disease. In summary, thalidomide
therapy modulates TNF[A] levels which appears to result in clinical benefit in
a number of disease states.
There are, however, a number of potential problems associated with
thalidomide treatment, e.g., teratogenicity and sedation. The Company believes
these issues can be addressed with further drug development. A number of
analogous, yet new molecules, have been synthesized by the Company and tested
for their ability to selectively, modulate elevated TNF[A] level in vitro.
Certain compounds have been identified, which are more potent in vitro than
thalidomide, including some more than 4000 times more active than thalidomide.
Initial results suggest that it may be possible to engineer out the toxic side
effects of the parent compound thalidomide, leading to a new generation of more
potent, yet safer, TNF[A] inhibitors. Lead compounds have entered pre-clinical
development and it is anticipated that the first compound will be ready for
safety testing in humans by the end of 1996.
Strategy/Therapeutic Development Program - The Company believes that
selective modulation of a pro-inflammatory cytokine such as TNF[A] provides a
therapeutic approach of great potential as there are currently no approved drug
therapies for a number of severe disease states characterized by excessive
levels of TNF[A]. The Company's near-term strategy is to apply for more rapid
approval for thalidomide
10
treatment of an acute HIV associated disease state, e.g. wasting in late-stage
AIDS patients, or for treatment of a diseased state such as ENL in leprosy. The
Company believes there is anecdotal and clinical evidence to support efficacy of
thalidomide in these indications. If successful, this program would give the
Company an approved drug in the therapeutic category. The Company also plans to
use the knowledge gained for developing new chemical entities with improved
properties. These compounds could lead to a proprietary product portfolio that
would service disease categories such as arthritis, inflammatory bowel disease,
and multiple sclerosis.
If the program at Rockefeller is successful or if the Company were to
develop any other such products having therapeutic benefits, the Company may
attempt to enter into licensing agreements or other arrangements with
established pharmaceutical companies which have more extensive experience and
financial and other resources to conduct the testing of such products in order
to obtain regulatory approval and to manufacture and market such products. Such
decisions would be made on a case-by-case basis.
Production, Marketing, and Customers
The Company currently has the ability to manufacture chiral products in
batches in sizes of up to 100 to 200 kilograms. The Company believes that its
current facility will be adequate for the Company's research and development
work and for manufacturing developmental quantities of certain of the Company's
products. However, the Company ultimately will need to provide for additional
process development and manufacturing capabilities. The Company's facility will
not be adequate for the manufacture of larger scale developmental and commercial
quantities of the Company's proposed chiral products. To date, the Company has
utilized outside manufacturers to demonstrate its production processes in larger
production quantities. The Company currently plans to continue to use third
parties, either through manufacturing alliances to access large scale
manufacturing capacity, or by entering into licensing agreements with customers
for commercial production.
The Company is marketing and intends to continue to market its chiral
products primarily through direct sales.
Revenues from the Company's sale of chiral chemical intermediates to a
major agrochemical company accounted for approximately 40% of total chiral
revenues for the year ended December 31, 1995.
Arrangements are in place for the commercial scale production of both
Good Manufacturing Practices ("GMP") compliant drug substance and drug product
for SYNOVIR. Drug substance is custom synthesized on behalf of Celgene in the
U.S. under full GMP compliance. The chemical synthesis for SYNOVIR is
proprietary to Celgene and a U.S. patent that protects this chemistry was
granted to the Company in October 1995.
In December, 1995, the Company entered into an agreement with Penn
Pharmaceutical, Ltd. ("Penn") to build a special facility devoted exclusively to
the production of SYNOVIR. Under terms of the agreement, based on certain
milestones with respect to commencing production and an FDA inspection, the
Company is responsible for $320,000 of start-up and validation costs. In
addition, the Company will lease the dedicated facility for a three-year period.
Annual facility payments are $268,000,
11
and commence in the month after the first milestone is reached. Celgene will
purchase SYNOVIR produced by Penn at a price to be agreed upon.
Governmental Regulation
Certain of the Company's proposed chiral products may be used by other
companies in their products and such other companies' products will likely
require regulatory approval, including that of the FDA. The nature and extent of
regulation may differ with respect to different products. Passing such review
successfully may be contingent on the development of certain product toxicity
and efficacy information from testing which, depending on the nature of the
product, can be time-consuming and costly. Other products which the Company
plans to attempt to develop for use in manufacturing by others may be required
to receive approval from Federal regulatory agencies, such as the FDA, or state
regulatory agencies. To the extent the Company manufactures controlled
substances, it will also be subject to certain regulations of the Drug
Enforcement Administration relating to manufacturing controls and security to
prevent pilferage of, or unauthorized access to, such substances in each stage
of the production process.
The regulatory process for a new pharmaceutical is a combination of a
number of stages. Compounds first undergo comprehensive pre-clinical testing
which does not involve human exposure. Once a company believes that it has
sufficient data to show that a new drug is adequately safe for initial
small-scale clinical studies, it compiles and submits an investigational new
drug application (IND). An IND is essentially a proposal to obtain the FDA's
permission to begin testing the drug in human subjects. Once an IND is obtained,
clinical studies can be initiated. Phase I studies evaluate safety of the
product for human beings. Phase II studies test the clinical efficacy and
additional safety of the drug, and Phase III studies provide statistical proof
of effectiveness and adequate evidence of safety to meet FDA approval
requirements. The FDA closely monitors the progress of each of the phases of
clinical testing and may, at its discretion, reevaluate, alter, suspend, or
terminate testing based on the data which have been accumulated to that point
and its assessment of the risk/benefit ratio to the patient. Upon successful
completion of clinical testing of a new drug, a new drug application (NDA) is
filed. An NDA may enable a company to obtain FDA authorization to market a new
pharmaceutical for the proposed indication. The whole drug discovery/development
process can take many years, sometimes more than ten years. SYNOVIR is currently
in Phase II (pivotal) clinical studies for cachexia associated with HIV/AIDS.
The new chemical entities are in early pre-clinical evaluation.
If the Company produces novel proprietary pharmaceutical products, they
may require costly and time-consuming testing as well as approval from the FDA
or other regulatory agencies. The Company's ability to commercialize any of
these products may depend upon its ability to enter into licensing agreements or
other arrangements with established pharmaceutical companies with the requisite
experience and financial and other resources to conduct the necessary testing of
such products in order to obtain regulatory approval and to manufacture and
market such products.
Patents and Trade Secrets
In 1990 the Company was issued a United States process patent covering
its chiral amine technology. The Company also has been issued 24 other United
States patents and has filed seven United
12
States patent applications relating to its novel microorganisms, related
biochemical compositions of matter and processes, and new therapeutic compounds.
The Company is aggressively seeking patent protection, both in the United States
and abroad, to protect its proprietary technology. The Company's ability to
compete effectively with other companies will depend, in part, on its ability
to maintain the proprietary nature of its technology, of which there can be no
assurance. The Company has been granted an orphan drug designation for use of
thalidomide for treatment of mycobacterial diseases, for ENL (a condition of
leprosy), for recurrent aphthous stomatitis and for cachexia. The Company may
apply for additional orphan drug designations which offer certain regulatory
protection, as well as potential tax credits for research and development
expenses.
The Company also plans to rely to a large extent on trade secret
protection, continuing technological innovation, and the know-how of its
employees and consultants. All of the Company's employees and consultants sign
confidentiality agreements, under which they agree not to use or disclose the
Company's confidential information as long as that information remains
proprietary or, in some cases, for fixed time periods.
Competition
The fine chemical and pharmaceutical therapeutics businesses are each
highly competitive. Competitors include major chemical and pharmaceutical
companies which may employ both biochemical and conventional technology, as well
as specialized biotechnology firms. Most of these companies have considerably
greater financial, technical, and marketing resources than the Company.
The Company also experiences competition in the development of its
products and processes from universities and other research institutions and, in
some instances, competes with others in acquiring technology from such sources.
Competition in the pharmaceutical/therapeutic business, specifically in
the immunomodulating areas being addressed by the Company, is particularly
intense. A number of companies are pursuing techniques to modulate TNF[A]
production. Some are pursuing small molecule approaches, as is the Company,
while others are investigating the use of monoclonal antibodies and TNF[A]
receptors. In some cases, these efforts are more clinically advanced than the
Company's current efforts with SYNOVIR and the new chemical entities. In
addition, a number of companies other than the Company also are attempting to
address, with other technologies and products, the disease states currently
being addressed by the Company, including cachexia. Furthermore, other companies
are attempting to develop thalidomide for AIDs and non-AIDs indications. Most of
the Company's competitors have substantially greater financial resources,
product development, and marketing capabilities than the Company.
The fine chemical and pharmaceutical industries have undergone, and are
expected to continue to undergo, rapid and significant technological change, and
the Company expects competition to intensify as technical advances in each field
are made and become more widely known. The Company believes that its success in
competing with others will be based on retaining scientific expertise and
technological superiority, identifying and retaining capable management,
identifying and pursuing scientifically feasible and commercially viable
opportunities.
13
Human Resources
At December 31, 1995, the Company employed 47 persons, of whom 31 were
primarily engaged in research and development activities, with the remainder
being engaged in executive, administrative, and market development activities.
Twenty of such employees have advanced degrees, including twelve who have Ph.D.
degrees. The Company also maintains consulting arrangements with a number of
scientists at various universities and other research institutions in Europe and
the United States.
Executive Officers. Information concerning executive officers of the
Company is set forth below.
Term of
Positions and Offices Employment
Name Age with the Company Commenced
- -------------------------------------------------------------------------------------------------------
John W. Jackson 51 Chairman of the Board and January 1996
Chief Executive Officer
Sol J. Barer 48 President, Chief Operating September 1987
Officer and Director
John W. Jackson joined the Company as Chairman of the Board and Chief
Executive Officer in January 1996. From February 1991 to January 1996, Mr.
Jackson was founder and President of Gemini Medical, a consulting firm which
specialized in services to start-up drug and biotechnology companies and
investment advice; from February 1986 to January 1991, Mr. Jackson was President
of the worldwide Medical Device Division of American Cyanamid; from 1978 to 1986
Mr. Jackson held various international positions, including vice
president-international for American Cyanamid; from 1971 to 1978, Mr. Jackson
held several human health marketing positions at Merck & Company.
Dr. Sol J. Barer joined the Company in September 1987 as Vice
President-Technology for the Company. From October 1990 to November 1993, Dr.
Barer was Senior Vice President, Science and Technology and Vice
President/General Manager Chiral Products. In November 1993, Dr. Barer was named
President and in March 1994 was named Chief Operating Officer and appointed a
director of the Company. From April 1984 until joining the Company in 1987, Dr.
Barer was employed by Chem Systems, an international consulting firm, most
recently as a Principal and Director of Process Evaluation and Research
Planning. From 1974 to March 1984, Dr. Barer was employed by Celanese Research
Company, where he held a number of technical and management positions, most
recently as Manager, Biotechnology and Advanced Chemical Technology.
14
Risk Factors
Early Stages of Product Development. Many of the Company's products
and processes are in the early stages of development. To date, the Company has
produced and sold only small quantities of certain chiral chemical intermediates
and is in clinical trials for SYNOVIR, the Company's version of thalidomide. The
Company's immunotherapeutic compounds and the products in which the Company's
chiral intermediates are used will require further development, testing and
regulatory approvals, and there can be no assurance that commercially viable
products will result from these efforts.
Governmental Regulation. SYNOVIR, the Company's version of
thalidomide, is currently in a pivotal clinical study to determine its
effectiveness in treating cachexia (wasting) in AIDS patients. SYNOVIR is also
being evaluated by the Company and others in additional early-stage clinical
studies. The testing of SYNOVIR has been, and the Company believes that it will
continue to be, a time-consuming and costly process. It is difficult to predict
how long FDA approval for any indication will take and whether any such approval
will be granted.
Substantially all of the Company's current chiral intermediate
products developed and marketed by others. The testing, marketing, and
manufacturing of such pharmaceutical products will require regulatory approval.
It is difficult to predict how long such approvals will take and whether any
such approvals will be granted. In addition, if the Company produces proprietary
chiral products, the testing, marketing, and manufacturing of such products will
likely be time-consuming and costly and will require regulatory approval,
including approval from the FDA. Delays in obtaining, or the failure to obtain,
necessary regulatory approvals from the FDA or similar authorities in other
countries of the Company's proprietary products or the pharmaceutical products
in which the Company's products are to be included would have an adverse effect
on the Company.
No Assurance of Proprietary Protection. The Company's success will
depend, in part, on its ability to obtain patents, maintain trade secret
protection, and conduct its business in the United States and abroad without
infringing the proprietary rights of others. Although the Company possesses
certain U.S. patents and has filed U.S. patent applications with respect to
certain of its products and technologies, there can be no assurance that others
will not develop and market competing technologies and products or that the
Company will be able to enforce the patents which it currently possesses or will
be able otherwise to obtain or enforce any patents for which it has filed an
application, or that. In addition, the Company could incur substantial costs in
defending any patent infringement suits or in asserting any patent rights,
including those granted by third parties.
Product Liability. The Company may be subject to product liability
or other claims if the use of its technology or products (SYNOVIR, NCEs, or
chiral intermediates) is alleged to have resulted in adverse effects.
Thalidomide, when used by pregnant women, has and can result in serious birth
defects. Therefore, if SYNOVIR is approved by the FDA, necessary precautions
must be taken by physicians prescribing the drug to women of child-bearing
potential. Although it is the present intention of the Company to apply for
product liability insurance, there can be no assurance that it will be able to
obtain coverage at economically feasible rates or that such coverage, if
obtained, will be adequate to protect the Company in the event of such claims
against it. The obligation to pay any product liability claim may have a
material adverse effect on the business or financial condition of the Company.
15
Dependence Upon Third Parties. The Company's ability to
commercialize SYNOVIR and other proprietary products may depend upon its ability
to enter into joint ventures or other arrangements with established
pharmaceutical companies with the requisite experience and financial and other
resources to conduct the necessary testing of such products in order to obtain
regulatory approval and to manufacture and market such products.
Since substantially all of the Company's current chiral intermediate
products may be components of pharmaceutical or agrochemical products developed
and marketed by others, the success of the Company's products is dependent upon
third parties over which the Company has no control. Such third parties may fail
to pursue or fund those products that include the Company's products whether due
to lack of resources or interest.
Competition. Competition in the pharmaceutical/therapeutic business,
particularly in the immunomodulating areas being addressed by the Company, is
intense. A number of companies are pursuing techniques to modulate TNF[A]
production. Some are pursuing small molecule approaches, as is the Company,
while others are investigating the use of monoclonal antibodies and TNF[A]
receptors. In some cases, these efforts are more clinically advanced than the
Company's current efforts with SYNOVIR and the new chemical entities. In
addition, a number of companies other than the Company also are attempting to
address, with other technologies and products, the disease states currently
being addressed by the Company, including cachexia. Furthermore, other companies
are attempting to develop thalidomide for AIDs and non-AIDs indications. Most of
the Company's competitors have substantially greater financial resources,
product development, and marketing capabilities than the Company. If the
Company's competitors efforts are successful, it may have a material adverse
effect on the Company.
16
ITEM 2. PROPERTIES.
The Company is currently occupying a 44,500-square foot laboratory and
office facility in Warren, New Jersey under a lease with an unaffiliated party
which has a term ending in 1997 with two five-year renewal options. The lease
further provides that rental payments will be increased at the end of each
five-year term (including any renewal terms) based upon the change in the
consumer price index during such five-year term but in no event will the
increase be greater than 20%. Such lease is a net lease which requires the
Company to pay maintenance, taxes, insurance, and other costs of the premises.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material litigation and knows of no
material litigation, pending, threatened, or contemplated, to which the Company
is or may become a party.
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 any new laws and
regulations on its operations and modifies its operations as appropriate. The
Company believes that it is in substantial compliance with all applicable
environmental laws and regulations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the fourth
quarter of 1995.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock of the Company is traded in the over-the-counter market
of the National Association of Securities Dealers Automated Quotation System
("NASDAQ") National Market System under the symbol CELG.
The following table sets forth for each period indicated the high and
low sale prices for the Common Stock as reported on the NASDAQ - National Market
System. Such prices reflect interdealer prices without adjustments for retail
markups, markdowns, or commissions.
Calendar Period High Low
- --------------- ---- ---
1994:
First Quarter......................$ 9-1/8 $ 6-3/8
Second Quarter...................... 8-3/8 5-3/4
Third Quarter....................... 8-3/4 6-7/16
Fourth Quarter...................... 7-7/8 5-1/4
1995:
First Quarter....................... 6 4 5/8
Second Quarter...................... 10 11/16 5
Third Quarter....................... 10 5/8 7 1/4
Fourth Quarter...................... 13 3/8 8 5/8
There were 519 holders of record of the Common Stock as of December 31,
1995. The Company believes that a significant number of beneficial owners of
Common Stock hold their shares in street name. The Company has not paid any cash
dividends since its inception and does not intend to pay any such dividends on
its Common Stock in the foreseeable future.
18
ITEM 6. SELECTED FINANCIAL DATA.
Year ended December 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
Operations Data:
Total revenues $ 1,741,269 $ 2,842,567 $ 2,799,967 $ 2,318,916 $ 1,286,068
Loss from continuing
operations ( 10,516,523) ( 7,877,139) ( 7,007,758) ( 5,229,260) ( 6,811,884)
Loss from discontinued
operation -- ( 2,336,088) ( 3,318,028) ( 1,918,109) ( 1,840,897)
------------- ------------ ------------ ------------ ------------
Net loss ( 10,516,523) ( 10,213,227) ( 10,325,786) ( 7,147,369) ( 8,652,781)
============= ============ ============ ============ ============
Loss from continuing
operations per share of
common stock ($1.30) ($1.00) ($ .89) ($ .67) ($1.21)
Loss from discontinued
operation
per share of common stock -- ( .30) ( .43) ( .25) ( .33)
------ ------ ------ ------ ------
Net loss per share ($1.30) ( 1.30) ( 1.32) ( .92) ( 1.54)
====== ====== ====== ====== ======
Weighted average number of
shares outstanding 8,073,000 7,853,000 7,841,000 7,789,000 5,608,000
Dividends -- -- -- -- --
December 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Cash and cash equivalents,
and marketable securities $11,712,905 $ 8,500,086 $17,899,946 $28,266,400 $35,575,051
Total assets 14,211,218 11,547,930 21,822,225 31,750,599 37,840,322
Accumulated deficit ( 70,989,400) ( 60,472,877) ( 50,259,650) ( 39,933,864) ( 32,786,495)
Stockholders' equity 7,142,501 10,004,066 20,295,614 30,374,593 36,630,572
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Liquidity and Capital Resources
Since inception, the Company has financed its working capital
requirements primarily through private and public sales of its debt and equity
securities, income earned on the investment of the proceeds from the sale of
such securities, and revenues from product sales.
In August 1995, the Company issued and sold in a private placement
offering, an aggregate principal amount of $12,000,000 of 8% convertible
debentures due July 31, 1997, and received net proceeds, after offering costs,
of $11,022,570. (See Note 6 to the Financial Statements).
On December 31, 1995, the Company had available working capital of
approximately $10,296,000, consisting principally of cash, cash equivalents, and
marketable securities. It increased approximately $2,288,000, or 29%, from
December 31, 1994, which was attributable to the convertible debenture offering,
offset by cash used in operations.
In March 1996, the Company issued and sold in a private placement
offering 503 shares of Series A Convertible Preferred Stock at $50,000 per
share, for total gross proceeds of $25,150,000. The Company received net
proceeds, after offering costs, of approximately $23,800,000. The proceeds from
the sale of the preferred stock increased the Company's working capital (on a
pro forma basis) to approximately $34,216,000 as of December 31, 1995 (See Note
12 of the Financial Statements).
In August 1992, the Company entered into a two-year research and
development agreement with the Rockefeller University. This agreement has been
extended through July 1998. Under the terms of the contract extension, the
Company is committed to pay Rockefeller University $504,000 annually.
During the year ended December 31, 1995, capital expenditures totalled
approximately $30,000 primarily for equipment and leasehold improvements to
expand its process development and manufacturing capabilities.
In the fourth quarter of 1995, the U.S. FDA approved the Company's
request to recover costs of providing its SYNOVIR drug to AIDS patients eligible
for entry into the Company's expanded trial for cachexia, a severe wasting
condition. The cost per patient for a twelve-week supply will be $550. At
present, the Company cannot estimate the impact that the potential recovery of
costs will have on the Company's operations. The recovery of such costs for 1995
was immaterial.
The Company believes that its current resources and income derived from
investments plus revenues from chiral product sales, research contracts, and
estimated recoveries under the FDA-approved SYNOVIR cost recovery program will
be sufficient to meet the Company's capital requirements for the balance of 1996
and 1997. However, to assure funding for the Company's future operations the
Company is likely to seek additional capital resources. These may include the
sale of additional securities under appropriate market conditions, alliances or
other partnership agreements with entities interested in and possessing
resources to support the Company's immunotherapeutic or chiral programs, or
other business transactions which would generate sufficient resources to assure
continuation of the Company's operations and research programs in the long-term.
However, no assurances can be given that the
20
Company will be successful in raising such additional capital or entering into a
business alliance. Further, there can be no assurance, assuming the Company
successfully raises additional funds or enters into a business alliance, that
the Company will achieve profitability or positive cash flow.
As of December 31, 1995, the Company had for Federal income tax purposes
a net operating loss carryforward of approximately $66,900,000. If not utilized
to offset future taxable income, such loss carryforward will expire between 2001
and 2010. Certain events, including any sales by the Company of shares of its
stock and/or transfers of a substantial number of shares of Common Stock by the
current stockholders, may restrict the ability of the Company to utilize its net
operating loss carryforward.
Results of Operations
Year ended December 31, 1995 v. Year ended December 31, 1994
Revenues for the year ended December 31, 1995 were approximately
$1,741,000, which was a decrease of approximately $1,101,000, or 39%, over the
comparable period in 1994. Chiral intermediate revenues decreased $1,340,000 to
$658,000, or 67%, for 1995 as compared to 1994. The decrease in chiral
intermediate revenues was due primarily to the sporadic nature of orders from
the Company's small customer base. Chiral research contract revenues for 1995
were $515,000, which was an increase of $257,000, or 100%, over 1994. The
increase in research contract revenues was due to the Company entering into
research contracts for new compounds and for expanding development of existing
compounds. Revenue backlog at December 31, 1995 for chiral intermediates and
research contracts amounted to $777,000. The Company had no backlog at December
31, 1994. The company is negotiating with new and existing customers for
additional chiral intermediate and research contract orders; however, there is
no assurance that these efforts will be successful. Investment income decreased
$18,000, or 3%, to $569,000 in 1995 as compared to 1994 due to the decrease in
funds available for investment during the first half of 1995.
For 1995, costs of goods sold decreased $304,000, or 28%, to $792,000
(which includes certain fixed manufacturing costs) as compared to 1994, due to
the low volume of chiral intermediate revenues. Research and development
expenses for 1995 increased $1,691,000, or 26%, to $8,183,000 as compared to
1994. The increase in research and development expenses was due primarily to an
increase in the Rockefeller University program and clinical trial expenses for
the immunotherapeutic program. These increased expenses were partially offset by
decreases in personnel and related expenses for the chiral research group.
Selling, general, and administrative expenses decreased $273,000, or 9%, to
$2,858,000 in 1995 as compared to 1994, due to generally lower spending across
most expense categories, partially offset by amortization of debt offering
costs. Interest expense for 1995 was $425,000, which related to the Debentures
issued in July, 1995.
The net loss for the year ended December 31, 1995 was approximately
$10,517,000, an increase of approximately $303,000, or 3%, over 1994. Net loss
for the year ended December 31, 1994 included the operating loss of the
Company's discontinued biotreatment operations of $2,336,000. Loss from
continuing operations during 1995 increased $2,639,000 due primarily to lower
chiral intermediates revenues and higher spending for the immunotherapeutic
program.
21
Year ended December 31, 1994 v. Year ended December 31, 1993
Revenues for the year ended December 31, 1994 were approximately
$2,843,000 which was at approximately the same level as compared to 1993.
Chemical intermediates revenue consisting of higher volume sales of chiral
products to existing customers increased $345,000, or 21%, to $1,998,000 in 1994
as compared to 1993. Chiral research contract revenues for 1994 was $258,000,
which was an increase of $103,000, or 66%, over the comparable period in 1993.
This increase in contract revenues was due to the Company entering into research
contracts for new compounds with new customers. Investment income decreased
approximately $406,000, or 41%, to approximately $587,000 in 1994 as compared to
1993, due to the decrease in funds available for investment.
For the year ended December 31, 1994, cost of goods sold as a percentage
of chemical intermediates revenue was 55% as compared to 87% for the comparable
1993 period. The lower cost of goods sold percentage in 1994 was due to improved
productivity and the volume of products internally manufactured by the Company
as compared to 1993 when a significant volume of products were produced by
outside manufacturers. In the comparative period for 1994, no outside
manufacturers were used and all of the Company's product revenues were derived
from products manufactured by Celgene. Research and development expenses for the
year ended December 31, 1994 increased $1,731,000, or 36%, to $6,492,000 as
compared to the same period in 1993, due to clinical trial expenses for the
immunotherapeutic program and, to a lesser extent, to higher personnel and
related expenses. Selling, general and administrative expenses for the year
ended December 31, 1994 decreased $470,000, or 13.1% to $3,131,000 as compared
to 1993 primarily due to no incentive bonus expense partially offset by increase
personnel and facilities expenses.
Net loss for the year ended December 31, 1994 was approximately
$10,213,000 which was at the same approximate level as compared to 1993. Loss
from continuing operations increased $869,000, or 12%, to $7,877,000 in 1994
over the comparable 1993 period. The operating loss of the discontinued
operation decreased $1,821,000 to $1,497,000 primarily due to cessation of the
Company's biotreatment operations during the second quarter of 1994.
Other Matters
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which will become effective on January 1, 1996. SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed. Adoption of SFAS No. 121 is not expected to have a material impact on
the Company's consolidated financial position and operating results, nor will it
affect the Company's cash flows.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." This statement establishes an alternative method of
accounting for stock based compensation awarded to employees such as stock
options granted by the Company to employees. The standard provides for the
recognition of compensation expense based on the fair value of the stock-based
award, but allows companies to continue to measure compensation cost in
accordance with Accounting Principles Board
22
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." Companies
electing to retain this method must make pro forma disclosures of net income and
earnings per share as if the fair value based method had been applied. The
Company plans to continue to use APB No. 25, which does not require the Company
to record compensation expense for the stock options it awards to employees.
Restricted stock awards for which the Company presently accrues compensation
would continue to be accounted for in that manner. With respect to fiscal 1996,
the Company will disclose the pro forma effect of the fair value method on 1995
and 1996 net income and earnings per share.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Part IV, Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with the Company's
auditors on accounting principles or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information is incorporated by reference to the Company's
definitive proxy statement for its 1996 Annual Meeting of Stockholders.
Reference is also made to Item 1 hereof.
ITEM 11. EXECUTIVE COMPENSATION.
This information is incorporated by reference to the Company's
definitive proxy statement for its 1996 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
This information is incorporated by reference to the Company's
definitive proxy statement for its 1996 Annual Meeting of Stockholders.
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the Company's
definitive proxy statement for its 1996 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(a) See Index to Financial Statements immediately following Exhibit
Index.
(b) No reports on Form 8-K were filed during the Company's fourth
quarter in 1995.
(c) Exhibits
See Exhibit Index immediately following signature pages.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CELGENE CORPORATION
By /s/ John W. Jackson
-------------------------------
John W. Jackson
Chairman of the Board and
Chief Executive Officer
Date: March 28, 1996
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 March 28, 1996
- -------------------
John W. Jackson Chief Executive Officer
/s/ Sol J. Barer Director March 28, 1996
- ----------------
Sol J. Barer
/s/ Frank T. Cary Director March 28, 1996
- -----------------
Frank T. Cary
/s/ Arthur Hull Hayes, Jr. Director March 28, 1996
- --------------------------
Arthur Hull Hayes, Jr.
/s/ Richard C. E. Morgan Director March 28, 1996
- ------------------------
Richard C. E. Morgan
/s/ Walter L. Robb Director March 28, 1996
- ------------------
Walter L. Robb
/s/ Lee J. Schroeder Director March 28, 1996
- --------------------
Lee J. Schroeder
/s/ Robert B. Eastty Controller (Chief Accounting March 28, 1996
- --------------------
Robert B. Eastty Officer)
The foregoing constitutes a majority of the directors.
25
(c) Exhibits.
3.1 - Certificate of Incorporation of the Company (Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1,
dated July 24, 1987).
3.2 - By-laws of the Company (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, dated July 24, 1987).
4.1 - Form of 8% Convertible Debenture due July 31, 1997 (Incorporated by
reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995).
4.2 - Form of Certificate of Designation of Series A Convertible Preferred
Stock, par value $.01 per share (Incorporated by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K, dated March 13, 1996).
10.1 - Asset and Technology Transfer Agreement, dated as of September 16, 1986,
between the Company and Hoechst Celanese (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-1, dated
July 24, 1987).
10.2 - Purchase Agreement, dated as of September 16, 1986, between the Company
and Hoechst Celanese (Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1, dated July 24, 1987).
10.3 - Stock Purchase Agreement, dated as of November 6, 1986, among the
Company and the purchasers on the signature pages thereto (Incorporated
by reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-1, dated July 24, 1987).
10.4 - 1986 Stock Option Plan (Incorporated by reference to Exhibit A to the
Company's Proxy Statement dated April 13, 1990).
10.5 - Forms of Stock Option Agreements (Incorporated by reference to Exhibit
10.6 to the Company's Registration Statement on Form S-1, dated July 24,
1987).
10.6 - Employment Agreement, dated September 12, 1987, between the Company and
Sol J. Barer (Incorporated by reference to Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992).
10.7 - Holdback Agreement, dated November 6, 1986, between the Company and the
signatories thereto (Incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1, dated July 24, 1987).
10.8 - Form of indemnification agreement between the Company and each officer
and director of the Company (Incorporated by reference to Exhibit 10.14
to the Company's Registration Statement on Form S-1, dated July 24,
1987).
26
10.9 - Agreement, dated October 24, 1986, between the Company and Collaborative
Research Incorporated (Incorporated by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-1, dated July 24, 1987).
10.10 - Lease Agreement, dated January 16, 1987, between the Company and Powder
Horn Associates (Incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-1, dated July 24, 1987).
10.11 - Amendment No. 1, dated September 12, 1990, to the Employment Agreement,
dated September 12, 1987, between the Company and Sol J. Barer.
(Incorporated by reference to Exhibit 10.19 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990).
10.12 - Stock Option and Registration Rights Agreement, dated June 21, 1990,
between the Company and John L. Ufheil (Incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990).
10.13 - Warrant Agreement, dated as of February 21, 1991 (Incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990).
10.14 - Form of Restricted Stock Award Agreement (Incorporated by reference to
Exhibit 10.24 to Amendment No. 1 to the Company's Registration Statement
on Form S-2, dated May 7, 1991).
10.15 - Draft Letter Agreement to Warrant Agreement (Incorporated by reference
to Exhibit 10.25 to Amendment No. 1 to the Company's Registration
Statement on Form S-2, dated May 7, 1991).
10.16 - 1992 Long-Term Incentive Plan (Incorporated by reference to Exhibit A to
the Company's Proxy Statement, dated April 17, 1992).
10.17 - 1992 Non-Employee Directors' Incentive Plan (Incorporated by reference
to Exhibit B to the Company's Proxy Statement, dated April 17, 1992).
10.18 - Form of Option Agreements under the 1992 Long-Term Incentive Plan and
1992 Non-Employee Directors' Incentive Plan (Incorporated by reference
to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992).
10.19 - Stock Option Agreement, dated August 2, 1993, between the Company and
John L. Ufheil. (Incorporated by reference to Exhibit 10.26 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993).
10.20 - License and asset purchase agreement dated June 17, 1994 between the
Company and Sybron Chemicals, Inc. (Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994).
10.21 - Amendment No. 2, dated November 1, 1993, to the Employment Agreement,
dated September 12, 1987, or between the Company and Sol J. Barer.
(Incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
27
10.22 - Amendment No. 3, dated March 1, 1994, to the Employment Agreement, dated
September 12, 1987 between the Company and Sol J. Barer. (Incorporated
by reference to Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994).
10.23 - Stock Option Agreement, dated March 21, 1994, between the Company and
Richard G. Wright. (Incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1994).
10.24 - Engagement Agreement dated November 23, 1994, between the Company and
Redington, Inc. (Incorporated by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994).
10.25 - Agent's Warrant issued in connection with the placement of 8%
Convertible Debentures (Incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995).
10.26 - Form of Registration Rights Agreement (Incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K, dated March
13, 1996).
10.27 - Agent's Warrant issued in connection with the placement of Series A
Convertible Preferred Stock.
23 - Consent of KPMG Peat Marwick LLP
27 - Financial Data Schedule - Article 5 for Year Form 10-K
28
CELGENE CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
CELGENE CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Independent Auditor's Report ............................................. F-2
Balance Sheets as of December 31, 1995 and 1994 .......................... F-3
Statements of Operations - Years Ended
December 31, 1995, 1994, and 1993 ................................ F-4
Statements of Stockholders' Equity - Years
Ended December 31, 1995, 1994 and 1993 ........................... F-5
Statements of Cash Flows - Years Ended
December 31, 1995, 1994 and 1993 ................................. F-6
Notes to Financial Statements ............................................ F-8
All other Schedules are omitted as they are not required, or are not
applicable, or the required information is shown in the financial statements or
notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CELGENE CORPORATION:
We have audited the accompanying balance sheets of Celgene Corporation
as of December 31, 1995 and 1994, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted audited
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Celgene Corporation
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in note 2 to the financial statements, the Company adopted
the provisions of the Financial Accounting Standard Board's Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," effective January 1, 1994.
Short Hills, New Jersey
February 17, 1996, except as
to note 12, which is as of
March 13, 1996
F-2
CELGENE CORPORATION
BALANCE SHEETS
December 31,
-------------------------------
1995 1994
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 337,165 $ 292,925
Marketable securities available for sale ...... 11,375,740 8,207,161
Accounts receivable ........................... 397,241 623,084
Other current assets .......................... 404,011 428,844
----------- ------------
Total current assets .......................... 12,514,157 9,552,014
Plant and equipment, net ...................... 1,207,805 1,954,666
Other assets .................................. 41,250 41,250
Deferred debt costs ........................... 448,006 --
----------- ------------
$14,211,218 $11,547,930
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ 607,206 $ 439,189
Accrued expenses .............................. 1,610,846 1,104,675
----------- ------------
Total current liabilities ..................... 2,218,052 1,543,864
Convertible debentures (note 6) ............... 4,592,366 --
Convertible debentures-accrued interest ....... 258,299 --
----------- ------------
Total liabilities ............................. 7,068,717 1,543,864
----------- ------------
Commitments and contingencies (note 11)
Stockholders' equity:
Preferred stock, par value $.01 per share
Authorized 5,000,000 shares; issued none ...... -- --
Common stock, par value $.01 per share
Authorized 20,000,000 shares; issued and
outstanding 8,783,592 and 7,862,689 shares at
December 31, 1995 and 1994,
respectively ............................... 87,836 78,627
Additional paid-in capital .................... 78,064,288 70,684,768
Unamortized deferred compensation-- restricted
stock ...................................... (7,085) (19,174)
Accumulated deficit ........................... (70,989,400) (60,472,877)
Net unrealized loss on marketable securities
available for sale .......................... (13,138) (267,278)
----------- ------------
Total stockholders' equity .................... 7,142,501 10,004,066
----------- ------------
$14,211,218 $11,547,930
=========== ============
See Accompanying Notes to Financial Statements
F-3
CELGENE CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------------
1995 1994 1993
----------- ----------- ----------
Revenues:
Sales of chemical intermediates ........... $ 657,753 $ 1,997,636 $1,652,233
Research contracts ........................ 515,000 258,000 155,000
Investment income ......................... 568,516 586,931 992,734
----------- ----------- ----------
1,741,269 2,842,567 2,799,967
----------- ----------- ----------
Expenses:
Cost of goods sold ........................ 792,251 1,096,687 1,444,904
Research and development .................. 8,183,045 6,492,468 4,761,907
Selling, general and administrative ....... 2,857,758 3,130,551 3,600,914
Interest .................................. 424,738 -- --
----------- ----------- ----------
12,257,792 10,719,706 9,807,725
----------- ----------- ----------
Loss from continuing operations ........... (10,516,523) (7,877,139) (7,007,758)
Discontinued operations (note 9)
Loss from operations ...................... (--) (1,497,088) (3,318,028)
Loss on disposal .......................... -- (839,000) --
----------- ----------- ----------
Loss from discontinued operation .......... (--) (2,336,088) (3,318,028)
----------- ----------- ----------
Net loss .................................. ($10,516,523) ($10,213,227) ($10,325,786)
============ ============ ============
Per share of Common Stock (note 2)
Loss from continuing operation ............ ($1.30) ($1.00) ($.89)
Loss from discontinued operation .......... -- (.30) (.43)
------------ ------------ ------------
Net loss .................................. ($1.30) ($1.30) ($1.32)
============ ============ ============
Weighted average number of shares of common
stock outstanding ......................... 8,073,000 7,853,000 7,841,000
============ ============ ============
See Accompanying Notes to Financial Statements.
F-4
CELGENE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
Net
Unrealized
Loss on
Common Stock Marketable
------------------------- Additional Unamortized Securities
Paid-in Deferred Accumulated Available
Shares Amount Capital Compensation Deficit For Sale Total
-------- -------- ---------- ------------- ------------ ----------- -----------
Balances at
December 31, 1992 ....... $7,827,595 $ 78,276 $ 70,444,712 ($ 214,531) ($39,933,864) -- $ 30,374,593
Exercised stock options .. 15,339 153 109,582 -- -- -- 109,735
Amortization of deferred
compensation ............ -- -- -- 137,072 -- -- 137,072
Net loss ................. -- -- -- -- (10,325,786) -- (10,325,786)
--------- ------- ------------ ------------ ------------ ------------ ------------
Balances at
December 31, 1993 ....... 7,842,934 78,429 70,554,294 (77,459) (50,259,650) -- 20,295,614
Repurchase of
employee's shares ....... (2,667) (26) (134) -- -- -- (160)
Restricted stock forfeited (4,000) (40) (44,960) 15,627 -- -- (29,373)
Exercised stock options .. 26,422 264 175,568 -- -- 175,832
Amortization of deferred
compensation ............ -- -- -- 42,658 -- -- 42,658
Net unrealized loss on
marketable securities
available for sale ...... -- -- -- -- -- (267,278) (267,278)
Net loss ................. -- -- -- -- (10,213,227) -- (10,213,227)
--------- ------- ------------ ------------ ------------ ------------ ------------
Balances at
December 31, 1994 ....... 7,862,689 78,627 $ 70,684,768 ($ 19,174) ($60,472,877) ($267,278) $10,004,066
Exercised stock options .. 24,987 250 170,638 -- -- -- 170,888
Amortization of deferred
compensation ............ -- -- -- 12,089 -- -- 12,089
Conversion of convertible
debenture ............... 895,916 8,959 7,565,114 -- -- -- 7,574,073
Cost associated with
conversion of
convertible debentures,
net .................... -- (356,232) -- -- -- (356,232)
Net unrealized gain on
marketable securities
available for sale ...... 254,140 254,140
Net loss ................. -- -- -- -- (10,516,523) -- (10,516,523)
--------- ------- ------------ ------------ ------------ ------------ ------------
Balances at
December 31, 1995 ....... $8,783,592 $ 87,836 $ 78,064,288 $ (7,085) ($70,989,400) ($13,138) $ 7,142,501
========= ======= ============ ============ ============ ============ ============
See Accompanying Notes to Financial Statements.
F-5
CELGENE CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------
1995 1994 1993
-------------- -------------- --------------
Cash flows from operating activities:
Loss from continuing operations ($10,516,523) ($ 7,877,139) ($ 7,007,758)
Adjustments to reconcile loss from
continuing operations to net cash
used in operating activities:
Depreciation and amortization 949,933 675,352 514,288
Amortization of deferred compensation 12,089 58,285 137,072
Interest on convertible debentures 424,738 -- --
Increase in accounts payable and
accrued expenses 674,188 17,253 150,605
(Increase) decrease in accounts receivable 225,843 (262,368) (222,344)
Increase (decrease) in other assets 24,833 60,381 (137,518)
------------ ------------ ------------
Net cash used in continuing operations (8,204,899) (7,328,236) (6,565,655)
Net cash used in discontinued operation -- (1,736,054) (2,421,809)
------------ ------------ ------------
Net cash used in operating activities (8,204,899) (9,064,290) (8,987,464)
------------ ------------ ------------
Cash flows from investing activities:
Continuing operations:
Capital expenditures (29,880) (198,964) (280,919)
Proceeds from sales and maturities
of marketable securities available
for sale 22,185,466 19,314,158 42,543,395
Purchases of marketable securities
available for sale (25,099,905) (10,678,498) (32,231,652)
------------ ------------ ------------
Net cash provided by (used in)
investing activities from
continuing operations (2,944,319) 8,436,696 10,030,824
Net investing activities of
discontinued operation -- -- (1,207,806)
------------ ------------ ------------
Net cash flows provided
by (used in) investing activities (2,944,319) 8,436,696 8,823,018
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 170,888 130,672 109,735
Net proceeds from issuance of
convertible debentures 11,022,570 -- --
------------ ------------ ------------
11,193,458 130,672 109,735
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 44,240 (496,922) (54,711)
Cash and cash equivalents at
beginning of period 292,925 789,847 844,558
------------ ------------ ------------
Cash and cash equivalents at end
of period $ 337,165 $ 292,925 $ 789,847
============ ============ ============
Net increase (decrease) in cash and
cash equivalents 44,240 (496,922) (54,711)
Increase (decrease) in marketable
securities available for sale 3,168,579 (8,902,938) (10,311,743)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents and marketable
securities available for sale $ 3,212,819 ($ 9,399,860) ($10,366,454)
============ ============ ============
See Accompanying Notes to Financial Statements. (continued)
F-6
CELGENE CORPORATION
STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31,
---------------------------------------------
1995 1994 1993
-------------- -------------- --------------
Non-cash investing activity:
Net change gain (loss) in net unrealized
loss on securities available for sale $ 254,140 ($ 267,278) --
============ ============ ============
Non-cash financing activities:
Issuance of common stock upon the
conversion of convertible debentures
and accrued interest thereon, net $ 5,928,907 -- --
============ ============ ============
Issuance of warrants for services
rendered in connection with the
issuance of convertible debentures $ 94,500 -- --
============ ============ ============
See Accompanying Notes to Financial Statements.
F-7
CELGENE CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1994
1. Nature of Business and Liquidity
Celgene Corporation ("Celgene" or the "Company") attempts to develop and
produce innovative products primarily for two major pharmaceutical markets: high
purity chiral chemical intermediates for use in the production of
pharmaceuticals, food additives, agricultural chemicals, and proprietary
products with distinct therapeutic advantages. Prior to June 1994, the Company
was also engaged in the development of biotreatment systems designed to detoxify
certain chemical process waste streams before they are released by a
manufacturing plant to the environment. See note 9 with respect to the Company's
disposal of its biotreatment business.
The Company believes that its current resources and income derived from
investments plus revenues from chiral product sales, research contracts, and
potential recoveries under the FDA approved SYNOVIR cost recovery program will
be sufficient to meet the Company's capital requirements for at least the
balance of 1996 and 1997. However, to assure funding for the Company's future
operations the Company continues to seek additional capital resources. These may
include the sales of additional securities under appropriate market conditions,
alliances or other partnership agreements with entities interested in and
possessing resources to support the Company's immunotherapeutic or chiral
programs, or other business transactions which would generate sufficient
resources to assure continuation of the Company's operations and research
programs in the long-term. However, no assurances can be given that the Company
will be successful in raising additional capital or entering into any business
alliances. Further, there can be no assurance, assuming the Company successfully
raises additional funds or enters into a business alliance, that the Company
will achieve profitability or positive cash flow.
The preparation of the financial statements requires management to make
estimates and assumptions that affect reported amounts and disclosures in these
financial statements. Actual results could differ from those estimates. The
Company is subject to certain risks and uncertainties as a result of changes in
the healthcare environment, results of clinical trials and discovery of new
drugs.
2. Summary of Significant Accounting Policies
(a) Cash Equivalents
At December 31, 1995 and 1994, cash equivalents consisted principally of
funds invested in overnight repurchase agreements secured by United States
government treasury bills and money market funds, United States government
securities such as treasury bills and notes, and Federal agency notes and bonds
with maturities of three months or less when purchased.
(b) Marketable Securities
On January 1, 1994, the Company adopted Financial Accounting Standards Board
("FASB") Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Accordingly,
F-8
the Company has classified all of its marketable securities as securities
available for sale. Such securities are to be held for an indefinite period of
time and are intended to be used to meet the ongoing liquidity needs of the
Company. Marketable securities available for sale at December 31, 1995 and 1994
are carried at fair value, and unrealized holding gains and losses on such
securities are excluded from earnings, and are included as a component of
stockholders' equity. Realized gains and losses are included in operations and
are measured using the specific cost identification method.
(c) 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:
Laboratory equipment and machinery ........................ 5-10 years
Furniture and fixtures .................................... 5-10 years
Amortization of leasehold improvements is calculated using the straight-line
method over the term of the lease or the life of the asset, whichever is
shorter. Maintenance and repairs are charged to operations as incurred, while
renewals and improvements are capitalized.
(d) Research and Development Costs
All research and development costs are expensed as incurred.
(e) 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 all years
in which the temporary differences are expected to reverse.
Research and development tax credits will be recognized as a reduction of
the provision for income taxes when realized.
(f) Revenue Recognition
Revenue from the sale of chemical intermediates is recognized upon product
shipment. Revenue under research contracts is recorded as earned under the
contracts, generally as services are provided. Revenue is recognized immediately
for nonrefundable license fees when agreement terms require no additional
performance on the part of the Company.
(g) Share Information
Net loss per share of common stock is based upon the weighted average number
of shares of common stock outstanding. The assumed exercise of stock options and
conversion of convertible debentures are not considered, as the effect would be
anti-dilutive.
F-9
(h) Presentation
In connection with the discontinuation of the Company's biotreatment
operation (see note 9), the 1994 and 1993 financial results applicable to
continuing operations exclude amounts from the discontinued operation.
(i) Deferred Debt Costs
Deferred debt costs are amortized over the life of the debt.
(j) Fair Value of Financial Instruments
The fair value, which is the carrying value, of marketable securities
available for sale is based on quoted market prices. The convertible debentures
approximate fair value due to the relative short period since their initial
issuance to December 31, 1995. For all other financial instruments their
carrying value approximates fair value due to the short maturity of these
instruments.
3. Plant and Equipment
Plant and equipment consists of the following:
December 31,
1995 1994
---- ----
Leasehold improvements........... $ 3,113,212 $ 2,955,606
Laboratory equipment and
machinery........................ 4,946,764 5,074,490
Furniture and fixtures........... 391,370 391,370
------- -------
8,451,346 8,421,466
Less: accumulated depreciation
and amortization................. 7,243,541 6,466,800
--------- ---------
$ 1,207,805 $ 1,954,666
=========== ===========
4. Accrued Expenses
Accrued expenses consist of the following:
December 31,
1995 1994
---- ----
Professional and consulting fees $ 912,400 $ 691,086
Accrued compensation 610,111 341,290
Other 88,335 72,299
--------- ---------
$1,610,846 $1,104,675
========= =========
F-10
5. Stockholder Registration Rights
All of the rights, designations and preferences of the preferred stock may
be determined by the Company's Board of Directors. At December 31, 1995 no
preferred stock had been issued. Certain stockholders have demand and piggyback
registration rights with respect to the common stock issued to such
stockholders. Celgene is party to holdback agreements with certain investors in
the event that it files a registration statement in connection with an
underwritten registration statement pursuant to the exercise of such
registration rights.
6. Convertible Debentures
In the third quarter ended September 30, 1995, the Company issued and sold
in a private placement offering, 8% convertible debentures due July 31, 1997 in
the aggregate principal amount of $12,000,000, and received net proceeds, after
offering costs, of $11,022,570. Such debentures are convertible into common
stock of the Company at the option of either the holders thereof or the Company.
The holders of the convertible debentures may convert the debentures into common
stock of the Company at a conversion price that varies and is based upon the
market price (as defined) of the common stock on the date of conversion.
The Company may require the conversion of the convertible debentures
commencing October 15, 1995 through July 30, 1997 at a conversion price which
varies and is based upon the market price of the common stock on the date of
conversion. The Company also has the right to redeem any convertible debenture
after it has received a notice of conversion with respect to such debenture. The
redemption price is the greater of 115% of the principal and the accrued
interest on the redeemed debenture or an amount which is based on the
appreciation of the common stock from the date of issuance of the debentures.
The conversion price of the convertible debentures is subject to adjustment
under certain circumstances. As of December 31, 1995, convertible debentures in
the aggregate principal amount of $6,213,000, plus accrued interest, had been
converted into a total of 895,916 shares of common stock.
7. Stock Options and Restricted Stock Awards
On June 16, 1995, the stockholders of the Company approved the 1995
Non-Employee Directors' Incentive Plan, which provides for the granting of
non-qualified stock options to purchase an aggregate of not more than 250,000
shares of common stock (subject to adjustment under certain circumstances) to
directors of the Company who are not officers or employees of the Company
("Non-Employee Directors"). Each new Non-Employee Director, upon the date of his
election or appointment, receives an option to purchase 20,000 shares of common
stock. 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 if he has served less than one
year), except that at the 1995 annual meeting of stockholders the Non-Employee
Directors received an option to purchase 6,000 shares of common stock. On April
5, 1995, each Non-Employee Director was granted, under this plan, a
non-qualified option to purchase 20,000 shares of common stock, subject to
stockholder approval which was received on June 16, 1995.
F-11
The shares subject to each option grant of 20,000 shares vest in four equal
annual installments commencing on the first anniversary of the date of grant.
The shares subject to an annual meeting option grant vest in full on the date of
the first annual meeting of stockholders held following the date of grant.
All options are granted at an exercise price that equates to the fair market
value of the Company's common stock at the grant date and expire 10 years after
the date of grant. This plan terminates in 2005 and no additional options or
restricted stock awards may be granted under the Company's 1992 Non-Employee
Directors' Stock Option Plan.
On May 27, 1992, the stockholders of the Company approved two new stock
option plans: the 1992 Long-Term Incentive Plan (the "Incentive Plan") and the
1992 Non-Employee Directors' Stock Option Plan (the "1992 Directors' Plan").
The Incentive Plan provides 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 1,000,000 shares of common stock, subject to adjustment under
certain circumstances. The Management Compensation and Development Committee of
the Board of Directors (the "Committee") determines the type, amount and terms,
including vesting, of any awards made under the Incentive Plan. This plan
terminates in 2002.
The Company also has a 1986 Stock Option Plan (the "1986 Plan"), which
provides for the granting of options and restricted stock awards to employees
and officers of the Company for up to 1,250,000 shares of common stock, of which
200,000 shares are issuable pursuant to grants of restricted stock awards. Prior
to the approval of the 1992 Directors' Plan, the 1986 Plan provided for up to
200,000 of the 1,250,000 shares of common stock to be issued to Non-Employee
Directors pursuant to the grant of options and restricted stock awards.
Non-Employee Directors no longer are eligible to participate in the 1986 Plan.
All options previously granted to Non-Employee Directors under the 1986 Plan
vest in four equal annual installments commencing one year from the date of
grant. The Committee determines the type, amount and terms, including vesting,
of any awards made under the 1986 Plan. The 1986 Plan will terminate in June,
1996.
With respect to options granted under the Incentive Plan, the 1992
Directors' Plan, and the 1986 Plan (collectively, the "Plans"), the exercise
price may not be less than the fair market value of the common stock on the date
of grant. In general, each option granted under the Plans expires 10 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.
Restricted stock awards granted pursuant to the Plans generally require no
payments by the grantee. All of the shares of stock subject to such restricted
stock awards are subject to forfeiture if the employee's employment, or
Non-Employee Director's association with the Company, is terminated or ended
(except under certain circumstances) prior to a vesting period of generally
three to five years from the restricted stock award grant date. The market price
of the shares on the date of the grant is recorded as a deduction from
stockholders' equity (unamortized deferred compensation -- restricted stock)
which is amortized to compensation expense over the applicable vesting period.
The Company may grant additional options outside the Plans in connection
with its efforts to hire or retain consultants and others. At December 31, 1995,
the Committee has been authorized by the Board
F-12
of Directors to grant options outside of the Plans for an additional 7,918
shares of common stock, substantially all of which may be exercisable at prices
below the fair value of the common stock on the date of grant.
In connection with the retention of a financial advisor, the Company in
February 1991 granted to such financial advisor a warrant to purchase, until
January 15, 1996, 50,000 shares of common stock at a price of $6.50 per share.
This warrant was outstanding as of December 31, 1995.
In connection with the retention of an investor relations firm, the Company
in November 1994 granted to such firm a warrant to purchase until September 1,
1999, 50,000 shares of common stock at a price of $6.50 per share. This warrant
was outstanding as of December 31, 1995.
In connection with the retention of an investment firm to assist in the sale
and issuance of convertible debentures, the Company in August, 1995 granted to
such firm warrants to purchase until July 31, 2000, 105,000 shares of common
stock at a price of $9.60 per share. These warrants were outstanding as of
December 31, 1995.
The following table summarizes restricted stock award activity:
1995 1994 1993
---- ---- ----
Shares granted -- -- --
Market price at date of grant -- -- --
Shares vested 1,333 22,996 31,101
Vested price $17.00 $ 7.375 $7.375-$17.00
Shares forfeited -- (4,000) --
The following table summarizes stock option activity:
1995 1994 1993
---- ---- ----
Options outstanding,
beginning of year ................ 1,304,799 1,145,969 1,002,472
Options granted .................. 209,368 418,994 282,000
Options exercised ................ (24,987) (26,422) (15,339)
Options cancelled ................ (78,712) (233,742) (123,164)
Options outstanding, end of
year ............................. 1,410,468 1,304,799 1,145,969
============ =========== ===========
Options exercisable, end of
year ............................. 973,514 924,493 936,616
============ =========== ============
Exercise prices .................. $8.50-$10.75 $6.00-$7.25 $6.63-$9.38
============ =========== ============
Options price range, end of
year ............................. $5.44-$17.75 $5.75-$17.75 $5.75-$17.75
============ ============ ============
Option price grant range ......... $5.44-$10.50 $6.63-$8.38 $7.13-$13.88
============ ============ ============
F-13
8. Income Taxes
At December 31, 1995 and 1994, the tax effects of temporary differences that
give rise to deferred tax assets are as follows:
Deferred Assets: 1995 1994
- --------------- ---- ----
Federal and state net operating loss
carryforwards ............................ $ 26,510,000 $ 22,280,000
Research and experimentation tax
credit carryforwards ..................... 1,851,000 1,777,000
Plant and equipment, principally due to
differences in depreciation .............. 1,226,000 1,184,000
Patents, principally due to differences
in amortization .......................... 90,000 97,000
Accrued expenses, principally due to
accrual for financial reporting
purposes ................................. 297,000 377,000
------------ ------------
Total deferred tax assets .................. 29,974,000 25,715,000
Valuation allowance ........................ (29,974,000) (25,715,000)
------------ ------------
Net deferred tax assets .................... $ -- $ --
============ ============
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, 1995, the Company had net operating loss carryforwards of
approximately $66,900,000 that will expire in the years 2001 to 2010. The
Company also has research and experimentation credit carryforwards of
approximately $1,851,000 that expire in the years 2001 to 2010. Ultimate
utilization/availability of such net operating losses and credits may be
curtailed if a significant change in ownership occurs.
9. Discontinued Operation
On June 16, 1994, the Company entered into an agreement with Sybron
Chemicals, Inc. ("Sybron Chemicals") pursuant to which the Company has
exclusively licensed its biotreatment technology and sold its biotreatment
laboratory and field demonstration equipment to Sybron Chemicals. Under the
terms of the agreement, Sybron Chemicals has the exclusive right to
commercialize the Company's biocatalysis technology for the removal of hazardous
wastes from manufacturing and process waste streams. During the next ten years,
under the terms of the agreement, the Company will receive royalty payments
based on a percentage of commercial net sales of biotreatment systems made by
Sybron Chemicals. The Company has not recorded any royalty revenues in 1995 and
1994.
During the second quarter of 1994, the Company recognized a charge to
discontinued operations of $839,000, or $.11 per share, for disposal of its
biotreatment business, of which $536,000 represents a non-cash loss on the sale
of capital equipment dedicated to the Company's biotreatment operations and
$303,000 relates to severance arrangements with biotreatment personnel.
F-14
For the years ended December 31, 1994, and 1993, revenues relative to the
biotreatment operations were approximately $38,000, and $195,000, respectively.
Direct expenses related to the biotreatment operations, primarily for personnel,
research and development and depreciation, including a $500,000 charge
representing management's best estimate of the impairment in value of the
biotreatment assets in 1993, amounted to $1,535,000, and $3,513,000 for the
years ended December 31, 1994, and 1993, respectively.
10. Marketable Securities Available for Sale
Marketable securities available for sale at December 31, 1995 include debt
securities with maturities ranging from January, 1996 to June, 1998. A summary
of marketable securities at December 31, 1995 is as follows:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ----------- -------------- ------------
US Government and agency
obligations $ 8,892,723 -- ($ 13,301) $ 8,879,422
Certificates of deposit $ 1,000,017 -- ($ 22) $ 999,995
Asset backed security $ 500,665 -- ($ 509) $ 500,156
Commercial Paper $ 995,473 $ 694 -- $ 996,167
------------ ------------ ------------ ------------
$ 11,388,878 $ 694 ($ 13,832) $ 11,375,740
============ ============ ============ ============
The net change in the gross unrealized loss for the year ended December 31,
1995 decreased by approximately $254,000. The proceeds from sales and maturities
of marketable securities available for sale included gross realized gains and
losses of approximately $34,000 and $148,000 respectively, for the year ended
December 31, 1995.
A summary of marketable securities at December 31, 1994 is as follows:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ----------- -------------- ------------
US Government and agency
obligations $ 6,852,770 -- ($ 161,048) $ 6,691,722
Corporate obligations $ 1,621,669 -- ($ 106,230) $ 1,515,439
----------- ----------- ----------- -----------
$ 8,474,439 -- ($ 267,278) $ 8,207,161
=========== =========== =========== ===========
The gross unrealized loss as of the January 1, 1994 adoption date was
approximately $110,000. The net change in the gross unrealized loss for the year
ended December 31, 1994 was an increase of approximately $157,000. The proceeds
from sales and maturities of marketable securities available for sale included
gross realized gains and losses of approximately $7,000 and $47,000,
respectively, for the year ended December 31, 1994.
F-15
11. Commitments and Contingencies
(a) Lease
Celgene leases its laboratory and office facilities in Warren Township, New
Jersey. The current lease term expires in 1997 and has two five-year renewal
options. Annual payments are $330,000. The lease provides that at the end of
each five-year term, the rent will be increased based upon the change in the
consumer price index, but in no case shall the increase be greater than 20%.
Celgene is also required to pay additional amounts for real estate taxes,
utilities, and maintenance. Total rental expense amounted to $448,000, $474,000,
and $479,000 in 1995, 1994 and 1993, respectively.
(b) Employment Agreements
Celgene has employment agreements with certain officers and employees. The
related outstanding commitments at December 31, 1995 total approximately
$826,000, and $44,000 for 1996, and 1997, respectively. Employment contracts
provide for an increase in compensation reflecting annual reviews and related
salary adjustments.
(c) Contracts
The Company enters into sponsored research contracts from which certain
revenues are derived. Aggregate research and development costs incurred in
connection with such contracts totalled $403,000, $247,000, and $120,000 in
1995, 1994 and 1993 respectively.
In August 1992, the Company entered into a two-year research and development
agreement with The Rockefeller University to prove the effectiveness of certain
glutarimides and their derivatives in reducing symptoms associated with elevated
TNF[A] levels in patients. Under the terms of the agreement, the Company has
the world-wide exclusive license to manufacture and market any drugs, including
SYNOVIR, which may result from the research performed at The Rockefeller
University. Rockefeller is entitled to receive royalties based on commercial
sales of any such drugs. In July 1994 this agreement was extended for an
additional two years. Under terms of the extension, the Company is committed to
pay the Rockefeller University $504,000 annually. The Company intends to seek in
1996 to extend the agreement an additional two years.
In December, 1995 the Company entered into an agreement with Penn
Pharmaceutical, Ltd. to build a special facility devoted exclusively to the
production of SYNOVIR, the Company's experimental drug which has been approved
by the FDA for expanded distribution, prior to final evaluation by that agency.
Under the terms of the agreement, based on certain milestones with respect to
commencing production and FDA inspection, the Company is responsible for
$320,000 of start-up and validation costs. In addition, the Company will lease
the dedicated facility for a three year period. Annual facility payments are
$268,000, which commences in the month the first milestone is completed. Penn
will manufacture SYNOVIR and sell it to the Company at a price to be agreed
upon.
(d) Insurance
Liability insurance market conditions have resulted in various coverages,
including product liability coverages, becoming either unavailable or
excessively expensive. Celgene has obtained limited general liability and
umbrella insurance coverage. If a lawsuit were filed and a judgement entered
against the
F-16
Company, it could have a material adverse effect on the business and financial
condition of Celgene if such judgment were not covered by the limited insurance
or exceeded the policy limits.
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 operation and modifies its operations as appropriate. The Company
believes that it is in substantial compliance with all applicable environmental
laws and regulations.
(e) Concentration on Market Risk
During 1995, one customer accounted for approximately 40% of the total chiral
revenues. During 1994, three customers accounted for approximately 83% (57%, 14%
and 12% individually) of the total chiral revenues. During 1993, three customers
accounted for approximately 96% (35%, 31% and 30% individually) of the total
chiral revenues.
12. Subsequent Event
On March 13, 1996, in a private placement, the Company completed the sale of
503 shares of Series A Convertible Preferred Stock, par value $.01 per share
(the ""Preferred Stock"), at an issue price of $50,000 per share, for total
gross proceeds of $25,150,000. The Company received net proceeds, after offering
costs, of approximately $23,800,000. The Preferred Stock, plus dividends at a
rate of 4.9% per year, is convertible into common stock of the Company at the
option of the holders thereof in one-third increments commencing on May 12, June
11, and July 11, 1996, at a conversion price per share of common stock equal,
generally, to the lesser of (i) $18.81 or (ii) 90% of the average closing price
per share of the common stock for the seven trading days immediately prior to
the date of conversion. The Company may redeem the shares in increments of no
less than $1.5 million commencing December 13, 1996, on thirty business days
written notice to stockholders, at a price that equals a specified premium,
ranging from 120% to 130%, over the purchase price plus dividends. Under certain
conditions, upon receipt of a conversion notice from a holder, the Company has
the right (i) to redeem shares presented for conversion, or (ii) to defer
conversion for 90 days, in which case the Company would issue warrants to any
holder of Preferred Stock affected by the deferral of the conversion. Any shares
of Series A Convertible Preferred Stock outstanding on March 13, 1998 shall be
converted automatically into common stock on such date at the conversion price
then in effect. The holders of Preferred Stock have no voting rights. The
Company granted registration rights to the subscribers in the private placement
that require the Company to file a registration statement covering the shares of
Common Stock of the Company underlying the Preferred Stock. If such registration
statement is not declared effective by June 11, 1996, the Company may be
required to pay the subscribers an amount in common stock equal to 1 1/2% per
month of the gross proceeds of the private placement offering until the
registration statement is declared effective, and the holders of Preferred Stock
may be entitled to exercise demand or piggyback registration rights.
In connection with the private placement, the Company granted to certain
executives and affiliates of the placement agent warrants to purchase an
aggregate of 66,853 shares of Common Stock at an exercise price of $20.52,
subject to proportional adjustment in the event that the Company undertakes a
stock split, stock dividend, recapitalization or similar event. These warrants
are exercisable for a period of five years from the date of issuance.
F-17
STATEMENT OF DIFFERENCES
The British pound sign shall be expressed as 'L'
The lower case Greek letter alpha associated with Tumor Necrosis Factor Alpha
shall be expressed as [A]
The trademark symbol shall be expressed as 'tm'
The 'less-than-or-equal-to' sign shall be expressed as <=