CELGENE CORP /DE/ - 10-K Annual Report

Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1998

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)

(732) 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:

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. X
---

Aggregate market value of voting stock held by non-affiliates of registrant as
of March 1, 1999: $146,007,577

Number of shares of Common Stock outstanding as of March 1, 1999: 16,753,028

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

TABLE OF CONTENTS

Item No. Page
- -------- ----

Part I

1. Business 1
2. Properties 25
3. Legal Proceedings 25
4. Submission of Matters to a Vote of
Security Holders 25
Part II

5. Market for registrant's Common Equity
and Related Stockholder Matters 26
6. Selected Financial Data 27
7. Management's Discussion and Analysis
of Financial Condition and results of Operations 28
7A. Quantitative and Qualitative disclosures about
Market Risk 32
8. Financial Statements and Supplementary Data 32
9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure 33

Part III

10. Directors and Executive Officers of the
Registrant 33
11. Executive Compensation 35
12. Security Ownership of Certain Beneficial
Owners and Management 39
13. Certain Relationships and Related
Transactions 40
Signatures 41
Part IV

14. Exhibits, Financial Statements, and
Reports on Form 8-K F-1

PART I

ITEM 1. BUSINESS

Celgene Corporation ("Celgene" or the "Company") is a specialty pharmaceutical
company engaged in the development and commercialization of human
pharmaceuticals, largely focused on the immunology/oncology market and
agrochemicals. The initial therapeutic focus of the immunology/oncology program
is the development of small molecule pharmaceuticals that (1) have the potential
to selectively regulate Tumor Necrosis Factor alpha ("TNF-(alpha)"), a protein
whose overproduction has been linked to many chronic inflammatory and
immunological diseases and (2) the development of anti-angiogenic
pharmaceuticals having the ability to inhibit the growth of new blood vessels as
for example, in a growing tumor, and hence potentially be of value as
anti-cancer agents. The Company's lead pharmaceutical is THALOMID(TM), its
formulation of thalidomide, a potent anti-angiogenic agent and a down regulator
of TNF-(alpha) production. On July 16, 1998, the Company received approval from
the U.S. Food and Drug Administration ("FDA") to market THALOMID for the
treatment of erythema nodosum leprosum ("ENL"), an inflammatory complication of
leprosy. Additionally the Company has implemented clinical programs with the
objective of submitting additional New Drug Applications ("NDA") to market
THALOMID in the treatment of certain cancers and in the treatment of cachexia
(wasting) in patients with Acquired Immune Deficiency Syndrome ("AIDS").

Working with the FDA, Celgene has developed a comprehensive education program
and distribution system the "System for Thalidomide Education and Prescribing
Safety", or the S.T.E.P.S.(TM) program designed to support the safe and
appropriate use of thalidomide due to the drug's history of teratogenicity
(capacity to cause birth defects). This program has been made part of THALOMID's
label. Celgene is also developing novel and proprietary thalidomide analogues,
called IMiDs(TM) (Immunomodulatory Drugs) as well as a class of proprietary
immunotherapeutic pharmaceutical compounds called SelCIDs(TM) ("Selective
Cytokine Inhibitory Drugs"). These two classes of compounds are orally
administered small molecules that suppress excess TNF-(alpha) production as well
as having anti-angiogenic properties and are intended to treat chronic
inflammatory diseases, cancer and other disorders.

As part of its pharmaceutical program, Celgene is also developing chirally pure
versions of commercialized pharmaceuticals with an objective of developing
products having greater efficacy and fewer side effects than the existing
racemic versions. The Company's lead compound in this area is a chirally pure
version of dl-methylphenidate (currently marketed under the trade name
Ritalin(R)) for the treatment of Attention Deficit Hyperactivity Disorder
(ADHD). The Company initiated its Phase III pivotal trial program in the fourth
quarter of 1998. The Company previously completed a Phase I/II trial and
announced that its chirally pure version demonstrated statistically significant
efficacy versus placebo and preliminary indications of longer duration of action
relative to the racemic version.

The Company is also employing its biocatalytic chiral chemistry technology to
develop chirally pure agrochemicals with superior attributes and/or lower
manufacturing costs than the conventional, racemic equivalent.

1

Celgene is developing compounds with the objective of producing an array of
novel, highly potent, selective, safe, orally administered drugs that have the
potential to regulate the overproduction of TNF-(alpha), as well as inhibiting
angiogenesis. Overproduction of TNF-(alpha) has been implicated in symptoms
associated with certain chronic inflammatory diseases. Chronic inflammatory and
immunological diseases collectively afflict millions of patients, and for the
most part are inadequately treated with existing therapies. The Company is
developing two new classes of compounds, IMiDs and SelCIDs, which have been
demonstrated in in vitro tests using human cells to be significantly more active
than thalidomide in suppressing TNF-(alpha) production and, in preclinical
tests, have not demonstrated teratogenicity. The initial therapeutic indications
targeted for the IMiDs and the SelCIDs include inflammatory bowel disease,
rheumatoid arthritis and oncological applications. The Company's first SelCID
was found to be well tolerated in two Phase I clinical trials in the United
Kingdom, and is entering a pilot study to assess its potential in Crohn's
disease in the United States. The United States Patent and Trademark Office
("U.S. PTO") has issued composition of matter patents to the Company relating to
certain of its novel IMiDs and SelCIDs.

Celgene's core chiral technology is based on biocatalysis, which involves the
identification and manipulation of enzymes to perform specialized chemical
reactions, such as the production of chirally pure compounds. Chirality refers
to the property of many chemical compounds to exist in two or more different
conformations that are mirror images of each other. While one conformation may
have beneficial effects, the other may be inactive or produce undesirable
effects. Chirally pure compounds contain only one of these conformations, and
thus may have attributes superior to those of the racemic mixture.

The Company is employing its biocatalytic chiral chemistry technology to develop
chirally pure versions of existing pharmaceutical products that may demonstrate
greater efficacy and/or fewer side effects. The Company filed Investigational
New Drug applications ("INDs") in the United States and Canada for a chirally
pure version of dl-methylphenidate, which has been used for decades in
formulations such as Ritalin(R), for the treatment of Attention Deficit
Hyperactivity Disorder ("ADHD") in children. The Company completed its Phase
I/II clinical trial of the drug and announced that its chirally pure version
demonstrated statistically significant efficacy versus placebo and preliminary
indications of longer duration of action relative to the racemic version and has
initiated pivotal Phase III trials. The Company is also developing a chirally
pure formulation of mexiletine for the treatment of neuropathic pain, a chronic
pain state frequently associated with trauma, spinal cord injury, and
complications of diabetes. Celgene recently reported that its chirally pure
formulation of mexiletine substantially reduced severe neuropathic pain in
established animal models.

Celgene, through its Celgro(TM) subsidiary, is also applying its chiral
technology to the production of chirally pure agrochemicals, in which the
Company's biocatalytic process can add significant value by substantially
lowering manufacturing costs and reducing environmental impact. In 1998, Celgro
entered into agreements with two leading agrochemical companies to develop
cost-effective processes for the production of chirally pure versions of certain
products currently produced by those firms. Each agreement provides that the
customer will fund a research and development program by Celgene relating to the
customer's product, make milestone payments to Celgene if certain benchmarks are
achieved and pay Celgene a royalty if the program leads to commercial sales.

2

Celgene has established a sales and marketing organization to commercialize
THALOMID and employs approximately 32 persons in this capacity. The Company
intends to develop and market its own pharmaceuticals for indications with
smaller patient populations. The Company anticipates partnering with larger
pharmaceutical companies with respect to drugs for indications with larger
patient populations. The Company also may partner with companies for the
development and commercialization of the Company's chirally pure pharmaceuticals
and agrochemical products. Celgene expects that these arrangements typically
will include milestone payments, reimbursement of research and development
expenses and royalty arrangements.

PRODUCTS UNDER DEVELOPMENT

Celgene's portfolio of product candidates currently under development and
certain key clinical trials is set forth in the following table and further
described below:

- -------------------------------------------------------------------------------

Product Indication/ Intended Use Status(1)
- -------------------------------------------------------------------------------
THALOMID TM Erythema Nodosum Approved and marketed
Leprosum (ENL) 10/98
- -------------------------------------------------------------------------------
Recurrent Aphthous Phase III study ongoing
Ulcers in HIV+ patients
----------------------------------------------------
AIDS-Cachexia Phase II/III trial
completed
Special trials ongoing
----------------------------------------------------
Multiple Myeloma Phase III trial protocol
in preparation
----------------------------------------------------
Lung Cancer NCI/Celgene pilot trial
being initiated
----------------------------------------------------
Head and Neck Cancer NCI/Celgene pilot trial
being initiated
----------------------------------------------------
Glioblastoma NCI/Celgene trial Phase
II ongoing
----------------------------------------------------
Crohn's Disease Pilot trial data under
review
Phase III protocol in
preparation
- -------------------------------------------------------------------------------
SelCID CDC801 Crohn's Disease Phase II being initiated
Phase I studies completed
- -------------------------------------------------------------------------------
SelCIDs TM (Selective Inflammatory Non-clinical tox
Cytokine Inhibitory Drugs) disease/oncology
- -------------------------------------------------------------------------------
d-MPH (Chirally pure Attention Deficit Phase II trial completed
version of Hyperactivity Disorder Phase III trial ongoing
dl-methylphenidate)(2) (ADHD)
- -------------------------------------------------------------------------------
IMiDs(TM) Inflammatory Non-clinical toxicology
(Immunomodulatory Drugs) disease/oncology for lead compound being
completed Phase I second
half of 1999
- -------------------------------------------------------------------------------

(1) See "Government Regulation" for a description of the meaning of terms used
to describe the status of the Company's product development activities.
(2) One commercial formulation of dl-methylphenidate is Ritalin(R).

IMMUNOLOGY/ONCOLOGY

General
Celgene is developing THALOMID (thalidomide) and two new classes (IMiDs and
SelCIDs) of orally available small molecule compounds with the objective of
producing an array of novel, highly

3

potent, selective, safe, orally administered drugs that have the potential to
regulate the overproduction of TNF-(alpha) and are anti-angiogenic.

TNF-(alpha), produced primarily by certain white blood cells, is one of a number
of proteins called cytokines, which act as chemical messengers throughout the
body to regulate many aspects of the immune system. TNF-(alpha) is essential to
the mounting of an inflammatory response, which is the normal immune system
reaction to infection or injury, and rids the body of foreign agents and
promotes tissue repair. However, chronic or excessive production of TNF-(alpha)
has been implicated in the pathophysiology of a number of acute and chronic
inflammatory diseases. These disease states which are inadequately treated with
existing therapies, include diabetes (non-insulin dependent), Alzheimer's
Disease, inflammatory bowel disease, rheumatoid arthritis, cancer cachexia,
Parkinson's Disease, multiple sclerosis, and lupus.

Traditional therapies for these disease states include anti-inflammatory drugs
and immunosuppressive agents. These therapies, however, often fail to achieve
significant clinical benefits and can cause serious side effects such as severe
drops in certain blood counts, liver toxicity, osteoporosis, teratogenicity, and
various endocrine abnormalities. Newer therapies, which include monoclonal
antibodies and receptor-based therapies, also have not adequately addressed
these diseases. It is widely believed that selective down regulation of
TNF-(alpha) represents a promising new strategy for treating chronic
inflammatory diseases. In pursuit of this strategy, two broad classes of
compounds have been investigated: proteins and small synthetic molecules.

Investigational anti-TNF-(alpha) proteins, including anti-TNF-(alpha) antibodies
and TNF-(alpha) receptors, have demonstrated efficacy in the treatment such
chronic inflammatory diseases as rheumatoid arthritis, and Crohns' disease (a
severe manifestation of inflammatory bowel disease). While initial doses of
these anti-TNF-(alpha) proteins have been well tolerated and reduced disease
activity has been observed in clinical studies, they do exhibit certain
shortcomings linked to their nature as proteins. First, they are relatively
larger molecules that must be injected. Second, the period of efficacy of a
given dosage of a protein-based drug often declines with repeated
administration, rendering protein-based drugs more suitable for treatment of
acute pathological conditions rather than chronic disease states. This
limitation is due in part to increasing production by the patient's immune
system of antibodies that neutralize administered proteins. Varying degrees of
this immunogenic response have been observed in clinical trials of
anti-TNF-(alpha) antibodies.

There are a number of large protein based therapeutic products under development
by other companies for TNF-(alpha) modulation. At least one such product has
received approval from the FDA for the treatment of Crohn's disease. Antibody or
receptor-based products are also under development for diseases such as
rheumatoid arthritis, and asthma. However, small molecule drugs, if developed,
may prove to be preferable in the treatment of chronic inflammatory diseases,
due to factors such as oral dosing (versus injection), avoidance of undesirable
immune response leading to side effects and reduced efficacy, and lower cost of
therapy. The Company believes its small molecule immunotherapeutic compounds
have the potential to selectively modulate TNF-(alpha) while affording these
benefits.

In addition, research has indicated that Celgene's small molecule THALOMID is
anti-angiogenic. Angiogenesis is the fundamental biological process by which new
blood vessels are formed. Cancer

3

cells which require oxygen and nutrients, initiate a biochemical mechanism that
stimulates angiogenesis, which in turn provides the cancerous cells with the
blood supply that they need. Inhibition of such angiogenesis could adversely
effect the graft of a tumor and hence be a potential anti-cancer therapy. Such
therapy could be also used in conjunction with radiation or more traditional
chemotherapeutic agents. Currently a number of anti-angiogenic agents are being
developed by a number of companies, however the Company believes that THALOMID
is the only approved anti-angiogenic agent on the market. Preliminary research
suggests that Celgene's small molecule immunotherapeutic compounds - some of
which are based on thalidomide's activity - also appear to have the potential to
inhibit such angiogenesis.

Thalidomide

The Company is currently developing THALOMID, its formulation of thalidomide, a
potent inhibitor of TNF-(alpha) and angiogenesis , for the treatment of a
variety of serious disease states for which there are currently no adequate
therapies. The Company's work with thalidomide was originally based on a
scientific collaboration with The Rockefeller University's Laboratory of
Cellular Physiology and Immunology ("Rockefeller"). In the early 1990s,
researchers at Rockefeller discovered that thalidomide is a selective modulator
of TNF-(alpha) , and therefore could be of potential benefit in many serious
immune related disease states, including cachexia and other AIDS-related
conditions. The Company believes that, in serious and debilitating disease
states, the risk of thalidomide's teratogenicity and other potential side
effects is outweighed by the gravity of the disease and the drug's potential
clinical benefits. Rockefeller has granted Celgene certain exclusive rights and
licenses to manufacture, use and sell thalidomide for treating the toxicity
associated with high concentrations of TNF-(alpha) in septic shock, cachexia and
HIV related disease states. Researchers at the Children's Hospital (affiliated
with Harvard University) discovered that thalidomide has anti-angiogenic action,
(and hence of potential use as an anti-cancer agent) and filed patents on this.
The patents (some of which have not issued in the U.S.) are exclusively licensed
to EntreMed, (a development stage biotechnology company). Celgene was granted an
exclusive sublicense of all of EntreMed's thalidomide patents in December 1998.

Thalidomide was developed initially as a sedative, and was also widely
prescribed by doctors in Europe in the late 1950s and early 1960s to pregnant
women for relief of morning sickness. After severe birth defects were later
observed with use of the drug, it was virtually removed from the world market.
Thalidomide was later discovered to have therapeutic effects in the treatment of
ENL in leprosy, a disease that is rare in the United States but common in many
parts of the developing world. Although the FDA had never approved the marketing
of thalidomide, the U.S. Public Health Service has been dispensing the drug for
the treatment of ENL for the past 25 years.

S.T.E.P.S.(TM) Program

Working with the FDA and other governmental agencies as well as certain advocacy
groups, the Company has designed and implemented a program, known as the System
for Thalidomide Education and Prescribing Safety ("STEPS") whose objective is
the safe and effective dispensing of THALOMID. This program includes
comprehensive physician, pharmacist, and patient education. Female patients are
required periodically to take pregnancy tests and to use contraception. All

5

patients are also subject to requirements concerning informed consent and
participation in a confidential outcomes registry managed on Celgene's behalf by
an academic epidemiology research group. Physicians under the program are also
required to comply with the educational, contraception counseling, informed
consent, and pregnancy testing elements of the program. Dispensing pharmacists
are required to confirm that the physician is a registered participant in the
program, and that the patient has signed an informed consent. Automatic refills
are not permitted under the program, and prescriptions may not exceed four weeks
dosing. A new prescription is required every month.

Target Disease States for Thalidomide
Key indications for which the Company is currently testing or about to commence
testing THALOMID are set forth below. There can be no assurance that the Company
will eventually commercialize or pursue regulatory approval for THALOMID for any
of these indications.

THALOMID(TM)
- -----------------------------------------------------------------------------

Indication Status
- -----------------------------------------------------------------------------
Erythema nodosum leprosum in leprosy (ENL) Approved and marketed
October 1998
- -----------------------------------------------------------------------------
Multiple Myeloma |X| Phase II data in review
|X| Phase III trial in
preparation
- -----------------------------------------------------------------------------
Glioblastoma Phase II
|X| NCI/Celgene trial ongoing
- -----------------------------------------------------------------------------
Crohn's Disease |X| Phase II data under review
|X| Phase III Protocol in
preparation
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Non-Small Cell Lung Cancer |X| Pilot study with NCI
being initiated
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Head and Neck Cancer |X| Pilot study with NCI
being initiated
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
AIDS-related Cachexia Phase II/III trial completed.
Special studies ongoing
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
AIDS-related Recurrent aphthous Phase III trial ongoing
stomatitis (RAS)
- -----------------------------------------------------------------------------

Thalidomide's immunological and anti-angiogenic properties are being
investigated as the basis for treatment of a variety of oncological diseases. A
number of trials are ongoing, some in cooperation with the National Cancer
Institute to evaluate the potential of the drug in cancer. Key investigations
include multiple myeloma and glioblastoma.

ONCOLOGY
Cancer tissue is highly vascularized. This observation has led to the
realization that blood vessels are essential for tumor growth, invasion, and
metastasis. Specifically, developing solid primary tumors are believed to remain
clinically insignificant, unless they can arrange to obtain nourishment from
their host. Biochemically, an invasive tumor acts by altering a complex system
of factors affecting vascular endothelial cells, causing the formation of new
vascular networks to spring from existing ones.

Almost three decades ago it was proposed that this tumor neovascularization or
angiogenesis could be a target of cancer therapy. Anti-angiogenic compounds were
believed to be able to work by reducing or halting remaining tumor growth and
could also be used in conjunction with more traditional chemotherapeutic agents.
Thalidomide was discovered to be anti-angiogenic at The Children's Hospital in
Boston. Celgene is currently working with the National Cancer Institute on a

6

number of clinical investigators to assess the potential of the drug in the
treatment of various cancers.

Key areas of THALOMID clinical research are delineated below.

Multiple Myeloma

Multiple Myeloma is a malignant proliferation of plasma cells and plasmacytoid
cells. It is the second most common hematological malignancy and is invariably
fatal. Myeloma accounts for about 13% of hematological malignancies. The
prevalence of the disease is approximately 40,000 people in the United States
and the incidence approximately 4 per 100,000: approximately 14,400 new cases
are reported annually with approximately 11,000 deaths associated with the
disease every year.

THALOMID is being investigated at the University of Arkansas where an initial
report (in December at the American Society of Hematology) focused on a group of
patients with advanced disease and histories of extensive prior chemotherapeutic
interventions, radiation treatments and multiple bone marrow transplants who
received THALOMID, 33% of patients responded and saw substantial decreases
(50-100%) in serum M protein levels, an important marker of the progression of
the disease. These encouraging results have been extended to a larger patient
population where similar results are being observed.

Celgene's plan is to present the data from the University of Arkansas study to
the FDA and develop a regulatory/clinical program towards indication approval of
THALOMID for multiple myeloma.

Glioblastoma Multiforme

Glioblastomas are the most common brain tumors and account for 50% of all
gliomas. These tumors arise after age 50 in most patients. Radiation therapy and
chemotherapy are standard therapeutic regimens.

Studies at the New York University School of Medicine and at the Dana Farber
Institute have demonstrated the potential for further investigating thalidomide
as a treatment for glioblastoma. Additionally a trial has been initiated in
collaboration with the National Cancer Institute and the Radiation Therapy
Oncology Group a national cooperative research organization to investigate the
effect of THALOMID and radiation as co-therapy for the treatment of
glioblastoma.

Other Oncology Indications

THALOMID is currently being investigated for a wide array of cancers including
prostate, breast, colorectal, lung, head and neck, melanoma and leukemia. If
successful, these studies should establish proof of principle and facilitate
design of pivotal studies. The NCI is supporting a number of these trials, while
others are being run by key investigators who are experts in their field.

7

IMMUNE MODULATION

Thalidomide has been shown to impact immune function markers both in vitro and
in vivo. Examples of such biological activities include the inhibition of the
inflammatory cytokine TNF(alpha), stimulation of the anti-inflammatory cytokine
IL-10, and activation of T-cell function. These types of activities could prove
to have therapeutic benefit in a variety of inflammatory, infectious and
autoimmune diseases. The two key areas of investigation at present involve
inflammatory bowel disease and serious complications associated with HIV/AIDs.

Erythema Nodosum Leprosum. ENL, a complication of leprosy, is a chronic
bacterial disease. Leprosy afflicts millions worldwide, although the disease is
relatively rare in the United States. Celgene does not plan to market THALOMID
outside the United States and Canada in the near term. ENL occurs in about 30%
of leprosy patients, and is characterized by cutaneous lesions, acute
inflammation, fever, and anorexia. On July 16, 1998, the Company received
approval from the FDA with respect to the Company's NDA for THALOMID in the
treatment of ENL.

Inflammatory Bowel Disease
Inflammatory bowel disease is characterized by serious chronic inflammation of
the wall or any part of the gastrointestinal tract and results in pain, bloating
and diarrhea. In addition, the chronic inflammation may result in abscesses and
fistula formation. The most serious form of inflammatory bowel disease is known
as Crohn's Disease and afflicts approximately 125,000 patients in the US.

A phase II pilot study using THALOMID in patients with severe Crohn's disease is
being concluded at the Cedar Sinai Medical Center. Preliminary data suggests
that thalidomide can not only provide clinical benefit, but potentially can also
be steroid sparing. This combination of effects could mean improvement over
current therapeutic options. A similar phase II pilot study has recently been
initiated using THALOMID for chronically active ulcerative colitis at Cedar
Sinai Medical Center. As many as 500,000 people suffer from ulcerative colitis
in the US.

HIV/AIDS

Cachexia. Cachexia is clinically defined as the involuntary loss of more than
10% of baseline body weight in the previous six months. Cachexia can markedly
diminish a patient's quality of life, may contribute directly to disease
progression, development of opportunistic infections and even death. The Company
announced in April 1997 that data from its Phase II/III trial of THALOMID in
HIV-associated weight loss showed "a statistically significant positive result"
in reaching the trial's primary endpoint, i.e. increase in body weight after
eight weeks of therapy. The double-blind placebo-controlled trial evaluated 102
AIDS patients who had lost an average of more than 10 percent of their body
weight.

Recurrent Aphthous Stomatitis. RAS is characterized by lesions of the oral
cavity, esophagus, and gastrointestinal tract and may interfere with normal
eating. The Company believes RAS afflicts an estimated 5,000 AIDS patients in
the U.S. Positive results have been reported in a study conducted by the AIDS
Clinical Trials Group of the National Institutes of Health using a formulation
of thalidomide manufactured by a third party. In mid-1997, the Company began a
pivotal clinical trial

8

involving 84 patients for the evaluation of thalidomide in the treatment of RAS,
using the same principal investigator as the AIDS Clinical Trials Group study.

IMiDs

Celgene has designed and synthesized a number of novel structural analogues of
thalidomide called IMiDs (immunomodulatory drugs) which have been demonstrated
in in vitro tests to be substantially more potent than thalidomide. Certain
analogues have demonstrated equivalent ability to inhibit TNF-(alpha)
overproduction but in a dose as low as 1/10,000 of the dose of thalidomide.
There can be no assurance, however, that the same effect can be duplicated in in
vivo tests. Research on these compounds is now focused on evaluating the
toxicological profile of the lead candidates and on increasing the immunological
and anti-angiogenic activity and the potential elimination of thalidomide's side
effects including teratogenicity. The Company anticipates filing an IND
application for its lead analogue in 1999. The US patent and Trademark Office
has issued composition of matter patents to the Company relating to certain of
its IMiDs.

SelCIDs

The Company has designed, synthesized and tested a large number of SelCIDs
("Selective Cytokine Inhibitory Drugs"). These compounds have demonstrated the
ability to be highly specific inhibitors of TNF-(alpha) overproduction in in
vitro bioassays of human cells. In 1997, the Company announced that its SelCIDs
appear to have a specific inhibitory effect on the phosphodiesterase type 4
enzyme (PDE-4), which is linked to the overproduction of TNF-(alpha). Studies
have determined that many of the SelCIDs decrease synthesis of TNF-(alpha)
through selective inhibition of PDE-4. The Company believes that control of
TNF-(alpha) at its source, versus simple removal of circulating levels of the
cytokine, may facilitate more effective therapy without immune suppression.
There can be no assurance, however, that the same effect can be duplicated in in
vivo tests.

The Company's first SelCID was found to be well tolerated in a small human
safety trial in the United Kingdom in 1997. An expanded safety trial in the UK
confirmed this in 1998. The Company filed an IND for the treatment of Crohn's
Disease in the United States late in 1998. Unlike many existing drugs which
inhibit PDE-4, SelCIDs have not shown any evidence of acute emesis (nausea and
vomiting) in animal tests. If confirmed in humans at therapeutically effective
doses, this would indicate that they are a unique class of PDE-4 inhibitors. The
U.S. Patent and Trademark Office has issued composition of matter patents to the
Company relating to certain of its novel thalidomide analogues and SelCIDs.

CHIRAL CHEMISTRY

Celgene is applying its biocatalytic synthesis technology towards the
development of substantial business opportunities in human pharmaceuticals and
agrochemicals. The Company believes it has made significant progress over the
past two years towards the development of two principal opportunities: (i) the
development of chirally pure versions of existing racemic drugs whose
performance and/or safety profiles may be enhanced by eliminating chiral
impurities; and (ii) the development and production of chirally pure
agrochemicals.

9

Chirality

Many human pharmaceuticals and agrochemicals exist in two or more different
three dimensional configurations that are identical in chemical structure but
are mirror images of each other. These conformations, known as stereoisomers,
generally interact differently with biological targets. In clinical
applications, one isomer may result in the desired therapeutic effect by
stimulating or inhibiting a targeted biological function, while the other isomer
may be inactive or cause undesirable side effects. In contrast to racemic
(compositions containing both isomers, i.e. chirally impure) pharmaceuticals,
the use of chirally pure pharmaceuticals can result in significant clinical
benefits such as reduced toxicity and increased efficacy. In agrochemical
applications, the use of chirally pure chemicals can result in a substantially
reduced volume of product required to achieve the desired benefit, thereby
potentially lowering manufacturing costs and reducing the environmental burden
as compared with racemic chemicals.

The worldwide market value of pharmaceuticals marketed in their chirally pure
form increased from approximately $7 billion in 1985 to approximately $50
billion in 1995. This increase was driven, in part, by the FDA's movement
towards requiring applicants, in connection with the submission of NDAs for
racemic compounds, to evaluate the racemic mixture as well as each stereoisomer,
as well as the greater selectivity of action of chirally pure drugs. Similarly,
agrochemicals are subject to complex and evolving environmental regulation in
the United States and abroad, including regulations establishing usage levels.
The Company believes that such regulatory constraints increase the commercial
opportunity for chirally pure agrochemicals which cause less environmental
impact, in terms of both their manufacture and use.

Celgene's Core Chiral Technology: Biocatalysis

Celgene's biocatalytic process enables the efficient production of chirally pure
compounds. This patented process is based primarily on the use of enzymes called
aminotransaminases, which are optimized by the Company through a variety of
techniques including genetic engineering. These enzymes catalyze the production
of only the desired stereoisomer of a chiral compound, and can be used in
conventional chemical synthesis reactors at room temperature.

The Company's biocatalytic process for producing chirally pure compounds differs
from the more common approach of producing racemic mixtures followed by
separating of the desired stereoisomer through resolution techniques such as
crystallization or chromatography. These traditional approaches to producing
chirally pure compounds can be cumbersome, result in low yields, use more raw
materials, involve the disposition of waste product, and are generally less
economical than the Company's process. The Company believes that its
biocatalytic process can be applied to the manufacture of a wide variety of
organic chemicals.

Chirally Pure Pharmaceuticals

Celgene believes there is a significant opportunity in developing chirally pure
versions of approved drugs currently sold in racemic form. Compounds that have
been approved and marketed have a significant body of information regarding
their safety and efficacy, and consequently: (i) the cost

10

and duration of clinical trials may be reduced if reference may be made to data
used in the course of obtaining regulatory approval for the racemic parent
compound; (ii) the risk of not obtaining regulatory approval may be reduced, and
(iii) marketing risks may also be reduced due to the established market for the
parent compound.

The Company is developing chirally pure versions of currently marketed racemic
drugs as potentially improved pharmaceuticals with potential benefits such as
reduced side effects, lower dosage requirements, enhanced specificity, and
applications in new indications. The Company filed IND applications with the FDA
and the Health Protection Branch of Canada and completed a Phase I/II clinical
trial for a chirally pure version of dl-methylphenidate ("dl-MPH"), which has
been used for decades in formulations such as Ritalin for the treatment of ADHD
in children. One million American children are estimated to be treated with
dl-MPH in its racemic form. Total US sales in 1998 of the racemic version of the
drug were in excess of $300 million. The Company's study was designed to
evaluate the pharmacokinetics and potential benefits of its chirally pure
version of dl-MPH. The Company completed this trial in the fall of 1997 and
announced that its chirally pure version of dl-MPH demonstrated statistically
significant efficacy versus a placebo and preliminary indications of longer
duration of action relative to the racemic version. In addition, the Company has
commenced development of a controlled release version of chirally pure dl-MPH,
which may substantially improve administration of the drug. The Company has been
issued both use and process patents for both its chirally pure and controlled
release versions of dl-MPH. The Company initiated Phase III pivotal trials for
D-MPH in late 1998.

The Company is also investigating a chirally pure formulation of mexiletine for
the treatment of neuropathic pain, a chronic pain state frequently associated
with trauma, spinal cord injury, and complications of diabetes. Neuropathic pain
generally arises from injury to the peripheral or central nervous tissue. In
most cases, chronic neuropathic pain responds poorly to treatment with opiates
or nonsteroidal anti-inflammatory analgesics. Mexilitine is used primarily for
the treatment of cardiac arrhythmia. However, high doses of racemic oral
mexiletine are sometimes used by physicians as an adjuvant treatment for
neuropathic pain, presumably due to its ability to block sodium channels that
communicate pain signals through the nervous system. However, this off-label use
has been limited, due to the racemic effect on sodium channels in the heart and
the central nervous system that can lead to significant side effects. Celgene's
preliminary research indicates that the anti-arrhythmic effect is resident in
one isomer and the pain suppression capability in the other.

Celgene has reported that its chirally pure formulation of mexiletine
substantially reduced severe neuropathic pain in established animal models. The
study examined the effect of each of the two isomers of mexiletine, racemic
mexiletine, and lidocaine, a prototypical sodium channel blocker, on allodynia
(pain response elicited by light touch stimuli), in two established preclinical
models. Celgene, in collaboration with researchers at the Anesthesiology
Research Laboratory at the University of California in San Diego, determined
that one isomer of mexiletine is active in the reduction of neuropathic pain.
Formulation of a pharmaceutical with this single, selective isomer may help
avoid adverse effects on cardiac and other issues. A racemic formulation of
mexiletine is marketed by several companies as an anti-arrhythmic agent. The
Company has filed for appropriate patent coverage for chirally pure mexiletine
for neuropathic pain.

11

Chirally Pure Agrochemicals

The Company's Celgro subsidiary is applying the Company's proprietary
biocatalytic synthesis technology to agrochemicals. Celgro's approach is to work
with agrochemical companies to adapt the Company's biocatalytic technology to
the manufacture of chirally pure versions of their existing crop protection
product, and then license the technology to these companies in exchange for
royalties. Celgro will also seek to develop chirally pure versions of existing
agrochemicals on its own, and then enter into license agreements with third
parties, who would manufacture and sell the agrochemicals and pay the Company
royalties. The Company believes that the agrochemical market presents a
substantial opportunity because many agrochemicals produced in racemic form,
could be manufactured in chirally pure form. As noted above, the Company entered
into research and development agreements with two leading agrochemical companies
in 1998.

The Company also believes that its chiral technology can be enabling in
agrochemical applications because it has the potential to significantly lower
manufacturing costs compared to conventional technologies and other chiral
technologies. Compared to the Company's biocatalytic process, conventional
technologies require more raw materials and greater plant capacity to produce
the same effective quantity of product, while other chiral technologies require
specialized equipment, more expensive chiral agents, more raw material, and
greater capacity for handling hazardous wastes produced in the separation
process. In addition, it is anticipated that the required application amount of
a chirally pure form of an agrochemical could be substantially less than the
racemic form, and achieve the same or better results, thereby reducing
environmental burden. Agrochemicals are highly price sensitive, and, therefore,
a process that produces chirally pure products at significant cost savings could
be in substantial demand.

PATENTS AND PROPRIETARY TECHNOLOGY

Patents and other proprietary rights are important to the Company's business. It
is the Company's policy to seek patent protection for its inventions, and also
to rely upon trade secrets, know-how, continuing technological innovations, and
licensing opportunities to develop and maintain its competitive position.

Under an agreement with The Rockefeller University ("Rockefeller"), the Company
has obtained certain exclusive rights and licenses to manufacture, use, and sell
products that are based on compounds identified in research carried out by
Rockefeller and the Company that can be used for treating toxicity associated
with high concentrations of TNF (the "Rockefeller License"). Rockefeller has
identified a method of using thalidomide and certain thalidomide-like compounds
to treat certain symptoms associated with abnormal concentrations of TNF-(alpha)
, including those manifested in septic shock, cachexia and HIV infection, and in
1995 was issued U.S. Patent No. 5,385,901 which claims such methods. This U.S.
Patent expires in 2012 and is included in the patent rights licensed to the
Company under the Rockefeller License. However, Rockefeller did not seek
corresponding patents in any other countries in respect of this invention. Under
the Rockefeller License, the Company is obligated to pay certain specified
royalties to Rockefeller on net sales of licensed products for covered
indications. The Rockefeller License is coterminous with the last to expire of
the licensed patents and is terminable by Rockefeller only in the event of a

12

breach of the agreement's terms. Any termination of the Rockefeller License
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company has been issued 28 U.S. Patents and has filed 15 U.S. Patent
applications. Of the issued U.S. Patents, 15 relate to immunotherapeutic and
chiral amine processes, compounds and uses. The Company's U.S. Patents expire
between 2001 and 2016. The Company has obtained patents in certain other
countries which correspond to some, but not all, of the Company's U.S. Patents.
The Company expects to continue to file patent applications covering the use of
its proprietary inventions.

Prior to the enactment in the United States of new laws adopting certain changes
mandated by the General Agreement on Tariffs and Trade ("GATT"), the exclusive
rights afforded by a U.S. Patent were for a period of 17 years measured from the
date of grant. Under these new laws, the term of any U.S. Patent granted on an
application filed subsequent to June 8, 1995, would terminate 20 years from the
date on which the patent application was filed in the United States or the first
priority date, whichever occurs first. Future patents granted on an application
filed before June 8, 1995, will have a term that terminates 20 years from such
date, or 17 years from the date of grant, whichever date is later.

Under the Drug Price Competition and Patent Term Restoration Act of 1984, a
U.S. Product patent or use patent may be extended for up to five years under
certain circumstances to compensate the patent holder for the time required for
FDA regulatory review of the product. The benefits of this act are available
only to the first approved use of the active ingredient in the drug product and
may be applied only to one patent per drug product. There can be no assurance
that the Company will be able to take advantage of this law.

The Company's success will depend, in part, on its ability to obtain and enforce
patents, protect trade secrets, obtain licenses to technology owned by third
parties when necessary, and conduct its business without infringing the
proprietary rights of others. The patent positions of pharmaceutical and
biotechnology firms, including the Company, can be uncertain and involve complex
legal and factual questions. In addition, the coverage sought in a patent
application can be significantly reduced before the patent is issued.
Consequently, the Company does not know whether any of its pending applications
will result in the issuance of patents or, if any patents are issued, whether
they will provide significant proprietary protection or commercial advantage, or
will be circumvented by others. Since patent applications in the United States
are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, the Company cannot be certain that it was the first to make the
inventions covered by each of its pending patent applications, or that it was
the first to file patent applications for such inventions. In the event a third
party has also filed a patent for any of its inventions, the Company may have to
participate in interference proceedings declared by the United States Patent and
Trademark Office to determine priority of invention, which could result in the
loss of any opportunity to secure patent protection for the invention and the
loss of any right to use the invention, and even if the eventual outcome is
favorable to the Company, such interference proceedings could result in
substantial cost to the Company. Protection of patent applications and
litigation to establish the validity and scope of patents, to assert patent
infringement claims against others and to defend against patent infringement
claims by others can be expensive and

13

time-consuming. There can be no assurance that in the event that any claims with
respect to any of the Company's patents, if issued, are challenged by one or
more third parties, that any court or patent authority ruling on such challenge
will determine that such patent claims are valid and enforceable. An adverse
outcome in such litigation could cause the Company to lose exclusivity relating
to such patent claims. If a third party is found to have rights covering
products or processes used by the Company, then the Company could be forced to
cease using the technologies covered by the disputed rights, could be subject to
significant liabilities to such third party, and could be required to license
technologies from such third party. Also, different countries have different
procedures for obtaining patents, and patents issued by different countries
provide different degrees of protection against the use of a patented invention
by others. There can be no assurance, therefore, that the issuance to the
Company in one country of a patent covering an invention will be followed by the
issuance in other countries of patents covering the same invention, or that any
judicial interpretation of the validity, enforceability, or scope of the claims
in a patent issued in one country will be similar to the judicial interpretation
given to a corresponding patent issued in another country. Furthermore, even if
the Company's patents are determined to be valid, enforceable, and broad in
scope, there can be no assurance that competitors will not be able to design
around such patents and compete with the Company using the resulting alternative
technology. The Company does not currently have, nor does it intend to seek,
patent protection relating to the use of THALOMID to treat erythema nodosum
leprosum, an inflammatory complication of leprosy.

The Company also relies upon unpatented proprietary and trade secret technology
that it seeks to protect, in part, by confidentiality agreements with its
collaborative partners, employees, consultants, outside scientific
collaborators, sponsored researchers, and other advisors. There can be no
assurance that these agreements provide meaningful protection or that they will
not be breached, that the Company would have adequate remedies for any such
breach, or that the Company's trade secrets, proprietary know-how, and
technological advances will not otherwise become known to others. In addition,
there can be no assurance that, despite precautions taken by the Company, others
have not and will not obtain access to the Company's proprietary technology.

GOVERNMENTAL REGULATION

Regulation by governmental authorities in the United States and other countries
is a significant factor in the manufacture and marketing of pharmaceuticals and
in the Company's ongoing research and development activities. All of the
Company's therapeutic products will require regulatory approval by governmental
agencies prior to commercialization. In particular, human therapeutic products
are subject to rigorous preclinical testing and clinical trials and other
pre-marketing approval requirements by the FDA and regulatory authorities in
other countries. In the United States, various federal, and in some cases state,
statutes and regulations also govern or impact upon the manufacturing, safety,
labeling, storage, record keeping, and marketing of such products. The lengthy
process of seeking required approvals, and the continuing need for compliance
with applicable statutes and regulations require the expenditure of substantial
resources. Regulatory approval, when and if obtained, may be limited in scope,
significantly limiting the indicated uses for which a product may be marketed.
Further, approved drugs, as well as their manufacturers, are subject to ongoing
review, and discovery of previously unknown problems with such products may
result in restrictions on their manufacture, sale or use or in their withdrawal
from the market. Any failure by the Company or its collaborators or licensees to
obtain or maintain, or any delay in

14

obtaining regulatory approvals could adversely affect the marketing of any
products developed by the Company, and its ability to receive product revenue,
royalty revenue, or profit sharing payments.

The activities required before a pharmaceutical may be marketed in the United
States begin with preclinical testing not involving human subjects. Preclinical
tests include laboratory evaluation of product chemistry and animal studies to
assess the potential safety and efficacy of a product and its formulations. The
results of these studies must be submitted to the FDA as part of an
Investigational New Drug Application ("IND"), which must be reviewed by the FDA
primarily for safety considerations before proposed clinical trials in humans
can begin. Typically, clinical trials involve a three-phase process.

In Phase I, clinical trials are conducted with a small number of individuals to
determine the early safety and tolerability profile and the pattern of drug
distribution and metabolism within the body. In Phase II, clinical trials are
conducted with groups of patients in order to determine preliminary efficacy,
dosing regimes, and expanded evidence of safety. In Phase III, larger-scale,
multi-center, adequate and well-controlled, comparative clinical trials are
conducted with patients in order to provide enough data for the statistical
proof of efficacy and safety required by the FDA and others, however in some
limited circumstances Phase III trials may be modified to allow evaluation of
safety and efficacy in a less regimented manner, which may allow the Company to
rely on historical data relating to the previous use of certain pharmaceuticals.
In Phase IV, confirmatory trials are conducted after the FDA's approval of an
NDA or issuance of an approvable letter in order to resolve any open issues.
Monitoring of all aspects of the study to minimize risks is a continuing
process. Reports of all adverse events must be made to the FDA. The results of
the preclinical testing and clinical trials are then submitted to the FDA in the
form of an NDA for approval to commence commercial sales. In responding to an
NDA, the FDA may grant marketing approval, request additional information, or
deny the application if it determines that the application does not satisfy its
regulatory approval criteria. When an NDA is approved, to the manufacturer must
establish a system for obtaining reports of experience and side effects that are
associated with the drug and make appropriate submissions to the FDA.

Pursuant to the Orphan Drug Act, a sponsor may request the FDA to designate a
drug intended to treat a "rare disease or condition" as an "orphan drug." A
"rare disease or condition" is defined as one which affects less than 200,000
people in the United States, or which affects more than 200,000 people, but for
which the cost of development and making available the drug is not expected to
be recovered from sales of the drug in the United States. Upon the approval of
the first NDA for a drug designated as an orphan drug for a specified
indication, the sponsor of the NDA is entitled to exclusive marketing rights in
the United States for such drug for that indication for seven years. Orphan
drugs may also be eligible for federal income tax credits for costs associated
with the drug's development. Possible amendment of the Orphan Drug Act by the
United States Congress and possible reinterpretation by the FDA are the subject
of frequent discussion. FDA regulations reflecting certain definitions,
limitations and procedures went into effect in January 1993. Therefore, there is
no assurance as to the precise scope of protection that may be afforded by
orphan drug status in the future, or that the current level of exclusivity and
tax credits will remain in effect. The Company has received from the FDA orphan
drug designation for thalidomide for the treatment of ENL, AIDS cachexia,
mycobacterial infections and RAS. The Company also obtained orphan drug
designation in Kaposi's Sarcoma and Glioblastoma as part of its agreement with
Entremed. However, there can be no assurance that another company also holding
orphan drug designation will not receive approval prior to

15

Celgene for the use of thalidomide for the treatment of one or more of these
indications, other than ENL. If such were to happen, Celgene's applications for
that indication could not be approved until the competing company's seven year
period of exclusivity expired.

Among the conditions for NDA approval is the requirement that the prospective
manufacturer's quality control and manufacturing procedures continually conform
with the FDA's current Good Manufacturing Practice regulations and guidelines
("GMP"). In complying with GMP, manufacturers must devote extensive time, money,
and effort in the area of production and quality control and quality assurance
to maintain full technical compliance. Manufacturing facilities and company
records are subject to periodic inspections by the FDA to ensure compliance.

Steps similar to those in the United States must be undertaken in virtually
every other country comprising the market for the Company's products before any
such product can be commercialized in those countries. The approval procedure
and the time required for approval varies from country to country and may
involve additional testing. There can be no assurance that approvals will be
granted on a timely basis, or at all. In addition, regulatory approval of prices
is required in most countries other than the United States. There can be no
assurance that the resulting prices would be sufficient to generate an
acceptable return to the Company.

COMPETITION

The pharmaceutical and agrochemical businesses in which the Company competes are
each highly competitive. The Company's competitors include major pharmaceutical
and chemical companies, many of which 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 industry, and specifically in the
immunotherapeutic areas being addressed by the Company, is particularly intense.
Numerous companies, including Immunex Corp., and Centocor Corp., are pursuing
techniques to modulate TNF-(alpha) production through various combinations of
monoclonal antibodies, TNF-(alpha) receptors, and small molecule approaches. In
addition, a number of other companies are attempting to address, with other
technologies and products, the disease states currently being targeted by the
Company. Other companies are attempting to develop thalidomide for AIDS-related
and non AIDS-related indications. Andrulis Pharmaceuticals Corp., a small
privately held company, is attempting to develop thalidomide for the treatment
of AIDS-related complications.

Several companies have established chiral products and chiral technologies.
Sepracor Inc. and Chiroscience Group plc are actively developing chirally pure
versions of pharmaceuticals currently marketed in racemic form. Chiroscience has
completed Phase I trials in the United Kingdom for a chirally pure version of
dl-MPH and is working with Medeva Plc, a leading supplier of dl-MPH in the
United States, towards full clinical development. Chiroscience has also taken
certain steps to assert patent and proprietary rights with respect to its
formulation of a chirally pure version of dl-MPH. The agrochemical market is
large and, within this market, efforts are underway by the

16

in-house development staffs of agrochemical companies to produce chirally pure
versions of their existing racemic crop protection agents.

The pharmaceutical and agrochemical industries have undergone, and are expected
to continue to undergo, rapid and significant technological change, and
competition is expected to intensify as technical advances in each field are
made and become more widely known. In order to compete effectively, the Company
will be required to continually upgrade its scientific expertise and technology,
identify and retain capable management, and pursue scientifically feasible and
commercially viable opportunities.

The Company's competition will be determined in part by the indications for
which the Company's products are developed and ultimately approved by regulatory
authorities. An important factor in competition will be the timing of market
introduction of the Company's or competitors' products. Accordingly, the
relative speed with which the Company can develop products, complete clinical
trials and approval processes, and supply commercial quantities of products to
the market will be expected to be important competitive factors. Competition
among products approved for sale will be based, among other things, on product
efficacy, safety, convenience, reliability, availability, price, and patent
position.

MANUFACTURING

THALOMID is formulated and encapsulated for the Company by Penn Pharmaceuticals
Ltd. of Great Britain ("Penn") in a special facility which has been certified by
the FDA, devoted exclusively to the production of THALOMID capsules. Both the
bulk manufacturing facility that produces the drug substance for THALOMID and
the Penn facility have been certified as GMP compliant. In certain instances,
the Company may be required to make substantial capital expenditures to access
additional manufacturing capacity.

SALES AND MARKETING

The Company currently intends to market itself pharmaceuticals it develops for
indications with smaller patient populations. For drugs with indications with
larger patient populations, the Company anticipates partnering with other
pharmaceutical companies. The Company also anticipates partnering with companies
for the development and commercialization of the Company's chirally pure
pharmaceutical and agrochemical products. Celgene expects that these
arrangements typically will include milestone payments, reimbursement of
research and development expenses and royalty arrangements. Celgene has
established a sales and marketing organization for THALOMID. A specialty
contract distributor distributes THALOMID in strict accordance with the
Company's program to promote the safe and effective dispensing and use of the
product.

EMPLOYEES

At February 28, 1999, the Company had 112 full time employees, 48 of whom were
engaged primarily in research and development activities, 33 of whom were
engaged in sales and marketing activities, and the remainder of whom were
engaged in executive and administrative activities. Of the Company's employees,
47 have advanced degrees, including 19 who have Ph.D. degrees. The

17

Company also maintains consulting arrangements with a number of scientists at
various universities and other research institutions in Europe and the United
States.

Forward-Looking Statements

This Annual Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included or incorporated by reference in this
Annual Report which address activities, events or developments which the Company
expects or anticipates will or may occur in the future, including such things as
the attainment of pharmaceutical development milestones or the receipt of
regulatory approval or the entering into of licensing or partnership
arrangements and other similar matters, are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions and expected future developments as well as other factors it believes
are appropriate in the circumstances. However, whether actual results and
developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties which could cause actual results
to differ materially from the Company's expectations, including the risk factors
discussed below and elsewhere in this Annual Report and other factors, many of
which are beyond the control of the Company. Consequently, all of the
forward-looking statements made in this Annual Report are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations. The Company assumes no
obligation to update publicly any such forward-looking statements, whether as a
result of new information, future events or otherwise.

RISK FACTORS

Uncertainty of Product Development. Many of the Company's products and processes
are in the early or mid-stages of development and will require the commitment of
substantial resources, extensive research, development, preclinical testing,
clinical trials, manufacturing scale-up, and regulatory approval prior to
commercialization. The Company has not yet commercialized any of its products
other than THALOMID. All of the pharmaceutical products under development by the
Company will require further development, clinical testing, and regulatory
approvals, and there can be no assurance that commercially viable products will
result from these efforts.

Uncertainty Associated with Clinical Trials; Extensive Government Regulation; No
Assurance of Regulatory Approval. The preclinical development, clinical trials,
manufacturing, marketing, and labeling of pharmaceuticals are all subject to
extensive regulation by numerous governmental authorities and agencies in the
United States and other countries. There can be no assurance that the Company
will be able to obtain the necessary approvals required to market its products
in any of these markets. The testing, marketing, and manufacturing of the
Company's products, will require regulatory approval, including approval from
the FDA, and, in certain cases, from the U.S. Environmental Protection Agency
(the "EPA"), or governmental authorities outside of the United States that
perform roles similar to those of the FDA and EPA. It is not possible to predict
how long the approval processes for any of the Company's products will take or
whether any such approvals

18

ultimately will be granted. Positive results in preclinical testing and/or early
phases of clinical studies are no assurance of success in later phases of the
approval process. In general, preclinical tests and clinical trials can take
many years, and require the expenditure of substantial resources, and the data
obtained from such tests and trials can be susceptible to varying interpretation
that could delay, limit, or prevent regulatory approval. Also, delays or
rejections may be encountered during any stage of the regulatory approval
process based upon the failure of the clinical or other data to demonstrate
compliance with, or upon the failure of the product to meet, the regulatory
agency's requirements for safety, efficacy, and quality or, in the case of a
product seeking an orphan drug indication, because another designee received
approval first; and those requirements may become more stringent due to changes
in regulatory agency policy, or the adoption of new regulations. Clinical trials
may also be delayed due to unanticipated side effects, the inability to locate,
recruit and qualify sufficient numbers of patients, lack of funding, the
inability to locate or recruit scientists, the redesign of clinical trial
programs, the inability to manufacture or acquire sufficient quantities of the
particular product candidate or any other components required for clinical
trials, changes in focus of the Company's or its collaborative partner's
development focus, and the disclosure of trial results by competitors. The scope
of any regulatory approval, when obtained, may significantly limit the indicated
uses for which a product may be marketed. Approved drugs and agrochemicals, as
well as their manufacturers, are subject to on-going review, and discovery of
previously unknown problems with such products may result in restrictions on
their manufacture, sale or use or in their withdrawal from the market. Delays in
obtaining, or the failure to obtain and maintain, necessary approvals from the
FDA, EPA, or other regulatory agencies for the Company's proprietary products,
would have a material adverse effect on the Company's business, financial
condition, and results of operations.

No Assurance of Market Acceptance. There can be no assurance that those of the
Company's products which receive regulatory approval, including THALOMID, or for
which no regulatory approval is required, will achieve market acceptance. A
number of factors render the degree of market acceptance of the Company's
products uncertain, including the extent to which the Company can demonstrate
such products' efficacy, safety, and advantages over competing products, as well
as the reimbursement policies of third party payors, such as government and
private insurance plans. In addition, there can be no assurance that the
Company's Celgro subsidiary will be able to negotiate a licensing agreement with
any agrochemical manufacturer on terms acceptable to the Company, or at all.
Failure of the Company's products to achieve market acceptance would have a
material adverse effect on the Company's business, financial condition, and
results of operations.

Risks of Product Liability and Availability of Insurance. The Company may be
subject to product liability or other claims based on allegations that the use
of its technology or products has resulted in adverse effects, whether by
participants in the Company's clinical trials or by patients. Thalidomide, when
used by pregnant women, has resulted in serious birth defects. Therefore,
necessary and strict precautions must be taken by physicians prescribing the
drug to women with childbearing potential, and there can be no assurance that
such precautions will be observed in all cases or, if observed, will be
effective. Use of thalidomide has also been associated, in a limited number of
cases, with other side effects, including nerve damage. Although the Company has
product liability insurance in force that it believes to be appropriate, there
can be no assurance that it will be able to obtain additional coverage as
required, or that such coverage will be adequate to protect the Company in the
event claims are asserted against it. The obligation to defend against or pay
any product liability claim

19

may have a material adverse effect on the Company's business, financial
condition, and results of operations.

Dependence on Patent and Proprietary Rights. The Company's success will depend,
in part, on its ability to obtain and enforce patents, protect trade secrets,
obtain licenses to technology owned by third parties when necessary, and conduct
its business without infringing the proprietary rights of others. The patent
positions of pharmaceutical and biotechnology firms, including the Company, can
be uncertain and involve complex legal and factual questions. In addition, the
coverage sought in a patent application can be significantly reduced before the
patent is issued. Consequently, the Company does not know whether any of its
pending applications will result in the issuance of patents or, if any patents
are issued, whether they will provide significant proprietary protection or
commercial advantage, or will be circumvented by others. Since patent
applications in the United States are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature
often lag behind actual discoveries, the Company cannot be certain that it was
the first to make the inventions covered by each of its pending patent
applications, or that it was the first to file patent applications for such
inventions. In the event a third party has also filed a patent for any of its
inventions, the Company may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office to determine priority of
invention, which could result in the loss of any opportunity to secure patent
protection for the invention and the loss of any right to use the invention, and
even if the eventual outcome is favorable to the Company, such interference
proceedings could result in substantial cost to the Company. Protection of
patent applications and litigation to establish the validity and scope of
patents, to assert patent infringement claims against others and to defend
against patent infringement claims by others can be expensive and
time-consuming. There can be no assurance that in the event that any claims with
respect to any of the Company's patents, if issued, are challenged by one or
more third parties, that any court or patent authority ruling on such challenge
will determine that such patent claims are valid and enforceable. An adverse
outcome in such litigation could cause the Company to lose exclusivity relating
to such patent claims. If a third party is found to have rights covering
products or processes used by the Company, then the Company could be forced to
cease using the technologies covered by the disputed rights, could be subject to
significant liabilities to such third party, and could be required to license
technologies from such third party. Also, different countries have different
procedures for obtaining patents, and patents issued by different countries
provide different degrees of protection against the use of a patented invention
by others. There can be no assurance, therefore, that the issuance to the
Company in one country of a patent covering an invention will be followed by the
issuance in other countries of patents covering the same invention, or that any
judicial interpretation of the validity, enforceability, or scope of the claims
in a patent issued in one country will be similar to the judicial interpretation
given to a corresponding patent issued in another country. Furthermore, even if
the Company's patents are determined to be valid, enforceable, and broad in
scope, there can be no assurance that competitors will not be able to design
around such patents and compete with the Company using the resulting alternative
technology. The Company does not currently have, nor does it intend to seek,
patent protection relating to the use of THALOMID to treat erythema nodosum
leprosum, an inflammatory complication of leprosy. The Company also relies upon
unpatented proprietary and trade secret technology that it seeks to protect, in
part, by confidentiality agreements with its collaborative partners, employees,
consultants, outside scientific collaborators, sponsored researchers, and other
advisors. There can be no assurance that these agreements provide meaningful
protection or that they will not be breached, that the Company

20

would have adequate remedies for any such breach, or that the Company's trade
secrets, proprietary know-how, and technological advances will not otherwise
become known to others. In addition, there can be no assurance that, despite
precautions taken by the Company, others have not and will not obtain access to
the Company's proprietary technology.

History of Operating Losses; Accumulated Deficit; Uncertainty of Future
Profitability; Capital Requirements; Uncertainty of Additional Funding. The
Company has sustained losses in each year since its incorporation in 1986. The
Company sustained a net loss of approximately $25.1 and 25.4 million for the
years ended December 31, 1998 and 1997, respectively, and had an accumulated
deficit of approximately $144.6 million at December 31, 1998. The Company
expects to make substantial expenditures to further develop its
immunotherapeutic and chiral products, and, based on these expenditures, it is
probable that losses will continue for at least the next 12 months. The Company
is currently utilizing its cash resources at a rate of approximately $1.5
million per month. The Company expects that its rate of spending generally will
remain high as the result of increased clinical trial costs and expenses
associated with the regulatory approval process and commercialization of
products now in development. In order 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 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.

If the Company is unable to raise additional funds, the Company believes that
its current financial resources, could fund operations through 1999. The
Company's actual cash requirements may vary materially from those now planned
and will depend upon numerous factors, including the results of the Company's
development and commercialization programs, the timing and results of
preclinical and clinical trials, the timing and costs of obtaining regulatory
approvals, the level of resources that the Company commits to the development of
manufacturing, marketing, and sales capabilities, the ability of the Company to
license its biocatalytic chiral process technology to agrochemical companies,
the technological advances and activities of competitors, and other factors.

Intense Competition and Rapid Technological Change. The pharmaceutical and
agrochemical businesses in which the Company operates are highly competitive and
subject to rapid and profound technological change. The Company's present and
potential competitors include major chemical and pharmaceutical companies, as
well as specialized biotechnology firms in the United States and in other
countries. 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. The pharmaceutical and
agrochemical 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. There can

21

be no assurance that others will not develop products or processes with
significant advantages over the products and processes that the Company is
seeking to develop. Any such development could have a material adverse effect on
the Company's business, financial condition, and results of operations.

Dependence on Sole Supplier of Raw Material and Sole Encapsulator for THALOMID.
The Company obtains all of its bulk drug material for THALOMID from a single
source. In addition, the Company currently relies on a single manufacturer to
encapsulate THALOMID. Because the FDA requires that all suppliers of
pharmaceutical bulk material and all manufacturers of pharmaceuticals for sale
in the United States achieve and maintain compliance with GMP, if the operations
of the sole supplier or the sole encapsulator were to become unavailable for any
reason, the required FDA review of the operations of a new supplier or new
encapsulator could cause a delay in the manufacture of THALOMID. Such a delay
could have a material adverse effect on the Company's business, financial
condition, and results of operations.

Dependence on Collaborations and Licenses with Third Parties. The Company's
ability to fully commercialize its proprietary products, if developed, may
depend to some extent upon the Company's ability to enter into joint ventures or
other arrangements with established pharmaceutical companies with the requisite
experience and financial and other resources to obtain regulatory approval, and
to manufacture and market such products. Accordingly, the Company's success will
depend, in part, upon the subsequent success of such third parties in performing
preclinical testing and clinical trials, obtaining the requisite regulatory
approvals, scaling up manufacturing, successfully commercializing the licensed
product candidates and otherwise performing their obligations. There can be no
assurance that the Company will be able to enter into acceptable collaborative
and licensing arrangements on acceptable terms, if at all, that such
arrangements will be successful, that the parties with which the Company may
establish arrangements will perform their obligations, or that potential
collaborators will not compete with the Company by seeking alternative means of
developing therapeutics for the diseases targeted by the Company. There can be
no assurance that the Company's existing or future arrangements will lead to the
development of product candidates or compounds with commercial potential, that
the Company will be able to obtain or maintain proprietary rights or licenses
for the proprietary rights with respect to any technology or product candidates
or compounds developed in connection with these arrangements, or that the
Company will be able to ensure the confidentiality of any proprietary rights and
information developed in such arrangements or prevent the public disclosure
thereof.

Under an agreement with The Rockefeller University ("Rockefeller"), the Company
has obtained certain exclusive rights and licenses to manufacture, use, and sell
products that are based on compounds identified in research carried out by
Rockefeller and the Company that can be used for treating toxicity associated
with high concentrations of TNF-(alpha) (the "Rockefeller License"). The
Rockefeller License is terminable by Rockefeller in the event of a material
breach of the agreement's terms.

Lack of Manufacturing Capabilities. The manufacture of large quantities of
pharmaceuticals is a complex process, and all pharmaceutical manufacturing
facilities must comply with applicable regulations of the FDA. The Company
currently has no experience in, or its own facilities for, manufacturing any
products on a commercial scale. The Company currently obtains bulk drug

22

material for THALOMID from a third-party and utilizes another manufacturer to
produce dosage form THALOMID. The Company intends to utilize outside
manufacturers if and when needed to produce the Company's other products on a
commercial scale. There can be no assurance that such manufacturers will meet
the Company's requirements for quality, quantity, or timeliness, or that these
manufacturers will achieve and maintain compliance with all applicable
regulations.

Limited Marketing Capabilities. The Company has established a sales and
marketing organization to commercialize THALOMID, and with respect to certain
other products, it may seek a corporate partner to provide such services. Any
delay in developing these resources may have an adverse impact on potential
sales. The Company has contracted with a specialty distributor to distribute
THALOMID. Failure of such specialty distributor to properly and continuously
perform its obligations under such agreement could have a material adverse
effect on the Company.

Dependence on Third-Party Reimbursement; Uncertainty of Product Pricing. Sales
of the Company's pharmaceutical products will depend, in part, on the extent to
which the costs of such products will be paid by health maintenance, managed
care, pharmacy benefit and similar health care management organizations, or
reimbursed by government health administration authorities, private health
coverage insurers, and other third party payors. These health care management
organizations and third party payors are increasingly challenging the prices
charged for medical products and services. Additionally, the containment of
health care costs has become a priority, and the prices of pharmaceutical and
biotechnology drugs have been targeted in this effort. There can be no assurance
that the Company's products will be considered cost effective by payors, that
reimbursement will be available or, if available, that the level of
reimbursement will be sufficient to allow the Company to sell its products on a
profitable basis.

Dependence on Key Personnel. The success of the Company will depend, in large
part, on its ability to continue to attract and retain highly skilled scientific
and management personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be able to attract and retain such
persons. The loss of the Company's executive officers or scientific personnel,
or the failure of the Company to attract and retain other highly skilled
personnel would have a material adverse effect on the Company's business,
financial condition, and results of operations. The Company does not maintain
key man life insurance coverage on the lives of any of its officers or key
employees.

Environmental/Safety Hazards. The Company uses certain hazardous materials in
its research and development activities. While the Company believes it is
currently in substantial compliance with the federal, state, and local laws and
regulations governing such use, there can be no assurance that accidental injury
or contamination will not occur. Any such accident or contamination could result
in substantial liabilities, which could exceed the Company's resources.
Additionally, there can be no assurance that the cost of compliance with
environmental and safety laws and regulations will not be greater than currently
expected.

Shares Eligible for Future Sale. Future sales of substantial amounts of Common
Stock could adversely affect the prevailing market price of the Company's Common
Stock. As of December 31, 1998, there were outstanding stock options for
approximately 2,428,113 shares of Common Stock, of which approximately 1,567,534
were currently exercisable, and warrants either outstanding or

23

issuable upon demand that are exercisable for 639,967 shares of Common Stock. In
addition, the 9.25% convertible note can be converted after one year (September
16, 1999) to 795,455 shares of common stock. All shares of Common Stock referred
to in this paragraph would be freely tradable upon issuance.

Potential Fluctuations in Quarterly Operating Results. The Company has
historically experienced, and expects to continue for the foreseeable future to
experience, significant fluctuations in its quarterly operating results. This
fluctuation is due to a number of factors, many of which are outside the
Company's control, including the timing of receipt of certain research and
development payments. Future operating results will depend on many factors,
including demand for the Company's products, regulatory approvals, the timing of
the introduction and market acceptance of new products by the Company or
competing companies, the Company's ability to control costs and its ability to
attract and retain highly qualified scientific and management personnel. Such
quarterly fluctuations in operating results may result in volatility of the
Company's stock price.

Volatility of Stock Price. There has been significant volatility in the market
prices for publicly traded shares of specialty pharmaceuticals companies,
including those of the Company. There can be no assurance that the price of the
Common Stock will remain at or exceed current levels. Factors such as
announcements of technical or product developments by the Company or its
competitors, market conditions for specialty pharmaceuticals stocks in general,
governmental regulation, healthcare legislation, public announcements regarding
medical advances in the treatment of the disease states that the Company is
targeting, or patent or proprietary rights developments may have a significant
impact on the market price of the Common Stock.

Anti-Takeover Effects of Shareholder Rights Plan; Certain Charter and By-law
Provisions; Delaware Law. The Board of Directors has adopted a shareholder
rights plan (the "Rights Plan"), the purpose of which is to protect stockholders
against unsolicited attempts to acquire control of the Company that do not offer
a fair price to all stockholders. The Plan is not intended to prevent, and
should not prevent, an offer to acquire the Company at a price and on terms that
are in the best interests of all stockholders, or a negotiated transaction to
sell the Company for a purchase price determined by the Board to be in the
Company's and its stockholders' best interests, nor should it have a material
adverse affect on the ability of a person or group to obtain representation on
or control of the Board through a proxy contest. Nonetheless, the Rights Plan
may have the effect of dissuading a potential acquirer from making an offer for
all the outstanding shares of Common Stock at a price that represents a premium
to the then current trading price.

Moreover, the Board of Directors has the authority to issue, at any time,
without further stockholder approval, up to 5,000,000 shares of preferred stock,
and to determine the price, rights, privileges, and preferences of those shares.
Such issuance could adversely affect the holders of Common Stock, and could
discourage a third party from acquiring a majority of the Company's outstanding
voting stock.

Additionally, the Board of Directors of the Company has adopted certain
amendments to the Company's By-laws intended to strengthen the Board's position
in the event of a hostile takeover attempt. The By-law provisions have the
following effects: (1) they provide that only persons who are nominated in
accordance with the procedures set forth in the By-laws shall be eligible for

24

election as directors of the Corporation, except as may be otherwise provided in
the By-laws; (2) they provide that only business brought before the annual
meeting by the Board of Directors or by a stockholder who complies with the
procedures set forth in the By-laws may be transacted at an annual meeting of
stockholders; (3) they provide that only the Chairman of the Board, if any, the
Chief Executive Officer, the President, the Secretary, or a majority of the
Board of Directors may call special meetings of the stockholders of the Company;
(4) they establish a procedure for the Board of Directors to fix the record date
whenever stockholder action by written consent is undertaken, and (5) they
require a vote of holders of two-thirds of the outstanding shares of Common
Stock to amend certain By-law provisions. Furthermore, the Company is subject to
the provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section 203, a
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.

Absence of Cash Dividends on Common Stock. The Company has never declared or
paid cash dividends on its Common Stock, and does not anticipate doing so in the
foreseeable future.

ITEM 2. PROPERTIES

The Company leases 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 May 2002 with one five-year renewal option. The Company also
sub-leases 17,500 square feet in a facility located in Annandale, New Jersey
that houses the Company's Celgro subsidiary. The facility consists of office and
laboratory space and is leased under a sub-lease which expires in September
1999. The Company believes that its laboratory facilities are adequate for its
research and development activities for at least the next 12 months.
Approximately 12,500 square feet of this facility are subleased, for a period
not to exceed three years, to Cambrex Corporation, which purchased the Company's
chiral intermediate business.

ITEM 3. LEGAL PROCEEDINGS

The Company is not engaged in any legal proceedings. The Company believes it is
currently in substantial compliance with all federal, state and local
environmental laws.

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 1998.

25

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.

The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "CELG." The following table sets forth, for the periods, indicated the
intra-day high and low sale prices per share of Common Stock on the Nasdaq
National Market:

--------------------------------------------------------------
High Low
--------------------------------------------------------------
1998
--------------------------------------------------------------
Fourth Quarter $ 17 1/4 $ 7 1/2
--------------------------------------------------------------
Third Quarter 15 4 1/8
--------------------------------------------------------------
Second Quarter 11 1/2 8 1/4
--------------------------------------------------------------
First Quarter 11 5/8 6 15/16
--------------------------------------------------------------
1997
--------------------------------------------------------------
Fourth Quarter $ 13 3/8 $ 7 3/4
--------------------------------------------------------------
Third Quarter 12 1/2 6 3/4
--------------------------------------------------------------
Second Quarter 7 7/8 4 7/8
--------------------------------------------------------------
First Quarter 12 3/8 7
--------------------------------------------------------------
1996
--------------------------------------------------------------
Fourth Quarter 12 1/4 7 7/8
--------------------------------------------------------------
Third Quarter 11 7/8 6
--------------------------------------------------------------
Second Quarter 18 1/8 11 1/8
--------------------------------------------------------------
First Quarter 19 11 1/8
--------------------------------------------------------------

The last reported sales price per share for the Common Stock on the Nasdaq
National Market on March 15, 1999 was $13.1875. As of March 15, 1999, there were
approximately 460 holders of record of the Company's Common Stock. The Company
has never declared or paid any cash dividends on its common stock. The Company
currently intends to retain any future earnings for funding growth and
therefore, does not anticipate paying any cash dividends on its common stock in
the foreseeable future.

26

ITEM 6. SELECTED FINANCIAL DATA

The following Selected Financial Data should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included elsewhere in this Annual Report. The data
set forth below with respect to the Company's Statement of Operations for the
years ended December 31, 1996, 1997 and 1998 and the balance sheet data as of
December 31, 1997 and 1998 are derived from the Company's Consolidated Financial
Statements which have been audited by KPMG LLP, independent accountants, and
which are included elsewhere in this Annual Report and are qualified by
reference to such Consolidated Financial Statements and Notes thereto. Other
information has been derived from other audited financial statements. The
historical results are not necessarily indicative of future results of
operations.

Year ended December 31,

1994 1995 1996 1997 1998
------------ ------------ ------------ ------------- --------------

Operations Data:
Total Revenues $ 98,000 $ 472,000 $ 881,665 $ 1,122,193 $ 3,800,490
Loss from continuing operations (5,710,781) (8,366,380) (17,057,521) (25,019,844) (32,022,873)
Discontinued operations
Loss from operations (4,502,446) (2,150,143) (761,460) (427,183) (59,837)
Gain on sale of chiral assets -- -- -- -- 7,014,830
Net loss applicable to common stockholders (10,213,227) (10,516,523) (21,609,639) (26,921,501) (25,092,528)

- -----------------------------------------------------------------------------------------------------------------------------------
Per share of common stock-basic and diluted
Loss from continuing operations $ (0.73) $ (1.04) $ (1.81) $ (2.05) $ (1.98)
Discontinued operations
Loss from operations (0.57) (0.27) (0.08) (0.03) (0.00)
Gain on sale of chiral assets -- -- -- -- 0.43
Net loss applicable to common shareholders (1.30) (1.30) (2.29) (2.20) (1.55)

- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 7,853,000 8,073,000 9,450,000 12,215,000 16,160,000

Dividends -- -- -- -- --

- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Cash and cash equivalents, and
marketable securities $ 8,500,086 $ 11,712,905 $ 17,814,984 $ 13,583,445 $ 5,123,843
Assets held for disposal -- -- -- 485,170 --
Total Assets 11,547,930 14,211,218 20,937,862 18,217,456 11,927,997
Convertible debentures -- 4,592,366 2,026,043 -- --
Convertible note -- -- -- -- 8,348,959
Accumulated deficit (60,472,877) (70,989,400) (92,599,039) (119,520,540) (144,613,068)
Stockholders' equity (deficit) 10,004,066 7,142,501 16,065,009 15,425,092 (3,732,624)

27

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Overview

The progenitor to Celgene was organized in 1980 as a unit of Celanese
Corporation, a major chemical company. Celgene's initial mandate was to apply
biotechnology to the production of fine and specialty chemicals. Following the
1986 merger of Celanese Corporation with American Hoechst Corporation, Celgene
was spun out as a separate company. In 1987, Celgene completed an initial public
offering of its common stock, and commenced the development of chemical and
biotreatment processes for the chemical and pharmaceutical industry. Celgene
discontinued the biotreatment operations in 1994 to focus on its targeted small
molecule immunotherapeutic compound development and biocatalytic chiral
chemistry synthesis platforms.

Since 1990, the Company's revenues have been generated primarily through the
research and development relating to, and supply of, chirally pure intermediates
to pharmaceutical companies for use in new drug development and, to a lesser
degree, from agrochemical research and development contracts. However, as the
Company developed its immunotherapeutic program, sales of chirally pure
intermediates became a less integral part of the Company's strategic focus.
Accordingly, on January 9, 1998 the Company completed the sale of its Chiral
Intermediate business to Cambrex Corporation for $15.0 million. The terms
provided for a payment of $7.5 million at closing and the present value
equivalent of $7.5 million in future royalties, with certain minimum royalty
payments in the third through the sixth years after closing.

In late September, 1998, the Company, after receiving final FDA approval,
commenced sales of its first commercial product, THALOMID (thalidomide).

The Company has sustained losses in each year since its incorporation in 1986.
In 1998, the Company had a loss from continuing operations of $32.0 million, and
at December 31, 1998, had an accumulated deficit of $144.6 million. The Company
expects to make substantial expenditures to further its immunotherapeutic
program, to commercialize THALOMID and to expand the chiral crop protection
business, and, based on these expenditures, it is likely that losses will
continue for at least the next 12 months.

Subject to the risks described elsewhere in this Annual Report the Company
believes that there are significant market opportunities for the products and
processes under development by the Company. To address these opportunities in a
timely and effective manner, the Company intends to seek out collaborations and
licensing arrangements with third parties. The Company has entered into
agreements covering the manufacture and distribution for the Company of certain
compounds, such as THALOMID, and research and development by the Company
covering processes for producing chirally pure crop protection agents for
license to agrochemical manufacturers.

Celgene has established a sales and marketing organization to commercialize
THALOMID and currently employs 35 persons in this capacity. The Company intends
to develop and market its own pharmaceuticals for indications with smaller
patient populations. For drugs with indications for larger patient populations,
the Company anticipates partnering with other pharmaceutical companies. The
Company also anticipates partnering with companies for the development and
commercialization of the Company's chirally pure pharmaceutical and agrochemical
products. Celgene expects that these arrangements typically will include
milestone payments, reimbursement of research and development expenses and
royalty arrangements.

28

Future operating results will depend on many factors, including demand for the
Company's products, regulatory approvals, the timing of the introduction and
market acceptance of new products by the Company or competing companies, partner
support payments, the Company's ability to control costs, and its ability to
attract and retain highly qualified scientific and management personnel.

Results of Operations

Fiscal Years Ended December 31, 1998,1997 and 1996

Total revenues. Total revenues increased by 245% to approximately $3.8
million from approximately $1.1 million in 1997. This was due to product sales
of approximately $3.3 million of THALOMID which, as noted, was approved in 1998
by the FDA and a decrease in research contracts of approximately $.6 million due
to completion of a contract at the end of 1997 with a major agrochemical
company. The Company's revenues for 1997 represented an increase of 27% over
1996 revenues of approximately $882,000. Revenues were primarily from product
sales in 1998 and research contracts for the years 1997 and 1996.

Cost of Goods Sold. Cost of goods sold in 1998 was approximately
$282,000 and relates to THALOMID, the Company's first commercial product,
launched in late September 1998. The cost of goods sold is lower than expected
as raw material, formulation and encapsulation costs of the product were
expensed as research and development cost prior to receiving FDA approval.

Research and development expenses. Research and development expenses
for 1998 increased by 14% to approximately $19.8 million from approximately
$17.4 million in 1997. This increase was due to an increase of approximately
$1.5 million for the Company's chiral pharmaceutical program primarily for
clinical trials and preclinical toxicology studies and approximately $780,000
due to the Company's immunotherapeutic program, primarily clinical trials for
potential new NDA filings for THALOMID.

Research and development expenses for 1997 increased by 15% to
approximately $17.4 million from approximately $15.2 million in 1996. This
increase was due to an increase of approximately $823,000 of expenses associated
with the Company's chiral pharmaceutical program primarily in clinical trials
and $1.3 million of expenses associated with the Company's Celgro subsidiary.
The increase in expenses for Celgro was primarily facility and personnel charges
related to establishing a separate location for the chiral agrochemical
business.

Selling, general and administrative expenses. Selling, general and
administrative expenses for 1998 increased by 78% to approximately $16.2 million
from approximately $9.1 million in 1997. This was primarily due to sales and
marketing expenses, $4.8 million, in anticipation of the THALOMID product launch
as well as post launch selling activities. Other increases were related to the
necessary infrastructure costs required to support the commercial operations
including Medical Affairs and Drug Safety costs of $928,000, information systems
development cost and additional finance personnel, $423,000, and other
administrative expenses such as legal, consulting and investor relations of
approximately $900,000.

Selling, general and administrative expenses for 1997 increased by 143%
to approximately $9.1 million from approximately $3.8 million in 1996. This was
primarily due to the formation of a sales and marketing organization in
anticipation of the THALOMID product launch as well as an increase in certain
support functions resulting from the anticipated transition to a commercial
operation. Major increases were as follows: sales and marketing expenses of $3.4
million for sales force recruiting and training and other pre-launch expenses;
Medical Affairs and Safety costs of $425,000; additional finance personnel and
information

29

systems development costs of $366,000; executive and administrative costs for
the new Celgro subsidiary of $487,000 and other administrative expenses such as
legal, consulting and investor relations of approximately $600,000.

Interest income and interest expense. Interest income for 1998
increased by 42% to approximately $705,000 from approximately $496,000 in 1997.
The increase was due to higher average cash balances in 1998. Interest income
for 1997 decreased by 62% from approximately $1.3 million in 1996. This decrease
was attributable to lower average cash balances in 1997. Interest expense for
1998 increased 129% to approximately $256,000 from $112,000 due primarily to the
interest expenses associated with the 9.5% convertible note issued in September
1998. Interest expense in 1997 decreased 65% from approximately $324,000 in
1996. The decrease was due to the conversion to equity of the 8% Convertible
Debentures issued in 1995.

Loss from continuing operations. The loss from continuing operations
increased 28% to approximately $32.0 million from approximately $25.0 million in
1997. The increase was due primarily to spending related to the launch of
THALOMID and ongoing research programs in Chiral Pharmaceuticals and
Immunotherapeutics as described above. The net loss from continuing operations
for 1997 increased by 46% from approximately $17.1 million in 1996 reflecting
increased spending in immunotherapeutics, the start of a THALOMID marketing
organization and the start of the chiral pharmaceutical development program.

Loss from discontinued operations. The loss from discontinued
operations decreased to $60,000 in 1998 from $427,000 in 1997 due to the fact
that the chiral intermediate business was sold in early January 1998. The
Company recorded a gain on the sale of the chiral intermediate assets of
approximately $7.0 million. The loss from discontinued operations decreased by
44% in 1997 from $761,000 in 1996. The reduced loss was primarily a result of an
increase in revenues from $1.4 million in 1996 to $2.1 million in 1997.

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 research contracts and product sales. The
Company has raised approximately $99.5 million in net proceeds from three public
and three private offerings, including its initial public offering in July 1987.

In July 1995, the Company issued and sold in a private placement
offering $12.0 million aggregate principal amount of 8% Convertible Debentures
due July 31, 1997 for total net proceeds, after offering costs, of approximately
$11.0 million. As of December 31, 1998, all of the 8% convertible Debentures had
been converted into Common Stock. 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 approximately $25.2 million
and net proceeds, after offering costs, of approximately $23.8 million. As of
December 31, 1998 all shares had been converted to Common Stock.

In September 1998, the Company issued a convertible note in the amount
of $8.75 million to an institutional investor. The note has a five year term and
a coupon rate of 9.25% with interest payable on a semi-annual basis. The debt
contains a conversion feature that allows the note holder to convert the debt
into common shares after one year at $11 per share, a 25% premium to the market
price at closing.

30

The Company's net working capital at December 31, 1998 decreased by 81%
to approximately $2.5 million (primarily cash and cash equivalents) from
approximately $13.4 million at December 31, 1997. The decrease in working
capital was primarily due to the increased rate of spending as previously
discussed.

Cash and cash equivalents decreased by $10.5 million in 1998 while
marketable securities increased by $2.1 million from 1997. This reflects the
receipt in December 1997 of funds from public offering of Company common stock,
which were not yet invested in marketable securities and the higher rate of
spending in 1998. Current research commitments for 1999 are approximately
$750,000, primarily to Rockefeller University ($504,000) and Glasgow University
($200,000). In addition a contract with Boston University entered into in 1997
for the prescription-monitoring program associated with the sales of THALOMID
was renewed for 1999. The commitment for 1999 is $1.2 million.

The Company expects that its rate of spending will increase as the
result of increased clinical trial costs and expenses associated with the
regulatory approval process and commercialization of products now in development
and increased commercial costs related to the launch of
THALOMID(TM)(thalidomide). In order to assure funding for the Company's future
operations, the Company is likely to seek additional capital resources. However,
no assurances can be given that the Company will be successful in raising
additional capital. If the Company is unable to raise additional funds, the
Company believes that its current financial resources including the proceeds of
$15.0 million from the convertible note issued in January 1999 as well as
revenues from the sales of THALOMID could fund operations based on budgeted
levels of research and development, sales and marketing, and administrative
activities through 1999.

As of December 31, 1998, the Company had for federal income tax
purposes a net operating loss carryforward of approximately $135.0 million. If
not utilized to offset future taxable income, such loss carryforward will expire
between 2002 and 2013. 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.

Year 2000 Computer Systems Compliance

Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 (Y2K) to mean
the year 1900 instead. If not corrected, those programs could cause date-related
transaction failures. The Company's Chief Information Officer, in conjunction
with outside consultants is in the process of remediating or replacing the
Company's systems.

As the Company was transitioning from a research and development
company to a commercial operation, the Company had already begun an assessment
of Information Technology needs to support the evolving structure. During 1998,
the Company replaced all personal computers, with the exception of several
computers connected to laboratory analytic equipment, with Year 2000 compliant
machines. The Company is in the process of upgrading internal applications to
ensure Y2K compliance. The Company believes that all critical systems and
software have been addressed and an assessment as to the date critical nature of
the laboratory computers will be complete with a plan to replace those machines
if necessary by the end of 1999. The Company has spent less than $1.0 million on
the systems upgrades to date. Additional expenditures are expected to be less
than $500,000. The Company uses outside vendors to produce, encapsulate,
package, process orders, invoice and maintain accounts receivable records for
THALOMID. The Company is in the process of receiving certifications from such
vendors. Most responses to date indicate the systems are or will be Y2K
compliant before the end of 1999.

31

Because the Company's Y2K compliance is dependent upon key third
parties also being Year 2000 compliant on a timely basis, there can be no
guarantee that the Company's efforts will prevent a material adverse impact on
its results of operations, financial condition or cash flows. If the Company's
systems or those of key third parties are not fully Y2K functional, disruptions
in operations could occur. Such disruptions could result in delays in the
distribution of product, errors in customer order taking, disruption of clinical
activities or delays in product development. These consequences could have a
material adverse impact on the Company's results of operations, financial
condition and cash flows. The Company is in the process of developing
contingency plans aimed at ameliorating such disruptions, to the extent
practicable.

The statements contained in the foregoing Year 2000 readiness
disclosure are subject to protection under the Year 2000 Information and
Readiness Disclosure Act.

Subsequent Events

On January 20, 1999, the Company issued a $15.0 million convertible
note to an institutional investor. The note has a five year term and a coupon
rate of 9% with interest payable on a semi-annual basis. The debt contains a
conversion feature that allows the note holder to convert the debt into shares
of common stock after one year at a conversion price of $18 per share. The
Company can redeem the note after three years, (two years if the stock trades at
225% of the conversion price for a period of 20 consecutive trading days), at
103% of the principal amount. This note was issued at a discount and net
proceeds after costs were $14.25 million.

Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which becomes effective beginning January 1,
2000. SFAS No. 133 requires a company to recognize all derivative instruments as
assets or liabilities in its balance sheet and measure them at fair value. The
Company does not expect the adoption of this Statement to have a material impact
on the financial statements.

The American Institute of Certified Public Accountants issued Statement
of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use and SOP 98-5, Reporting on the Costs of Start-up
Activities, which are effective for the 1999 financial statements. The Company
does not expect adoption of these SOPs to have a material impact on the
financial statements.

ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

The Company does not use derivative financial instruments. The
Company's convertible notes have a fixed interest rate, so the Company is not
exposed to changes in interest rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See Part IV, Item 14 of this Report.

32

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Name Age Position
- ---- --- --------

John W. Jackson 54 Chairman of the Board and
Chief Executive Officer
Sol J. Barer, Ph.D. 51 President, Chief Operating
Officer, and a Director
Frank T. Cary 78 Director
Arthur Hull Hayes, Jr., M.D. 66 Director
Richard C. E. Morgan 54 Director
Walter L. Robb, Ph.D. 71 Director
Lee J. Schroeder 70 Director
Gilla Kaplan, Ph.D. 51 Director
Jack L. Bowman 66 Director

John W. Jackson has been Chairman of the Board and Chief Executive Officer of
the Company since January 1996. Mr. Jackson was founder and President of Gemini
Medical, a consulting firm which specialized in services and investment advice
to start-up medical device and biotechnology companies, from February 1991 to
January 1996. Previously, Mr. Jackson had been President of the worldwide
Medical Device Division of American Cyanamid, a major pharmaceutical company,
from February 1986 to January 1991 and served in various international
positions, including Vice President-International for American Cyanamid from
1978 to 1986. Mr. Jackson served in several human health marketing positions at
Merck & Company, a major pharmaceutical company, from 1971 to 1978.

Sol J. Barer has been President of the Company since October 1993 and Chief
Operating Officer and a director of the Company since March 1994. Dr. Barer was
Senior Vice President--Science and Technology and Vice President/General
Manager--Chiral Products of the Company from October 1990 to October 1993 and
Vice President--Technology of the Company from September 1987 to October 1990.
Dr. Barer received a Ph.D. in organic and physical chemistry from Rutgers
University.

Frank T. Cary has been Chairman of the Executive Committee of the Board of
Directors of the Company since July 1990 and has been a director of the Company
since 1987. From 1973 to 1981, Mr. Cary was Chairman of the Board and Chief
Executive Officer of International Business Machines Corporation. Mr. Cary also
is a director of Cygnus Therapeutic Systems Inc., ICOS Corporation, Lincare
Inc., SPS Transaction Services, Inc., Lexmark International Inc., SEER
Technologies, Inc., Vion Pharmaceuticals Inc. and Teltrend, Inc.

33

Arthur Hull Hayes, Jr., a director of the Company since 1995, has been President
and chief operating officer of MediScience Associates, Inc., a consulting
organization that works with pharmaceutical firms, biomedical companies and
foreign governments, since July 1991. Dr. Hayes has also been a partner in Issue
Sphere, a public affairs firm that focuses on health science issues, since
November 1995, as well as a professor in medicine, pharmacology and family and
community medicine at New York Medical College and clinical professor of
medicine and pharmacology at the Pennsylvania State University College of
Medicine. From 1986 to 1990, Dr. Hayes was President and Chief Executive Officer
of E.M. Pharmaceuticals, a unit of E. Merck AG and from 1981 to 1983 was
Commissioner of the U.S. Food and Drug Administration. Dr. Hayes also is a
director of Myriad Genetics, Inc., NaPro BioTherapeutics, Inc. and Premier
Research Worldwide.

Richard C. E. Morgan, a director of the Company since 1987 has been the Managing
Member of Amphion Partners LLC (formerly Wolfensohn Partners, L.P.), since 1986.
Between January 1996 and January 1998, Mr. Morgan was a partner of Jackson Hole
Management Company, Inc. Mr. Morgan also is Chairman of the Board of Directors
and Chief Executive Officer of AXCESS, Inc.; a director of SEQUUS
Pharmaceuticals, Inc.; Chairman of the Board of Directors of Quidel Corp.; a
director of ChromoVision Medical Systems, Inc.; and a director of Indigo, N.V.

Walter L. Robb, a director of the Company since 1992, has been a private
consultant and President of Vantage Management Inc., a consulting and investor
services company, since January 1993. Mr. Robb was Senior Vice President for
Corporate Research and Development of General Electric Company, and a member of
its Corporate Executive Council from 1986 to December 1992. Mr. Robb also is
Chairman of the Board of Directors of Neopath, Inc. and a director of Marquette
Electronics, Inc., Cree Research Inc., and Mechanical Technology, Inc.

Lee J. Schroeder, a director of the Company since 1995, has been President of
Lee Schroeder & Associates, Inc., pharmaceutical business consultants, since
1985. Mr. Schroeder was President of Fox Meyer Lincoln from 1983 to 1985, and
was an Executive Vice President of Sandoz, Inc. from 1981 to 1983. Mr. Schroeder
also is a director of Harris Technology Group, Inc., Bryan Memorial Hospital,
MGI Pharmaceutical, Inc., Ascent Pediatrics, Inc., and Interneuron
Pharmaceuticals, Inc.

Gilla Kaplan, Ph.D., a director of the Company since April 1998, is an
immunologist in the Laboratory of Cellular Physiology and Immunology at The
Rockefeller University in New York where she was appointed Assistant Professor
in 1985 and Associate Professor in 1990. Dr. Kaplan is a member of numerous
professional societies and has been the organizer of several major symposia on
tuberculosis. Dr. Kaplan has served as an advisor to the Global Program for
Vaccines and Immunization of the World Health Organization, has participated in
several NIH peer review panels, is on the Editorial Board of Microbial Drug
Resistances, and Tubercle and Lung Disease. Dr. Kaplan is the author of more
than 100 scientific publications and has received international recognition for
her work. In 1995, she gave the Special Honorary Lecture at the American Society
for Microbiology and in 1997 was appointed a Fellow of the American Academy of
Microbiology.

Jack L. Bowman, a director of the Company since April 1998, served as Company
Group Chairman of Johnson & Johnson from 1987 to 1994. From 1983 to 1987 Mr.
Bowman served as Executive Vice President of American Cyanamid. Mr. Bowman is
also a director of NeoRx Corporation, Cell Therapeutics, Inc., CytRx
Corporation, Cellegy Pharmaceuticals and Targeted Genetics.

34

Election of Directors
Each director holds office (subject to the Company's By-Laws) until the next
annual meeting of stockholders and until such director's successor has been
elected and qualified. There are no family relationships between any of the
directors and executive officers of the Company.

ITEM 11. EXECUTIVE COMPENSATION.

Summary Compensation Table
The following table sets forth information about the compensation paid, or
payable, by the Company for services rendered in all capacities to the Chief
Executive Officer of the Company and each of the most highly paid executive
officers of the Company who earned more than $100,000, for each of the last
three fiscal years in which such officers were executive officers for all or
part of the year.

Annual Compensation Long-Term Compensation
--------------------------------------------- ----------------------------------------------
Other Annual Restricted Securities All Other
Name and Compensation Stock Underlying Compensation
Principal Position Year Salary ($) Bonus ($) ($) Award(s) ($) Options # ($)
------------------ ---- ---------- --------- ------------ ------------- ----------- ------------

John W. Jackson 1998 285,000 79,800 19,200 0 100,000 13,390(4)
Chairman and 1997 270,000 97,200 9,500(3) 0 0 13,390(4)
Chief Executive 1996 243,429(1) 105,625(2) 4,750(3) 0 250,000 0
Officer
Sol J. Barer, Ph.D. 1998 243,333 51,100 19,200 0 50,000 0
President and Chief 1997 232,500 63,647 9,500(3) 0 0 0
Operating Officer 1996 216,667 50,000 4,750(3) 0 72,500 0

(1) Mr. Jackson commenced his employment with the Company on January 11, 1996.
(2) Mr. Jackson's bonus consisted of $50,000 in cash and 5,000 shares of
unrestricted stock, valued at $55,625 on the date of grant.
(3) Reflects matching contributions under the Company's 401K plan. (4) Reflects
life insurance premiums for a life insurance policy for Mr. Jackson.

Employment Agreements and Termination of Employment Arrangements
John W. Jackson and Sol J. Barer (each an "Executive") are employed
pursuant to substantially similar employment agreements (the "Employment
Agreements") providing for their continued employment until September 30, 2000
(the period during which Executive is employed is referred to as the "Employment
Period"). The Employment Period shall be automatically renewed for successive
one-year terms unless the Company or Executive gives written notice to the other
at least one year prior to the expiration of the Employment Period. The
Employment Agreements provide Messrs. Jackson and Barer with a base salary
(which may be increased by the Board of Directors, or a committee thereof) of
$270,000 and $235,000, respectively, per annum. In addition, each of the
Employment Agreements provides for an annual bonus in such amount as may be
determined by the Board of Directors, or a committee thereof. The Employment
Agreements also provide that Messrs. Jackson and Barer are entitled to continue
to participate in all group health and insurance programs and all other fringe
benefit or retirement plans which are generally available to the Company's
employees. Each of the Employment Agreements provides that if the Executive is
terminated by the Company without cause, he shall be entitled to receive a
lump-sum payment in an amount equal to the greater of (A) twelve months salary
at the rate being paid on the date of such termination or (B) salary at such
rate for the unexpired term of the Employment Agreement. Each Employment
Agreement also provides that if Executive is terminated without cause or if
Executive terminates his employment within 30 days of having actual knowledge of
the occurrence of any of the following events: (i) Executive not maintaining his
position with the Company as Chief Executive Officer (in the case of Mr.
Jackson) and Chief

35

Operating Officer (in the case of Mr. Barer), (ii) a significant change in the
duties normally attached to such Executive's position, (iii) a good faith
determination by such Executive that, as a result of a change in control, such
Executive is unable to carry out the duties of such position and (iv) a breach
by the Company of any material term of such Executive's Employment Agreement,
the Executive shall be paid in a lump-sum an amount of cash equal to 2.99 times
Executive's "base amount," as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code").

If during the two-year period following a change in control (as defined
in the Company's 1992 Long-Term Incentive Plan) of the Company, (i) there is a
change in an employee's title or a significant change in the nature or scope of
his employment or duties and such person terminates his employment within 90
days following such change or (ii) an employee's employment by the Company is
terminated without cause (as defined), then all of the options held by such
employee then outstanding will become immediately and fully exercisable, and all
restrictions applicable to restricted stock automatically will terminate.

Stock Options
The following table sets forth information for each of the named
executive officers with respect to the value of options exercised during the
year ended December 31, 1998 and the value of outstanding and unexercised
options held as of December 31, 1998. There were no SARs exercised during 1998
and none were outstanding as of December 31, 1998.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

Number of
Securities Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired Value at December 31, 1998 at December 31, 1998
on Exercise Realized ------------------------------- --------------------------------
Name ($) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ------------- --------------- ------------- ---------------

John W. Jackson -- -- 283,333 66,667 $ 805,064 $ 454,136
Sol J. Barer, Ph.D. -- -- 250,746 33,334 $1,289,901 $ 227,071

(1) Represents the difference between the closing market price of the Common
Stock as reported by Nasdaq on December 31, 1998 of $15.375 per share and the
exercise price per share of in-the-money options multiplied by the number of
shares underlying the in-the-money options.

Compensation Committee Report
The Compensation Committee determines the Company's executive
compensation policies. The Compensation Committee determines the compensation of
the Company's executive officers and approves and oversees the administration of
incentive compensation programs for all employees including executive officers.
The Compensation Committee is composed solely of outside directors.

Executive Compensation Policies and Programs
The Company's executive compensation program is part of a company-wide
program covering all employees. The program's goals are to attract, retain, and
motivate employees, and it utilizes incentives such that employees and
stockholders share the same risks. The compensation program is designed to link
compensation to performance.

A portion of each employee's compensation relates to the grant of stock
options, and such grants are based on the successful attainment of strategic
corporate, business unit, and individual goals. As

36

the Company has not as yet attained significant commercial revenues, goals are
set which relate to the successful attainment of strategic events.

The Company does not have a pension plan or other capital accumulation
program. Grants of stock options are therefore of great importance to executives
as well as all employees. Any long-term value to be derived from such grants
will be consistent with stockholder gains.

Executive and employee compensation includes salary, employment-related
benefits, and long-term incentive compensation:

Salary. Salaries are set competitively relative to the biotechnology
and pharmaceutical industries--industries with which the Company competes for
its highly skilled personnel. Individual experience and performance is
considered when setting salaries within the range for each position. Annual
reviews are held and adjustments are made based on attainment of individual
goals.

Benefits. All employees are eligible for similar benefits, such as
health, disability, and life insurance.

Long-Term Incentive Compensation. An incentive compensation program is
established annually. The purpose of this program is to provide financial
incentives to executives and employees to achieve annual corporate, business
unit, and individual goals. The incentive program also aligns executive and
employee interests with those of stockholders by using grants of stock options.
Such grants vest over time thereby encouraging continued employment with the
Company. The size of grants is tied to comparative biotechnology industry
practices. To determine such comparative data, the Company relies on outside
compensation consultants, the Company's auditors, and third party industry
surveys.

Under the Company's 1998 incentive program, it was agreed, subject to
the achievement of certain goals in 1998 by the Company, that the Company would
grant at a future date options to purchase shares of common stock. A similar
incentive program has been designed for 1999 based on attainment of corporate,
business unit, and individual goals. The program is open to all regular
full-time employees, other than the executive officers of the Company.

Chief Executive Officer Compensation. Pursuant to Mr. Jackson's
contract with the Company entered into on September 30, 1997, Mr. Jackson
received base salary of $285,000 for 1998. Mr. Jackson also received a bonus of
$79,800 for 1998. Factors considered in determining Mr. Jackson's bonus included
the successful attainment of several important milestones in the development of
the Company's products, as well comparisons to total compensation packages of
chief executive officers at corporations within the Company's industry that are
of comparable size.

Members of the Compensation Committee

Richard C. E. Morgan, Chairman
Frank T. Cary
Jack L. Bowman
Lee J. Schroeder

Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee are Richard C. E.
Morgan, Chairman, Frank T. Cary, Jack L. Bowman, and Lee J. Schroeder. Each is
an outside director of the Company.

37

Director Compensation
Directors do not receive salaries or cash fees for serving as directors
nor do they receive any cash compensation for serving on committees; however,
all members of the Board of Directors who are not employees of the Company
("Non-Employee Directors") are reimbursed for their expenses for each meeting
attended and are eligible to receive stock options pursuant to the 1995
Non-Employee Directors' Plan (the "1995 Directors' Plan").

The 1995 Directors' Plan was adopted by the Board of Directors on
April 5, 1995, and approved by the Company's stockholders at the 1995 Annual
Meeting of Stockholders. The 1995 Directors' Plan provides for the granting to
Non-Employee Directors of non-qualified options to purchase an aggregate of not
more than 250,000 shares (subject to adjustment in certain circumstances) of
Common Stock.

Under the 1995 Directors' Plan, each Non-Employee Director as of
April 5, 1995 was granted a non-qualified option to purchase 20,000 shares of
Common Stock, and each new Non-Employee Director upon the date of his election
or appointment will be granted a non-qualified option to purchase 20,000 shares
of Common Stock. These initial options vest in four equal annual installments
commencing on the first anniversary of the date of grant, assuming the
Non-Employee Director remains a director.

Upon the date of each Annual Meeting of Stockholders, each Non-Employee
Director is granted a non-qualified option to purchase 10,000 shares of Common
Stock (or a pro rata portion thereof if the director did not serve the entire
year since the date of the last annual meeting). These options vest in full on
the date of the first Annual Meeting of Stockholders held following the date of
the grant, assuming the Non-Employer Director is a director on that date.

All options granted pursuant to the 1995 Directors' Plan will expire no
later than 10 years from the date of grant and no options may be granted after
June 16, 2005. If a Non-Employee Director terminates his service on the Board of
Directors for any reason, options which were exercisable on the date of
termination and which have not expired may be exercised at any time until the
date of expiration of such options. In addition, if there is a change of control
and within two years thereafter a director is removed without cause (as defined)
or is not nominated for election by the Company's stockholders, all unvested
portions of a stock option will automatically vest.

In 1998, pursuant to the 1995 Directors' Plan, each of Messrs. Cary,
Hayes, Morgan, Robb and Schroeder received an option to purchase 10,000 shares
of Common Stock at an exercise price of $10.688 per share, the fair market value
of the stock on the date of the grant. Dr. Kaplan and Mr. Bowman each received
an option to purchase 20,000 shares of common stock at an exercise price of
$10.625 as new non-employee directors and 1,700 shares at an exercise price of
$10.688 as the pro-rata share for time served since the date of the last annual
meeting.

38

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.

The table below sets forth the beneficial ownership of the Common Stock
as of March 26, 1998 (i) by each director, (ii) by each of the named executive
officers (iii) by all directors and executive officers of the Company as a
group, and (iv) by all persons known by the Board of Directors to be beneficial
owners of more than five percent of the outstanding shares of Common Stock.

Amount and Nature of Percent of
Name Beneficial Ownership Class
---- -------------------- -----

John W. Jackson 305,733(1)(2) 1.8%
Sol J. Barer, Ph.D. 250,761(2) 1.5%
Frank T. Cary 118,000(1) *
Arthur Hull Hayes, Jr., M. D. 35,000(1) *
Richard C. E. Morgan 320,055(1)(3) 1.9%
Walter L. Robb, Ph.D. 97,000(1) *
Lee J. Schroeder 46,000(1) *
Gilla Kaplan 20,000 *
Jack L. Bowman 6,000 *
All directors and current
executive officers of
the Company as a group
(nine persons) 1,198,549(4) 6.8%
Donald P. Moriarty and
William P. Scully (5) 1,355,500(5) 8.1%
c/o McGrath, Doyle & Phair
150 Broadway
New York, NY 10038

Frontier Capital Management
Company, Inc. (6) 938,050(6) 5.6%
99 Summer Street
Boston, MA 02110

* Less than one percent (1%).

(1) Includes shares of Common Stock which the directors and executive officers
have the right to acquire through the exercise of options within 60 days of
March 26, 1998, as follows: John W. Jackson--283,333; Sol J. Barer-- 250,746;
Frank T. Cary--81,000; Arthur Hull Hayes, Jr.--35,000; Richard C. E.
Morgan--61,000 shares; Walter L. Robb --54,000, and Lee J. Schroeder--46,000;
Gilla Kaplan --20,000 and Jack Bowman --5,000. Does not include shares of Common
Stock which the directors and executive officers had the right to acquire
through the exercise of options not exercisable within 60 days of March 26,
1998, as follows: John W. Jackson--136,667; Sol J. Barer-- 68,334; Frank T.
Cary--10,000; Arthur Hull Hayes, Jr.--15,000; Richard C. E. Morgan--10,000;
Walter L. Robb-- 10,000, and Lee J. Schroeder--10,000; Gilla Kaplan --16,700;
and Jack L. Bowman --16,700.

39

(2) Includes with respect to Mr. Jackson 400 shares owned by the son of Mr.
Jackson, as to which shares Mr. Jackson disclaims beneficial ownership; includes
with respect to Dr. Barer 15 shares owned by the daughter of Dr. Barer, as to
which shares Dr. Barer disclaims beneficial ownership.

(3) Includes 252,055 shares of Common Stock owned by Amphion Ventures, L.P. of
which Amphion Partners, LLC is the general partner. Mr. Morgan is a managing
member of Amphion Ventures, LLC. Mr. Morgan's indirect pecuniary interest in
these shares of Common Stock, within the meaning of Rule 16a-1(a)(2)(ii)(B)
under the Securities Exchange Act of 1934, is significantly less than the amount
disclosed. Mr. Morgan otherwise disclaims beneficial ownership of such shares of
Common Stock owned by Amphion Ventures, L.P.

(4) Includes or excludes, as the case may be, shares of Common Stock as
indicated in the preceding footnotes.

(5) Information regarding Donald P. Moriarty and William P. Scully was obtained
from a Schedule 13D, as amended, filed by them with the Securities and Exchange
Commission. Such Schedule 13D states that Messrs. Moriarty and Scully are deemed
to be the beneficial owners of and to have shared dispositive power over all
such shares of Common Stock, and that such shares are held by Mr. Moriarty, Mr.
Scully, their family members, and Twin Oaks Partners, a partnership in which
Messrs. Moriarty and Scully are general partners.

(6) Information regarding Frontier Capital Management Company, Inc. was obtained
from a Schedule 13G, filed by it with the Securities and Exchange Commission.
Such Schedule 13G states that Frontier Capital Management Company, Inc. is the
beneficial owner of and has the sole dispositive power over all such shares of
Common Stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.

(a) See Index to Consolidated Financial Statements immediately following
Exhibit Index.

(b) Current Report on Form 8-K filed November 18, 1997 with respect to Item 2.

(c) Exhibits

See Exhibit Index immediately following signature pages.

40

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 31, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Signature Title Date
- --------- ----- ----

/s/ John W. Jackson Chairman of the Board and Chief March 31, 1999
- ------------------- Executive Officer
John W. Jackson

/s/ Sol J. Barer Director March 31, 1999
- -------------------
Sol J. Barer

/s/ Jack L. Bowman Director March 31, 1999
- -------------------
Jack L. Bowman

/s/ Frank T. Cary Director March 31, 1999
- -------------------
Frank T. Cary

/s/ Arthur Hull Hayes, Jr. Director March 31, 1999
- -------------------
Arthur Hull Hayes, Jr.

/s/ Gilla Kaplan Director March 31, 1999
- -------------------
Gilla Kaplan

/s/ Richard C. E. Morgan Director March 31, 1999
- -------------------
Richard C. E. Morgan

/s/ Walter L. Robb Director March 31, 1999
- -------------------
Walter L. Robb

/s/ Lee J. Schroeder Director March 31, 1999
- -------------------
Lee J. Schroeder

/s/ James R. Swenson Controller (Chief Accounting Officer) March 31, 1999
- -------------------
James R. Swenson

The foregoing constitutes a majority of the directors.

41

Celgene CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
Consolidated Statements of Operations-Years Ended December 31, 1996, 1997, and 1998 F-4
Consolidated Statements of Stockholders' Equity(deficit)-Years Ended December 31, 1996,
1997 and 1998 F-5
Consolidated Statements of Cash Flows-Years Ended December 31, 1996, 1997 and 1998 F-7
Notes to Consolidated Financial Statements F-9

F-1

INDEPENDENT AUDITORS' REPORT

The Board of directors and Stockholders
Celgene CORPORATION:

We have audited the accompanying consolidated balance sheets of Celgene
Corporation and subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Celgene
Corporation and subsidiary as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.

/s/ KPMG LLP

Short Hills, New Jersey
February 11, 1999

F-2

CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS

ASSETS December 31,
1997 1998
------------- --------------

Current assets:
Cash and cash equivalents $ 13,583,445 $ 3,066,953
Marketable securities available for sale -- 2,056,890
Accounts receivable, net of allowance of $43,386 in 1998 1,430,384 2,662,389
Inventory -- 1,571,408
Other current assets 353,266 229,060
Assets held for disposal 485,170 --
------------- -------------

Total current assets 15,852,265 9,586,700

Plant and equipment, net 2,286,024 2,262,130
Other assets 79,167 79,167
------------- -------------

Total assets $ 18,217,456 $ 11,927,997
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY (deficit)

Current liabilities:
Accounts payable $ 842,262 $ 3,848,853
Accrued expenses 1,388,933 3,041,859
Capitalized lease obligations 210,499 225,372

------------- -------------
Total current liabilities 2,441,694 7,116,084

Capitalized lease obligation-net of current portion 350,670 195,578
Long term convertible note -- 8,348,959
------------- -------------

Total liabilities 2,792,364 15,660,621
------------- -------------

Stockholders' equity (deficit):

Preferred stock, $.01 par value per share
5,000,000 shares authorized; Series A convertible,
redeemable, cumulative preferred; 74 shares issued and
outstanding at December 31,1997, plus $329,455 accretion
premium; none outstanding at December 31, 1998 4,029,455 --

Common stock, $.01 par value per share
20,000,000 shares authorized at December 31,1997 and
30,000,000 shares authorized at December 31,1998;
issued and outstanding 15,427,949 and 16,612,973 shares at
December 31,1997 and December 31,1998, respectively 154,279 166,130

Common stock in treasury, at cost - 22,888 shares at
December 31, 1997 and none at December 31, 1998 (76,535) --

Additional paid-in capital 130,838,433 140,714,314
Accumulated deficit (119,520,540) (144,613,068)
------------- -------------

Total stockholders' equity (deficit) 15,425,092 (3,732,624)
------------- -------------

Total liabilities and stockholders' equity (deficit) $ 18,217,456 $ 11,927,997
============= =============

See accompanying notes to financial statements.

F-3

Celgene Corporation
Consolidated Statements of Operations

For Years Ended December 31,
1996 1997 1998
------------ ------------ ------------

Revenues:

Product Sales $ 65,000 $ -- $ 3,265,490
Research contracts 816,665 1,122,193 535,000
------------ ------------ ------------
Total revenues 881,665 1,122,193 3,800,490

Expenses:

Cost of goods sold -- -- 282,307
Research and development 15,152,735 17,380,390 19,771,953
Selling, general and administrative 3,770,781 9,145,456 16,218,486
------------ ------------ ------------
Total expenses 18,923,516 26,525,846 36,272,746
------------ ------------ ------------
Operating loss (18,041,851) (25,403,653) (32,472,256)

Other Income and Expense:
Interest income 1,308,243 495,580 705,215
Interest expense 323,913 111,771 255,832
------------ ------------ ------------
Loss from continuing operations (17,057,521) (25,019,844) (32,022,873)

Discontinued operations (note 10)
Loss from operations (761,461) (427,183) (59,837)
Gain on sale of chiral assets -- -- 7,014,830
------------ ------------ ------------
Net loss (17,818,982) (25,447,027) (25,067,880)

Accretion of premium payable
on preferred stock and warrants (note 7) 1,012,881 521,397 24,648
Deemed dividend for preferred stock
conversion discount (note 7) 2,777,777 953,077 --
------------ ------------ ------------
Net loss applicable to common
shareholders $(21,609,640) $(26,921,501) $(25,092,528)
============ ============ ============

Per share basic and diluted (note 2):
Loss from continuing operations $ (1.81) $ (2.05) $ (1.98)
Discontinued operations:
Loss from operations (0.08) (0.03) (0.00)
Gain on sale of chiral assets 0.43
------------ ------------ ------------
Net loss applicable to common stockholders $ (2.29) $ (2.20) $ (1.55)
============ ============ ============

Weighted average number of shares of
common stock outstanding 9,450,000 12,215,000 16,160,000
============ ============ ============

See accompanying notes to financial statements

F-4

Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1996 and 1997

Common Stock Preferred Stock Treasury Stock Additional
------------ --------------- -------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ -------

Balances at January 1, 1996 8,807,863 $ 88,079 - $ - (24,271) $ (243) $ 78,064,288

Exercised stock options 42,069 420 337,521
Repurchase of shares (5,714) (99,996)
Amortization of deferred compensation
Conversion of convertible debentures 372,681 3,727 2,645,388
Issuance of preferred stock,net 503 25,150,000 (1,320,375)
Conversion of preferred stock 1,388,809 13,888 (236) (12,141,309) 12,127,421
Preferred stock lock-up warrants 138,156
Accretion of premium on preferred stock 874,725
Deemed dividend for preferred stock
conversion discount 2,777,777
Comprehensive Income (Loss):
Net loss
Net change in unrealized gain (loss) on
investment securities

Total comprehensive income (loss)
------------------------------------------------------------------------------------
Balances at December 31, 1996 10,611,422 106,114 267 13,883,416 (29,985) (100,239) 94,770,176

Exercised stock options 2,986 30 20,187
Shares issued in lieu of cash bonus 5,000 50 55,575
Amortization of deferred compensation
Conversion of convertible debenture 441,248 4,412 2,326,892
Issuance of Series B Preferred Stock-net 5,000 4,046,923 793,825
Conversion of preferred stock 2,166,193 21,662 (5,180) (14,654,071) 14,632,409
Accretion of premium on preferred stock 521,397
Redemption of preferred stock (13) (721,287)
Deemed dividend on Series B Preferred
Stock and fair value of warrants 953,077
Comprehensive Income (Loss):
Net loss
Net change in unrealized gain (loss) on
investment securities

Total comprehensive income (loss)

Treasury shares issued 7,097 23,704 55,250
Issuance of common stock,net 2,201,100 22,011 18,184,119
------------------------------------------------------------------------------------
Balances at December 31, 1997 15,427,949 154,279 74 4,029,455 (22,888) (76,535) 130,838,433

Accumulated
Other
Unamortized Comprehensive
Deferred Accumulated Income
Compensation Deficit (Loss) Total
------------ ------- ------ -----

Balances at January 1, 1996 $ (7,085) $ (70,989,400) $ (13,138) $ 7,142,501

Exercised stock options 337,941
Repurchase of shares (99,996)
Amortization of deferred compensation 5,952 5,952
Conversion of convertible debentures 2,649,115
Issuance of preferred stock,net 23,829,625
Conversion of preferred stock -
Preferred stock lock-up warrants (138,156) -
Accretion of premium on preferred stock (874,725) -
Deemed dividend for preferred stock
conversion discount (2,777,777) -
Comprehensive Income (Loss):
Net loss (17,818,981) (17,818,981)
Net change in unrealized gain (loss) on
investment securities 18,852 18,852
----------------
Total comprehensive income (loss) (17,800,129)
------------------------------------------------------------
Balances at December 31, 1996 (1,133) (92,599,039) 5,714 16,065,009

Exercised stock options 20,217
Shares issued in lieu of cash bonus 55,625
Amortization of deferred compensation 1,133 1,133
Conversion of convertible debenture 2,331,304
Issuance of Series B Preferred Stock-net 4,840,748
Conversion of preferred stock -
Accretion of premium on preferred stock (521,397) -
Redemption of preferred stock (721,287)
Deemed dividend on Series B Preferred -
Stock and fair value of warrants (953,077) -
Comprehensive Income (Loss): -
Net loss (25,447,027) (25,447,027)
Net change in unrealized gain (loss) on
investment securities (5,714) (5,714)
--------------
Total comprehensive income (loss) (25,452,741)
--------------
Treasury shares issued 78,954
Issuance of common stock,net 18,206,130
------------------------------------------------------------
Balances at December 31, 1997 - (119,520,540) - 15,425,092

See accompanying notes to financial statements

(continued)

F-5

Consolidated Statements of Stockholders' Equity (Deficit) (continued)
Year ended December 31, 1998

Common Stock Preferred Stock Treasury Stock Additional
----------------- ---------------- ------------------ Paid-in
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ -------

Balances at December 31,1997 15,427,949 $ 154,279 74 $ 4,029,455 (22,888) $ (76,535) $ 130,838,433

Exercised stock options 283,120 2,831 2,028,715
Exercise of warrants 118,230 1,183 986,883
Costs related to secondary offering (73,136)
Conversion of preferred stock 575,669 5,757 (74) (4,054,103) 4,048,346
Accretion of premium on preferred stock 24,648
Shares issued for employee benefit plans 8,317 83 22,888 76,535 387,070
Stock purchase 199,688 1,997 2,498,003
Net loss and comprehensive loss

---------------------------------------------------------------------------------------
Balances at December 31,1998 16,612,973 $ 166,130 - $ - - $ - $ 140,714,314
=======================================================================================

Accumulated
Other
Unamortized Comprehensive
Deferred Accumulated Income
Compensation Deficit (Loss) Total
------------ ------- ------ -----

Balances at December 31,1997 $ - $ (119,520,540) $ - $ 15,425,092

Exercised stock options 2,031,546
Exercise of warrants 988,066
Costs related to secondary offering (73,136)
Conversion of preferred stock -
Accretion of premium on preferred stock (24,648) -
Shares issued for employee benefit plans 463,688
Stock purchase 2,500,000
Net loss and comprehensive loss (25,067,880) (25,067,880)

--------------------------------------------------------------
Balances at December 31,1998 $ - $ (144,613,068) $ - $ (3,732,624)
==============================================================

See accompanying notes to financial statements

F-6

CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31,
1996 1997 1998
---- ---- ----

Cash flows from operating activities:

Loss from continuing operations $ (17,057,521) $(25,019,844) $(32,022,873)
Adjustments to reconcile loss from continuing
operations to net cash used in operating
activities:
Depreciation 362,590 380,364 812,555
Provision for losses on accounts receivable -- -- 43,386
Amortization of convertible debt costs 234,540 126,577 --
Amortization of deferred compensation 5,952 1,133 --
Interest on convertible debentures 323,914 68,736 --
Issuance of stock award -- 55,625 --
Shares issued for employee benefit plans -- 78,954 463,688

Change in current assets & liabilities:

Increase in Inventory -- -- (1,571,408)
Increase(decrease) in accounts payable
and accrued expenses 216,226 (379,091) 4,659,517
(Increase)decrease in accounts receivable 18,646 (1,051,789) (1,275,391)
(Increase)decrease in other assets (256,586) 150,304 124,206
------------- ------------ ------------
Net cash used in continuing operations (16,152,239) (25,589,031) (28,766,320)

Net cash used in discontinued operations (491,872) (302,996) (59,837)
------------- ------------ ------------

Net cash used in operating activities (16,644,111) (25,892,027) (28,826,157)
------------- ------------ ------------

Cash flows from investing activities:

Capital expenditures (1,340,232) (1,240,775) (788,661)
Proceeds from sales and maturities of marketable
securities available for sale 137,051,037 47,470,593 8,559,604
Purchases of marketable securities
available for sale (142,548,468) (30,584,284) (10,616,494)
Proceeds from sale of chiral assets -- -- 7,500,000
------------- ------------ ------------

Net cash provided by (used in) investing activities (6,837,663) 15,645,534 4,654,449
------------- ------------ ------------

Cash Flows from financing activities:

Net proceeds from secondary offering -- 18,206,130 --
Costs related to secondary offering -- -- (73,136)
Proceeds from sale of stock -- -- 2,500,000
Proceeds from exercise of common stock
options and warrants 237,946 20,217 3,019,612
Redemption of Series A preferred stock -- (721,287) --
Net proceeds from issuance of preferred stock 23,829,624 4,840,748 --
Capital lease buyout -- -- (400,414)
Capital lease funding -- 561,169 260,195
Proceeds from convertible note, net -- -- 8,348,959
------------- ------------ ------------

Net cash provided by financing activities 24,067,570 22,906,977 13,655,216
------------- ------------ ------------

Net (decrease) increase in cash and cash
equivalents 585,796 12,660,484 (10,516,492)

Cash and cash equivalents at beginning of year 337,165 922,961 13,583,445
------------- ------------ ------------

Cash and cash equivalents at end of year $ 922,961 $ 13,583,445 $ 3,066,953
============= ============ ============

See accompanying notes to financial statements

(continued)

F-7

CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Years ended December 31,
--------------------------------------
1996 1997 1998
---- ---- ----

Non-cash investing activity:
Change in net unrealized gain(loss) on
marketable securities available for sale $ 18,852 $ (5,714) $ -
=========== =========== ==========

Non - cash financing activities:

Issuance of common stock upon the conversion
of convertible debentures and accrued interest
thereon, net $ 2,649,115 $ 2,331,304 $ -
=========== =========== ==========

Accretion of premium payable on preferred
stock and warrants $ 1,012,881 $ 521,397 $ 24,648
=========== =========== ==========

Deemed dividend for preferred stock conversion
discount $ 2,777,777 $ 953,077 $ -
=========== =========== ==========

Issuance of common stock upon the conversion
of convertible preferred stock and accrued
accretion thereon, net $12,141,309 $14,654,071 $4,054,103
=========== =========== ==========

Issuance of common stock upon exercise of options
through the return of common stock previously
outstanding $ 99,996 $ - $ -
=========== =========== ==========

Interest paid $ - $ 20,599 $ 19,766
=========== =========== ==========

See accompanying notes to financial statements

F-8

CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998

(1) NATURE OF BUSINESS AND LIQUIDITY

Celgene Corporation and its subsidiary Celgro (collectively "Celgene" or the
"Company") is a specialty pharmaceutical company engaged in the development and
commercialization of human pharmaceuticals and agrochemicals, and employs two
broad technology platforms: (i) small molecule immunotherapeutic compound
development and (ii) biocatalytic chiral chemistry. The initial therapeutic
focus of the immunology program is the development of small molecule
pharmaceuticals that have the potential to selectively regulate Tumor Necrosis
Factor alpha(TNF-(alpha)), a protein whose overproduction has been linked to
many chronic inflammatory and immunological diseases. The Company's lead
compound in immunology is THALOMID(TM), its formulation of thalidomide, a potent
yet selective inhibitor of TNF-(alpha). On July 16, 1998 the Company received an
approval from the U.S. Food and Drug Administration ("FDA") to market THALOMID
for the treatment of erythema nodosum leprosum ("ENL"), an inflammatory
complication of leprosy, and commenced sales at the end of September, 1998. The
Company expects to submit an additional New Drug Application ("NDA") in 2000 to
market THALOMID in the treatment of multiple myeloma, a blood related cancer .
Celgene has further applied its expertise in small molecule chemistry to develop
novel and proprietary thalidomide analogues, called IMiDs(TM) (Immunomodulatory
Drugs) as well as a class of proprietary immunotherapeutic pharmaceutical
compounds called SelCIDs (TM) ("Selective Cytokine Inhibitory Drugs"). These two
classes of compounds are orally administered small molecules that are highly
specific for the suppression of TNF-(alpha) and are intended to treat chronic
inflammatory diseases and other disorders.

The Company expects that its rate of spending will increase as the result of
increased clinical trial costs and expenses associated with the regulatory
approval process and commercialization of products now in development and
increased commercial costs related to the launch of THALOMID. In order to assure
funding for the Company's future operations, the Company may need to seek
additional capital resources. However, no assurances can be given that the
Company will be successful in raising additional capital. The Company believes
that its current financial resources including $15.0 million received in January
1999 for a convertible note issued to an institutional investor plus the
revenues from the sales of Thalomid will fund operations through 1999.

The consolidated financial statements include the parent Company and its
subsidiary Celgro. All inter-company transactions have been eliminated. The
preparation of the consolidated financial statements requires management to make
estimates and assumptions that affect reported amounts and disclosures. Actual
results could differ from those estimates. The Company is subject to certain
risks and uncertainties such as uncertainty of product development,
uncertainties regarding regulatory approval, no assurance of market acceptance
of products, risk of product liability, uncertain scope of patent and
proprietary rights, intense competition, and rapid technological change.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Cash Equivalents
At December 31, 1997 and 1998, cash equivalents consisted principally of funds
invested in money market funds, and United States government securities such as
treasury bills and notes.

(b) Marketable Securities
The Company has classified all of its marketable securities as securities
available for sale at December 31, 1998. Such securities were to be held for an
indefinite period of time and were intended to be used to meet the ongoing
liquidity needs of the Company. Realized gains and losses are included in
operations and are measured using the specific cost identification method.

(c) Inventory
Inventories are priced at lower of cost or market using the first-in, first-out
(FIFO) method. The cost of inventory reflects primarily the packaging costs for
a significant portion of the finished goods inventory. Prior to FDA approval,
the raw material, formulation and encapsulation costs are recorded as Research
and Development expense.

F-9

CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(d) Long-Lived Assets
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.

The Company reviews long-lived assets for impairment whenever events or changes
in business circumstances occur that indicate that the carrying amount of the
assets may not be recoverable. The Company assesses the recoverability of
long-lived assets held and to be used based on undiscounted cash flows and
measures the impairment, if any, using discounted cash flows.

(e) Research and Development Costs
All research and development costs are expensed as incurred.

(f) 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.

(g) Revenue Recognition
Revenue from the sale of products 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.

(h) Stock Options
The Company generally does not record compensation cost for the issuance of
employee stock options since the options are generally issued with an exercise
price equal to the market price at the date of grant. For the fair value of the
employee stock options issued in 1996, 1997 and 1998, see note 7.

(i) Earnings per Share
"Basic" earnings per common share equals net income divided by weighted average
common shares outstanding during the period. "Diluted" earnings per common share
equals net income divided by the sum of weighted average common shares
outstanding during the period plus common stock equivalents if dilutive. The
Company's basic and diluted per share amounts are the same since the assumed
exercise of stock options, warrants, conversion of convertible debentures and
preferred stock are all anti-dilutive. The amount of common stock equivalents
excluded from the calculation were 3,738,168 in 1996, 3,770,954 in 1997, and
3,863,535 in 1998.

F-10

CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(j) Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting and presentation of comprehensive income and
its components in a full set of financial statements. Comprehensive income
(loss) consists of net losses and net unrealized gains (losses) on securities
and is presented in the statements of stockholders' equity (deficit). The
Statement requires only additional disclosures in the financial statements; it
does not affect the Company's financial position or results of operations. Prior
year financial statements have been reclassified to conform to the requirements
of SFAS No. 130.

(k) Presentation
In connection with the disposition of the Company's chiral intermediate
operation (see note 9), the 1996, 1997, and 1998 financial results applicable to
continuing operations exclude amounts from this discontinued operation.

(l) 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 interest rates approximating market rates. For all
other financial instruments their carrying value approximates fair value due to
the short maturity of these instruments.

(3) INVENTORY

December 31,
1998
--------------

Raw materials $ 440,400
Work in process 535,494
Finished gods 595,514
==============
Total $1,571,408
==============

Inventory costs prior to FDA approval of THALOMID on July 16, 1998 were expensed
as research and development costs.

(4) PLANT AND EQUIPMENT
Plant and equipment consists of the following:

December 31,
1997 1998
------------------ ------------------

Leasehold improvements $ 3,957,366 $ 4,008,246
Laboratory equipment and machinery 4,430,336 4,874,733
Furniture and fixtures 437,478 470,667
Leased Equipment 415,109 675,304
------------------ ------------------
9,240,289 10,028,950

Less: accumulated depreciation 6,954,265 7,766,820
------------------ ------------------

$ 2,286,024 $ 2,262,130
================== ==================

F-11

CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998

(5) ACCRUED EXPENSES
Accrued expenses consists of the following:

December 31,
1997 1998
------------------ ------------------

Professional and consulting fees $ 235,000 $ 787,381
Accrued compensation 1,041,772 1,650,048
Other 112,161 604,430
------------------ ------------------
$ 1,388,933 $ 3,041,859
================== ==================

(6) CONVERTIBLE DEBT

On September 16, 1998 the Company issued a convertible note to an institutional
investor in the amount of $8,750,000. The note has a five year term and a coupon
rate of 9.25% with interest payable on a semi-annual basis. The note contains a
conversion feature that allows the note holder to convert the note into common
shares after one year at $11 per share. The Company can redeem the note after
three years at 103% of the principal amount, (two years if the Company's stock
trades at $24.75 or higher for a period of 20 consecutive trading days). This
note was issued at a discount of $437,500 which is being amortized over three
years.

During 1995, the Company issued and sold in an offering pursuant to Regulation
S, 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.
The recorded value of the debentures at the date of issuance was discounted to
produce a market interest rate of approximately 13.5%. As of December 31, 1997,
all convertible debentures in the aggregate principal amount of $12,000,000,
plus accrued interest, had been converted into a total of 1,709,845 shares of
common stock.

(7) STOCKHOLDERS' EQUITY

Series A Convertible Preferred Stock

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. The Company received
net proceeds, after offering costs, of $23,829,625. The Preferred Stock, plus
accretion at a rate of 4.9% per year, was convertible at the option of the
holders thereof, into common stock of the Company 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. As a result of the issuance of
securities with variable conversion features the Company recognized the value of
the discount to market conversion feature as a deemed dividend.

In connection with the private placement, the Company also granted to certain
executives and affiliates of the placement agent warrants, valued at $60,168, 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. These warrants are all outstanding at December 31, 1998.

F-12

CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998

(7) STOCKHOLDERS' EQUITY, Continued

As of December 31, 1998, all of the shares of the Series A Preferred Stock (503
shares), with their respective accrued accretion, had been converted or redeemed
into 3,342,202 shares of common stock. Through December 31, 1998 the Company had
accrued $1,420,770 representing accretion of the premium on the Preferred Stock.
The Company agreed to reduce the maximum conversion price of 58 shares to $8.50
per share of common stock from $18.81 for holders who agreed to a lock-up ending
on December 1, 1997. During 1996 the Company had also issued warrants valued at
$138,156, that entitle certain stockholders of the Series A Preferred Stock to
purchase 153,507 shares of common stock at an exercise price of $11.50. The
warrants were issued in exchange for the deferral of conversion for 90 days. At
December 31, 1998, all these warrants either expired or were exercised for 3,418
shares of common stock.

Series B Convertible Preferred Stock

On June 9, 1997, in a private placement, the Company completed the sale of 5,000
shares of Series B Convertible Preferred Stock (the "Series B Preferred"), par
value $.01 per share, at an issue price of $1,000 per share. The Company
received net proceeds, after offering costs of $4,840,748. Shares could be
converted at an initial conversion price of $6.50 per share. As of December 31,
1998, all shares of the Series B Preferred had been converted into 788,469
shares Common Stock.

Upon request of the purchasers of the Series B Preferred, the Company is
required to issue warrants to acquire a number of shares of Common Stock equal
to (i) 1,500,000 divided by the Conversion Price in effect on the Issuance Date
(230,769 warrants as of December 31, 1998) plus (ii) 37.5% of the conversion
shares issuable on such issuance date upon conversion of all shares of Series B
Preferred Stock issued through the issuance date (288,461 warrants as of
December 31, 1998). All such warrants will have a term of four years from the
issuance date and an exercise price equal to 115% of the conversion price in
effect on the issuance date ($6.50 at December 31, 1998). The fair value of
warrants at the issuance date was $1.28 per warrant. As of December 31, 1998 no
warrants have been issued.

Through December 31, 1998, the Company had recorded $953,077 representing
accretion of the deemed dividend on the Series B Preferred Stock. The deemed
dividend represents the difference between the Series B Preferred Stock
conversion price and the Company's Common Stock fair market value at the date of
issuance.

Preferred Stock

The Board of Directors has the authority to issue, at any time, without further
stockholder approval, up to 5,000,000 shares of preferred stock, and to
determine the price, rights, privileges, and preferences of those shares.

Rights Plan

During 1996, the Company adopted a shareholder rights plan ("Rights Plan"). The
Rights Plan involves the distribution of one "Right" as a dividend on each
outstanding share of the Company's common stock to each holder of record on
September 26, 1996. Each Right shall entitle the holder to purchase one-tenth of
a share of common stock. The Rights trade in tandem with the common stock until,
and are exercisable upon, certain triggering events, and the exercise price is
based on the estimated long term value of the Company's common stock.

F-13

CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998

(8) STOCK BASED COMPENSATION

(a) Stock Options

The Company has two incentive plans that provide for the granting of options,
restricted stock awards, stock appreciation rights, performance awards and other
stock-based awards to employees and officers of the Company to purchase not more
than an aggregate of 1,400,000 shares of common stock under the 1992 plan and
1,500,000 shares of common stock under the 1998 plan, 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. The plans terminate in 2002 and 2008 respectively.

With respect to options granted under the incentive 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 vests evenly over a three
or four year period and 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.

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 350,000 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). The shares subject to each non-employee director's 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
equals 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.

The weighted-average fair value per share for stock options granted was $3.97
for the 1998 options, $3.93 for the 1997 options, and $5.01 for those granted in
1996. The company estimated the fair values using the Black-Scholes option
pricing model and used the following assumptions:

1996 1997 1998
----- ----- ----

Risk-free interest rate 6.38% 6.37% 5.68%
Expected stock price volatility 62% 55% 66%
Expected term until exercise (years) 2.22 3.09 2.86
Expected dividend yield 0% 0% 0%

The Company does not record compensation expense for stock option grants. The
following table summarizes results as if compensation expense was recorded for
the annual option grants under the fair value method:

F-14

CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998

(8) STOCK BASED COMPENSATION (Continued)

(thousands of dollars, except per share data) 1996 1997 1998
--------------------------------------------- ---- ---- ----

Net loss applicable to common shareholders:
As reported $(21,610) $(26,922) $(25,093)
Pro forma $(23,515) $(28,652) $(26,745)
Per share basic and diluted:
As reported $ (2.29) $ (2.20) $ (1.55)
Pro forma $ (2.49) $ (2.35) $ (1.66)

The pro forma effects on net loss and loss per share for 1996, 1997 and 1998 may
not be representative of the pro forma effects in future years since
compensation cost is allocated on a straight-line basis over the vesting periods
of the grants, which extends beyond the reported years.

The following table summarizes the stock option activity for both Plans:

Options Outstanding
------------------------------------------
Shares Available Weighted Average
for Grant Shares Price per Share
-------------------- ------ -----------------------------

Balance January 1, 1996 1,201,913 1,415,341 $ 7.70
Expired (126,126) -- --
Granted (679,037) 679,037 13.25
Exercised -- (42,069) 8.03
Cancelled 46,095 (46,095) 6.40
---------- --------- -----
Balance December 31, 1996 442,845 2,006,214 9.60
Authorized 500,000 -- --
Expired (74,797) -- --
Granted (492,775) 492,775 9.39
Exercised -- (6,986) 7.83
Cancelled 142,027 (142,027) 9.36
--------- --------- ------
Balance December 31, 1997 517,300 2,349,976 9.59
Authorized 1,620,000 -- --
Expired (85,095) -- --
Granted (559,983) 559,983 8.87
Exercised -- (283,120) 7.18
Cancelled 198,726 (198,726) 10.74
--------- --------- ------
Balance December 31, 1998 1,690,948 2,428,113 $ 9.62
=========== ========== ======

F-15

CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998

(8) STOCK BASED COMPENSATION (Continued)

The following table summarizes information concerning options outstanding under
the Plans at December 31, 1997:

Options Outstanding Options Exercisable
------------------------------------------------------------------ -----------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Exercise Remaining Exercisable Exercise
Exercise Price at 12/31/98 Price Term (yrs.) at 12/31/98 Price
-------------- ----------- ----- ----------- ----------- -----

5.00- 9.00 1,350,740 $ 7.48 5.6 863,361 $ 7.12
9.01-13.00 610,644 10.74 7.6 298,854 10.81
13.01-18.00 466,729 14.31 6.9 405,319 14.12
---------- -------- --- ---------- -------
2,428,113 $ 9.62 6.6 1,567,534 $ 9.63
========== ======== === ========== =======

On January 22, 1999 the Company granted options to purchase approximately
105,000 shares to certain members of management exercisable at $16.50 (market
price at the date of grant). These options vest evenly over three years and have
a ten year term. Also on January 22, 1999, the Company granted options to
purchase approximately 140,000 shares to certain employees at an exercise price
of $16.50. The options vest equally over four years and have a ten year term.

(b) Stock Awards

On January 1, 1997, the Company awarded 5,000 shares to the Company's Chairman
and CEO, which were immediately vested. the fair value of $55,625 for this award
was expensed.

(c) Warrants

In connection with the retention of an investment firm to assist in the sale and
issuance of 8% 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. As of December 31, 1998, 40,188 warrants
were outstanding.

In connection with the retention of an investment firm to assist in the sale and
issuance of the Series A Preferred Stock, the Company, in March, 1996 granted to
such firm warrants to purchase until March 10, 2001, 66,853 shares of common
stock at a price of $20.52. These warrants were outstanding as of December 31,
1998.

During 1997, the Company issued to certain stockholders of the Series A
Convertible Preferred Stock warrants valued at $7,826, to purchase 8,696 shares
of common stock at an exercise price of $11.50. The warrants were issued in
exchange for the deferral of conversion for 90 days. These warrants are
exercisable for a period of two years from the date of issuance and these
warrants were outstanding as of December 31, 1998.

In connection with the retention of a consultant to provide strategic
development services, the Company, in December 1997, granted to such consultant
warrants to purchase until December 24, 1999, 5,000 shares of common stock at a
price of $12.00. these warrants were outstanding as of December 31, 1998.

F-16

CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998

(9) INCOME TAXES

At December 31, 1997 and 1998, the tax effects of temporary differences that
give rise to deferred tax assets are as follows:

Deferred Assets: 1997 1998
------------ ------------

Federal and state net operating loss carryforwards $ 44,334,000 $ 54,779,000
Research and experimentation tax credit carryforwards 2,735,000 3,235,000
Plant and equipment, principally due to differences in depreciation 753,000 772,000
Patents, principally due to differences in amortization 68,000 62,000
Accrued expenses 385,000 665,000
------------ ------------
Total deferred tax assets 48,275,000 59,513,000
Valuation allowance (48,275,000) (59,513,000)
------------ ------------
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,
1998, the Company had net operating loss carryforwards of approximately
$135,000,000 that will expire in the years 2001 through 2012. The Company also
has research and experimentation credit carryforwards of approximately
$3,235,000 that expire in the years 2001 through 2018. Ultimate
utilization/availability of such net operating losses and credits may be
curtailed if a significant change in ownership occurs.

(10) DISCONTINUED OPERATION

On January 9, 1998, the Company concluded an agreement with Cambrex Corporation
for Cambrex to acquire Celgene's chiral intermediate business for approximately
$15 million. The Company received $7.5 million upon the closing of the
transaction, and will receive future royalties with a present value not
exceeding $7.5 million, with certain minimum royalty payments in the third
through sixth year following the closing of the transaction. Included in the
transaction are the rights to Celgene's enzymatic technology for the production
of chirally pure intermediates for the pharmaceutical industry, including the
current pipeline of third party products and the equipment and personnel
associated with the business.

Revenues relative to the chiral intermediate business were approximately $1.4
million, and $2.1 million for 1996 and 1997, respectively. Direct expenses
related to the chiral intermediate business were $2.2 million and $2.5 million
for 1996 and 1997, respectively.

(11) MARKETABLE SECURITIES AVAILABLE FOR SALE

Marketable securities available for sale at December 31, 1998 include debt
securities with maturities ranging from March, 1999 to October, 2002. Marketable
securities at December 31, 1998 include Corporate Bonds ($1,006,890) and US
Government and agency obligations ($1,050,000). The carrying value equaled fair
market value. There were no marketable securities at December 31, 1997.

(12) COMMITMENTS AND CONTINGENCIES

(a) Leases
Celgene leases its main laboratory and office facilities in Warren Township, New
Jersey. The current lease term for the main laboratory and office space expires
in 2002 and has one five-year renewal option. 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 $453,000, $477,000 and $486,000 in 1996, 1997 and
1998, respectively. Celgene

F-17

CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998

has subleased 12,500 square feet of this facility to Cambrex Corporation for up
to three years for the Chiral Intermediate business which Cambrex purchased on
January 9, 1998.

In January, 1997 the Company entered into a sub-lease agreement to lease an
additional 18,000 square feet of laboratory and office space in Annandale, New
Jersey. The sub-lease agreement is for a two year term, expiring in February,
1999. Annual payments are $227,500.

In July, 1997, the Company entered into an equipment leasing agreement; under
the agreement, the Company can lease up to $1,000,000 of equipment for a three
year term after which the Company can purchase the equipment for a nominal
value. Through December 31, 1998, the Company has leased $675,000 of laboratory
equipment under this agreement. Under this capital lease, the Company is
committed to 36 monthly payments of approximately $21,000.

(b) Employment Agreements
Celgene has employment agreements with certain officers and employees. The
related outstanding commitments over the next two years are approximately $1.6
million, of which $1.0 million is due in 1999. Employment contracts provide for
an increase in compensation reflecting annual reviews and related salary
adjustments.

(c) Contracts
Pursuant to the terms of a research and development agreement with The
Rockefeller University, the Company has the world-wide exclusive license to
manufacture and market any drugs, including Thalomid, which may result from the
research performed at Rockefeller and funded by the Company. Rockefeller is
entitled to receive royalties based on commercial sales of any such drugs for
certain indications for ten years after the first sale. Under terms of the
current research agreement extension, the Company is committed to pay
Rockefeller $504,000 annually for research.

In December 1995 the Company entered into an agreement with Penn Pharmaceutical,
Ltd. of Great Britain ("Penn") for the production of Thalomid. Annual facility
payments are approximately $480,000, which commenced in December, 1996. Penn
will manufacture Thalomid and sell it exclusively to the Company. The agreement
has been renewed for 1999, for facility payments of approximately $480,000.

In October 1997, the Company entered into a contract with Boston University to
manage the surveillance registry which is intended to monitor compliance to the
requirements of the Company's S.T.E.P.S. program (prescription safety and
education program) for all Thalomid patients. The contract has been renewed for
1999. Under the terms of the agreement quarterly payments of approximately
$300,000 are required. The contract is renewable for one year terms upon
agreement of both parties.

In December 1997, the Company entered into a research agreement with the
University of Glasgow for clinical testing and evaluation of certain of
Celgene's patented compounds. Under terms of the agreement, Celgene would pay
the University approximately $200,000 in two annual installments. The term of
the agreement is for two years.

In June 1998, the Company entered into a research agreement with a contract
research organization to manage the pivotal clinical trial for d-methylphenidate
encompassing four separate protocols. The agreement is for approximately two
years and is estimated at approximately $3.0 million over the life of the
agreement.

In December 1998, the Company entered into an exclusive license agreement with
EntreMed, Inc. whereby EntreMed granted to Celgene an exclusive license to its
patent and technology rights for thalidomide. In return EntreMed will receive
royalties on all sales of Thalomid.

In December 1998, the Company entered into a one year clinical trial agreement
with the University of Arkansas for Medical Science to collaborate on clinical
trials for multiple myeloma under four separate protocols. The commitment for
1999 is $200,000.

F-18

CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998

The Company has various other research and consulting agreements totaling
approximately $336,000 for 1999.

(d) Contingencies
The Company believes it maintains insurance coverage adequate for its current
needs.

The Company's operations are subject to environmental laws and regulations which
impose limitations on the discharge of pollutants into the air and water and
establish standards for the treatment, storage and disposal of solid and
hazardous wastes. The Company reviews the effects of such laws and regulations
on its 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 of Market Risk
Sales to one chain pharmacy and three wholesalers accounted for 27%, 18%, 15%,
and 14% of sales respectively, in 1998. The direct sales to the chain pharmacy
were for the initial stocking order. All future sales will be through
wholesalers.

One customer accounted for 100% of the research contract revenue in 1996 and
1997. Three customers accounted for 37%, 28% and 24% of 1998 research contract
revenue.

(13) SUBSEQUENT EVENT

On January 20, 1999, the Company issued a $15.0 million convertible note to an
institutional investor. The note has a five year term and a coupon rate of 9%
with interest payable on a semi-annual basis. The debt contains a conversion
feature that allows the note holder to convert the debt into shares of common
stock after one year at a conversion price of $18 per share. The Company can
redeem the note after three years, (two years if the stock trades at 225% of the
conversion price for a period of 20 consecutive trading days), at 103% of the
principal amount. Net proceeds after issuance at a discount were $14.25 million.

F-19

(c) Exhibit Index.

3.1 Certificate of Incorporation of the Company, as amended (incorporated
by reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1, dated July 24, 1987).

3.2 Bylaws of the Company (incorporated by reference to the Company's
Current Report on Form 8K, dated September 16, 1996).

10.1 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).

10.2 1992 Long-Term Incentive Plan (incorporated by reference to Exhibit A
to the Company's Proxy Statement, dated May 30, 1997).

10.3 1995 Non-Employee Directors' Incentive Plan (incorporated by reference
to Exhibit B to the Company's Proxy Statement, dated May 30, 1997).

10.4 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 10Q for the quarter ended June
30, 1995).

10.5 Agent's Warrant issued in connection with the placement of Series A
Convertible Preferred Stock (incorporated by reference to the Company's
Annual Report on Form 10K for the year ended December 31, 1995).

10.6 Form of Lock-Up Warrant issued to certain holders of Series A
Convertible Preferred Stock (incorporated by reference to the Company's
Registration Statement on Form S-3 dated November 25, 1997 (No.
333-38891)).

10.7 Form of Warrant to be issued in connection with the issuance of Series
B Convertible Preferred Stock (incorporated by reference to Exhibit
10.2 to the Company's Current Report on Form 8K dated June 10, 1997).

10.8 Rights Agreement, dated as of September 16, 1996, between Celgene
Corporation and American Stock Transfer & Trust Company (incorporated
by reference to the Company's Registration Statement on Form 8A, filed
on September 16, 1996).

10.9 Form of indemnification agreement between the Company and each officer
and director of the Company (incorporated by reference to Exhibit 10.12
to the Company's Annual Report on Form 10K for the year ended December
31, 1996).

10.10 Form of Employment Agreement dated September 30, 1997 between the
Company and John W. Jackson (incorporated by reference to the Company's
Registration Statement on Form S-3 dated November 25, 1997 (No.
333-38891)).

10.11 Form of Employment Agreement dated September 30, 1997 between the
Company and Sol J. Barer (incorporated by reference to the Company's
Registration Statement on Form S-3 dated November 25, 1997 (No.
333-38891)).

F-20

10.12 Manufacturing Agreement between Penn Pharmaceuticals Limited and the
Company (incorporated by reference to the Company's Registration
Statement on Form S-3 dated November 25, 1997 (No.
333-38891)).

10.13 Celgene Corporation Replacement Stock Option Plan (incorporated by
reference to Exhibit 99.1 of the Company's Registration Statement on
Form S-3 dated May 18, 1998 (No. 333-52963)).

10.14 Form of Stock Option Agreement to be issued in connection with the
Celgene Corporation Replacement Stock Option Plan (incorporated by
reference to Exhibit 99.2 of the Company's Registration Statement on
Form S-3 dated May 18, 1998 (No. 333-52963)).

10.15 1998 Long Term-Incentive Plan (incorporated by reference to Exhibit A
to the Company's Proxy Statement, dated May 18, 1998).

10.16 Stock Purchase Agreement dated June 23, 1998 between the Company and
Biovail Laboratories Incorporated (incorporated by reference to the
Company's Current Report on Form 8K filed on July 17, 1998 (No.
000-16132)).

10.17 Agreement dated December 9, 1998 between the Company and EntreMed, Inc.
(certain portions of the agreement have been omitted and filed
separately with the United States Securities and Exchange Commission
pursuant to a request for confidential treatment.

23.1 Consent of KPMG LLP

27. Financial Data Schedule