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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee Required)
For the fiscal year ended December 31, 1999
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
For the transition period from ___________ to ___________
Commission File No. 0-16132
CELGENE CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-2711928
- ------------------------------------------ --------------------------------
(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
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
Aggregate market value of voting stock held by non-affiliates of
registrant as of March 1, 2000: $3,530,935,951
Number of shares of Common Stock outstanding as of March 1, 2000:
21,363,806
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CELGENE CORPORATION ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM NO. PAGE
- ----------- -----
Part I
1. Business ................................................ 2
2. Properties .............................................. 22
3. Legal Proceedings ....................................... 22
4. Submission of Matters to a Vote of Security Holders...... 22
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters ..................................... 23
6. Selected Consolidated Financial Data .................... 24
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 25
7a. Quantitative and Qualitative Disclosures about Market
Risk .................................................... 27
8. Financial Statements and Supplementary Data ............. 27
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ..................... 28
Part III
10. Directors and Executive Officers of the Registrant ...... 29
11. Executive Compensation .................................. 31
12. Security Ownership of Certain Beneficial Owners and
Management .............................................. 34
13. Certain Relationships and Related Transactions .......... 35
Part IV
14. Exhibits, Financial Statements, and Reports on Form
8-K ..................................................... 35
Signatures .............................................. 36
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PART I
ITEM 1. BUSINESS
Celgene Corporation, a Delaware Corporation incorporated in 1986, is an
independent biopharmaceutical company engaged primarily in the discovery,
development and commercialization of orally administered, small molecule drugs
for the treatment of cancer and immunological diseases. The key mechanisms of
action for our drugs are modulation of the overproduction of TNF-- and
inhibition of angiogenesis. Additionally, our chiral chemistry program develops
chirally pure versions of existing compounds for both pharmaceutical and
agrochemical markets. We had total revenues of $26.2 million in 1999.
The FDA approved our first commercialized product, THALOMID, for sale in
the United States in July 1998. The approved indication for THALOMID is for the
treatment of acute cutaneous manifestations of moderate to severe ENL and as
maintenance therapy for prevention and suppression of cutaneous manifestation
recurrences. ENL is an inflammatory complication of leprosy. We sell this
product in the United States through our 60 person sales and commercialization
organization.
Our pipeline of new drugs is highlighted by two classes of orally
administered therapeutic agents: IMiDs and SelCIDs. The IMiD class is based on
the activity of THALOMID in modulating the overproduction of TNF-- and
inhibiting angiogenesis. In preclinical studies, our IMiDs have demonstrated a
higher level of activity than thalidomide. In animal models, these compounds
did not cause birth defects or sedation. We completed Phase I trials in the
fourth quarter of 1999 for each of our lead IMiDs. The results, announced in
February, 2000, found that both IMiDs were well-tolerated in healthy human
volunteers.
The second class of compounds, SelCIDs, is designed to modulate TNF-- by
selectively inhibiting PDE 4, a key cell-signaling enzyme. Our SelCIDs are
targeted to control inflammation without broad suppression of the immune
system. Phase I trials demonstrated our lead SelCID compound, CDC 801, was safe
and well tolerated. There were no signs of nausea or vomiting, common side
effects of known PDE 4 inhibitors. CDC 801 is being tested in a Phase II pilot,
placebo controlled trial for the treatment of Crohn's disease. This trial is
expected to be completed in the first half of 2000.
In the third quarter of 1999, we announced favorable clinical results of
two Phase III pivotal efficacy trials for ATTENADE, a chirally pure version of
dl-methylphenidate. dl-methylphenidate is commonly marketed as Ritalin.
ATTENADE is designed to treat the symptoms of Attention Deficit Disorder, or
ADD and Attention Deficit Hyperactivity Disorder, or ADHD. We expect that the
final 12-month safety trial will be completed in the first half of 2000 and we
plan to submit an NDA to the FDA in the second half of 2000.
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CELGENE PRODUCT OVERVIEW
The target disease states for, and clinical trial status of, THALOMID and
our products and compounds currently under development are outlined in the
following table:
PRODUCT INDICATION/INTENDED USE STATUS
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THALOMID Erythema Nodosum Leprosum (ENL) Approved
Multiple Myeloma Phase II trial data published and
presented at the American Society of
Hematology. Phase III pivotal trial
protocol in preparation.
Myelodysplastic Syndrome Phase II trial ongoing and initial data
presented at the American Society of
Hematology.
Leukemia Multiple Phase II trials underway.
Glioblastoma(1) Initial Phase II trials completed. Other
Phase II trials underway.
Liver Cancer Phase II trial underway.
Kidney Cancer Phase II trial underway.
Prostate Cancer(1) Initial Phase II trial completed. Other
Phase II trials underway.
Kaposi's Sarcoma(1) Phase II trial completed.
Cancer Cachexia Initial Phase II trial completed.
Sarcoidosis Initial Phase II trial completed. Other
Phase II trials underway.
Scleroderma Initial Phase II trial completed.
Recurrent Aphthous Stomatitis Phase III pivotal trial completed in
AIDS patients.
Crohn's disease Phase II trial completed and initial
data published.
Ulcerative Colitis Phase II trial underway.
Colon and Rectal Cancer(1) Phase II trial announced.
SelCIDs
CDC 801 Crohn's disease Phase II trial underway.
CC 7085 Crohn's disease Preclinical toxicology.
IMiDs
CDC 501 Blood cancers Initial Phase I trial completed.
CC 4047 Blood cancers Initial Phase I trial completed.
ATTENADE Attention Deficit Disorder and Attention Phase III pivotal efficacy trials
Deficit Hyperactivity Disorder completed. Phase III safety trials
ongoing.
- ----------
(1) At least one study supported by the National Cancer Institute
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OVERVIEW OF ONCOLOGY AND IMMUNOLOGY
Our clinical and commercial focus is to produce a portfolio of highly
potent, selective drugs that have the potential to regulate the overproduction
of TNF-- and are anti-angiogenic.
TNF--, produced primarily by certain white blood cells, is one of a number
of proteins called cytokines that act as chemical messengers throughout the
body to regulate many aspects of the immune system. TNF-- is essential to
mounting an inflammatory response, which is the normal immune system reaction
to infection or injury that rids the body of foreign agents and promotes tissue
repair. However, chronic or excessive production of TNF-- has been implicated
in a number of acute and chronic inflammatory diseases. These disease states,
which are inadequately treated with existing therapies, include non-insulin
dependent diabetes, Alzheimer's disease, congestive heart failure, 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 often fail to achieve
significant clinical benefits and can cause serious side effects such as severe
drops in certain blood component counts, liver toxicity, osteoporosis,
teratogenicity and various endocrine abnormalities. We believe that selective
control and reduction of TNF-- 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.
Anti-TNF-- proteins, including anti-TNF-- antibodies and TNF-- soluble
receptors, have demonstrated efficacy in the treatment of such chronic
inflammatory diseases as rheumatoid arthritis and Crohn's disease. While
initial doses of these anti-TNF-- proteins have been well tolerated and have
reduced disease activity in clinical studies, these proteins exhibit certain
shortcomings linked to their nature as proteins. First, they are large
molecules that must currently be injected or infused. Second, the period of
efficacy of a given dosage of a protein-based drug can decline 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 a patient's immune system
of antibodies that neutralize administered proteins.
There are a number of large molecule, protein-based therapeutic products
under development by other companies for TNF-- modulation. One product has
received approval from the FDA for the treatment of Crohn's disease and
rheumatoid arthritis, and another has received approval for rheumatoid
arthritis. Synthetic small molecule drugs, however, if successfully developed,
may prove to be preferable in the treatment of chronic inflammatory diseases,
due to factors such as oral dosing, lower cost of therapy and avoidance of
undesirable immune response that results in adverse side effects and reduced
efficacy. We believe that our small molecule immunotherapeutic compounds have
the potential to selectively modulate TNF-- while affording these benefits.
In addition, research has indicated that our small molecule drug,
THALOMID, is anti-angiogenic. Angiogenesis is the fundamental biological
process by which new blood vessels are formed. Cancer cells require oxygen and
nutrients and initiate a biochemical mechanism that stimulates angiogenesis
which, in turn, provides the cancerous cells with the blood supply that they
need to grow. Inhibition of angiogenesis could adversely affect the graft of a
tumor and be a potential anti-cancer therapy. This 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, we believe that THALOMID is the only product on the
market that has a direct anti-angiogenic effect. Moreover, preliminary research
suggests that our two new classes of small molecule immunotherapeutic compounds
- -- one of which is based on thalidomide's activity -- may be anti-angiogenic.
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THALOMID
In July 1998, we received FDA approval to market THALOMID for treatment of
ENL and the product was launched in late September 1998. THALOMID is the first
drug approved under a special "Restricted Distribution for Safety" regulation
and is distributed through our S.T.E.P.S. program. Our program is designed to
support the safe and appropriate use of THALOMID and has been made a part of
the approved labeling for THALOMID. We are currently developing THALOMID for
the treatment of a variety of serious disease states for which we believe there
are currently no adequate approved therapies. Our current intent is to seek FDA
approval for THALOMID for at least one cancer of the blood, such as multiple
myeloma, one solid tumor cancer and an AIDS-related indication.
The immunological and anti-angiogenic properties of THALOMID are being
investigated as the basis for treatment of a variety of oncological diseases,
and a number of trials are ongoing, some in cooperation with the NCI, to
evaluate the potential of the drug in cancer. Key investigations include
multiple myeloma, which was the subject of an article and editorial in the
November 18, 1999 issue of The New England Journal of Medicine, Volume 341,
Number 21, and glioblastoma multiforme, for which initial data were presented
in November 1999 at the Chemotherapy Foundation Symposium XVII in New York.
Additional presentations have been made at the 41st ASH Symposium in December
1999.
Our work with thalidomide was originally based on a scientific
collaboration with The Rockefeller University's Laboratory of Cellular
Physiology and Immunology. In the early 1990s, researchers at The Rockefeller
University discovered that thalidomide is a selective modulator of TNF-- and,
therefore, could be of potential benefit in many serious immune-related disease
states, including cachexia and other AIDS-related conditions. We believe that,
in serious and debilitating disease states, the risk of birth defects and other
potential side effects related to thalidomide is outweighed by the drug's
potential clinical benefits. The Rockefeller University has granted to us
certain exclusive rights and licenses to manufacture, use and sell thalidomide
for treating the toxicity associated with high concentrations of TNF-- in
septic shock, cachexia and HIV-related disease states. Researchers at the
Children's Medical Center, which is affiliated with Harvard University,
discovered that thalidomide is anti-angiogenic and filed patents on this
utility. These patents, some of which have not issued in the United States, are
exclusively licensed to EntreMed, Inc. We were granted an exclusive sublicense
to all of EntreMed's thalidomide patents in December 1998.
As a result of our own applications and designations acquired from
EntreMed, we now have Orphan Drug designations from the FDA for THALOMID
covering: primary brain malignancies; HIV associated wasting syndrome; severe
Recurrent Aphthous Stomatitis, or RAS, in severely, terminally
immunocompromised patients; clinical manifestations of mycobacterial infections
caused by Mycobacterium tuberculosis and non-tuberculous mycobacteria; ENL;
multiple myeloma; Crohn's disease and Kaposi's sarcoma. If the FDA approves any
of these indications for THALOMID, we will be granted a seven-year period of
exclusivity during which time the FDA is prohibited, except under some
conditions, from approving another version of thalidomide for the approved
indication.
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, 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 dispensed the drug for the
treatment of ENL for the past 25 years. We note that thalidomide's history may
limit market acceptance of THALOMID.
ONCOLOGY
Cancer tissue has many blood vessels. This observation has led to the
realization that growth of blood vessels is 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 causing the
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formation of new blood vessels from existing ones. Almost three decades ago, it
was proposed that this tumor 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 Medical Center in Boston.
We are currently working with the NCI and a number of clinical
investigators to assess the potential of THALOMID in the treatment of various
cancers. In the first 12 months after THALOMID was commercially launched in the
United States, approximately 70% of the product's prescriptions were in
oncology, as reported by prescribers on our S.T.E.P.S. program enrollment
surveys.
Multiple Myeloma. Multiple myeloma is a malignant proliferation of plasma
cells and plasmacytoid cells. It is the second most common blood borne
malignancy and is invariably fatal. According to the Leukemia Society of
America, multiple myeloma accounts for about 13% of blood borne disease and
affects approximately 40,000 people in the United States. The incidence of this
disease is approximately four per 100,000, and approximately 14,400 cases are
reported annually with approximately 11,000 deaths associated with the disease
every year.
Clinical research published in the November 18, 1999 edition of The New
England Journal of Medicine, Volume 341, Number 21, reported results of a study
conducted at the University of Arkansas on the use of THALOMID in 84 multiple
myeloma patients with advanced stage disease and histories of extensive prior
chemotherapeutic interventions, radiation treatments and multiple bone marrow
transplants. This Phase II study found that 32% of the patients had a partial
response and 10% of the patients had a complete or nearly complete remission
based on decreases in paraprotein, the myeloma protein in serum, or Bence Jones
protein in urine, important markers of the progression of the disease. Clinical
data from 180 patients in this study was presented at the December 1999 ASH
meeting by researchers at the University of Arkansas who reported that 36% of
the patients achieved a 25% reduction in tumor burden. Eighteen patients
achieved paraprotein response of at least 90%, 14 patients achieved at least a
75% paraprotein response, 16 patients achieved at least a 50% paraprotein
response and four patients achieved a complete response. Side effects reported
by the investigators were constipation, weakness/fatigue and somnolence. A
number of additional presentations and posters presented confirmatory evidence
at the ASH meeting regarding the efficacy of THALOMID. In September 1999,
similar findings were reported at the International Myeloma Workshop in
Stockholm, Sweden on trials conducted at Cedars-Sinai Medical Center, Los
Angeles. In this Phase II, open label study of 20 relapsing or progressive
multiple myeloma patients utilizing low-dose THALOMID administered over an
eight-week trial period, 30% of patients experienced a greater than 50%
reduction of tumor burden. Further data confirming earlier trials was presented
at the Chemotherapy Foundation Symposium XVII in November 1999 in New York on
15 refractory patients treated at Saint Vincent's Medical Center, New York in
which there was observed a 67% overall response with THALOMID alone or in
combination with chemotherapy.
In the 12 months following the launch of THALOMID, as reported by
prescribers on our S.T.E.P.S. program enrollment surveys, approximately 30% of
total usage was in multiple myeloma. Based on this information and on the
growing volume of clinical trial data, our plan is to develop a
regulatory/clinical program based on what has been learned from these studies
and file a supplemental NDA for THALOMID for the treatment of multiple myeloma.
Glioblastoma Multiforme. Glioblastomas are the most common brain tumors
and account for 50% of all gliomas, an aggressive form of brain cancer. The
usual treatment of high-grade gliomas is surgical removal followed by radiation
therapy.
Studies at the New York University School of Medicine and at the Dana
Farber Institute have demonstrated the potential for thalidomide as a treatment
for glioblastoma multiforme. Phase I/II data from the New York University trial
were presented in November 1999 at the Chemotherapy Foundation Symposium XVII
in New York. THALOMID in combination with carboplatin was administered to 71
patients with recurrent glioblastoma multiforme. At the maximum tolerated dose
of THALOMID, 53 of the patients were evaluated for efficacy, with 70%
experiencing responses, two with partial responses, 35
6
with disease stabilization. The trial's most commonly reported side effects
were constipation and drowsiness. A Phase III trial will assess whether
patients benefited because of the higher carboplatin doses or if there was any
synergy between thalidomide and carboplatin. Additionally, a Phase II trial has
been initiated in collaboration with the NCI's Radiation Therapy Oncology Group
to investigate the effect of THALOMID and radiation as co-therapy for the
treatment of glioblastoma.
Other Oncology Indications. In addition to glioblastoma multiforme, the
NCI is currently investigating THALOMID in clinical trials on prostate,
colorectal, head and neck and non-small cell lung cancer. Other trials such as
those in liver cancer, kidney cancer and leukemia are being run by key
investigators. Recently, researchers in London reported that continuous,
low-dose thalidomide is useful as an agent in patients with advanced cancers as
a palliative. That study showed that three of 18 patients with kidney cancer
also showed a response benefit and three patients had stabilization of their
disease for periods of up to six months. In addition, four of 17 melanoma
patients experienced stable disease for up to six months. According to a report
in the medical journal Lancet, follow-up studies using higher doses have also
shown "encouraging results" in patients with kidney cancer. These researchers
are now testing thalidomide in combination with interferon or interleukin 2 in
this group. Similarly, the NCI reported trial results in which 63 patients were
treated with either a low dose or a high dose of thalidomide. Approximately 53%
of the low dose and 68% of the high dose patients had declines in prostate
specific antigen, a recognized marker for prostate cancer. If successful, these
studies would establish proof of principle, leading to the design of additional
trials, including pivotal studies.
IMMUNOLOGY
THALOMID has been shown to impact the immune system both in vitro and in
vivo. Examples of such biological activities include the inhibition of TNF--,
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. In addition, other areas of
investigation include sarcoidosis, an inflammation of body tissue which often
attacks the lungs and lymph nodes, and scleroderma, a chronic tissue disorder.
Erythema Nodosum Leprosum. ENL is a complication of leprosy, a chronic
bacterial disease. Although the disease is relatively rare in the United
States, leprosy afflicts millions worldwide. ENL occurs in about 30% of leprosy
patients and is characterized by cutaneous lesions, acute inflammation, fever
and anorexia. On July 16, 1998, we received approval from the FDA to market
THALOMID for the treatment of ENL.
Inflammatory Bowel Disease. According to the Crohn's and Colitis
Foundation of America, there are approximately one million Americans with
active 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 with an
estimated 70,000 to 125,000 U.S. patients diagnosed with active moderate to
severe manifestation of the disease.
A Phase II pilot study using THALOMID in patients with severe Crohn's
disease has been concluded at the Cedars-Sinai Medical Center, Los Angeles, and
reported in the journal Gastroenterology. About 70% of the patients suffering
from moderate to severe Crohn's disease who completed at least five weeks of
the 12-week trial demonstrated a response when treated with low dose THALOMID,
with 20% of these patients experiencing remission. All patients were able to
reduce their steroid regimen by at least 50%, with 44% of patients
discontinuing steroids. Data from this trial suggests that THALOMID may provide
clinical benefit and potentially reduce the need for steroid treatment. This
combination of effects could mean improvement over current therapeutic options.
A similar Phase II pilot study has been initiated at Cedars-Sinai Medical
Center using THALOMID for chronically active ulcerative colitis, which is
another form of inflammatory bowel disease. Estimates of the prevalence of
ulcerative colitis in the United States generally range between 250,000 and
500,000. Recent preliminary data has shown that eight of 11 patients with
intractable bowel disease benefited from THALOMID.
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HIV/AIDS. Recurrent Aphthous Stomatitis, or RAS, is a complication of AIDS
characterized by lesions of the oral cavity, esophagus and gastrointestinal
tract and may interfere with normal eating. We believe RAS currently afflicts
an estimated 5,000 AIDS patients in the United States. 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, we began a pivotal clinical trial involving 84
patients for the evaluation of THALOMID in the treatment of RAS, using the same
principal investigator as the AIDS Clinical Trials Group study. We will be
analyzing this clinical trial data in 2000 with a view toward the possibility
of a supplemental NDA submission to the FDA.
S.T.E.P.S. PROGRAM
Working with the FDA and other governmental agencies as well as certain
advocacy groups, we designed and implemented our S.T.E.P.S. program, the
objective of which is the safe and appropriate use of THALOMID. This
proprietary program includes comprehensive physician, pharmacist and patient
education. Female patients are required to use contraception and are given
pregnancy tests regularly. All patients are also subject to other requirements,
including informed consent and participation in a confidential outcomes
registry managed on our behalf by an academic epidemiology research group.
Physicians are also required to comply with the educational, contraception
counseling, informed consent and pregnancy testing and other 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
each prescription may not exceed four weeks dosing. A new prescription is
required each month.
SALES AND COMMERCIALIZATION
We have established an organization of approximately 60 persons to sell
and commercialize THALOMID. These individuals have considerable experience in
the pharmaceutical industry and many have experience with oncological and
immunological products. We expect to expand our THALOMID sales and
commercialization group to support products we develop to treat oncological and
immunological diseases. We intend to market and sell the products we develop
for indications with accessible patient populations. For drugs with indications
with larger patient populations, we anticipate partnering with other
pharmaceutical companies. In addition, we are positioned to accelerate the
expansion of these sales resources as appropriate to take advantage of product
in-licensing and product acquistion opportunities. We intend to establish
commercial relationships with selected companies in other countries to market
THALOMID.
MANUFACTURING
THALOMID is formulated and encapsulated for us by Penn Pharmaceuticals
Ltd. of Great Britain in an FDA approved facility 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 cGMP compliant. In certain instances, we may be required to make
substantial capital expenditures to access additional manufacturing capacity.
In addition, we have established a contract with another cGMP certified bulk
drug substance supplier for THALOMID that will begin in 2001 once the
regulatory process is completed. We are also actively seeking an alternate
manufacturer to provide additional capacity for the formulation and
encapsulation of THALOMID and expect that this will be concluded in 2000.
IMIDS
We have designed and synthesized a number of novel structural analogues of
thalidomide called IMiDs which have been demonstrated in in vitro tests to be
substantially more potent than thalidomide. There can be no assurance, however,
that the same effect can be duplicated in humans. Animal models have suggested
that our IMiDs do not cause the birth defects associated with thalidomide.
Research on these compounds has identified two clinical trial candidates and
each has completed a Phase I trial. Research continues on follow-on compounds
with enhanced immunological and anti-angiogenic activity.
8
IMiDs may have potential for treating conditions where there is a deficiency in
T-cell activity, such as viral diseases including HIV-related diseases, or for
enhancing potential IL-12 mediated anti-tumor activities. In preclinical
studies, our lead IMiD compound has been shown to inhibit interleukins 1-beta,
6 and 12 while stimulating the production of interleukins 10 and 2 as well as
interferon gamma. The activity of T-cells is enhanced by the compound up to
1,000 times more than with thalidomide. We expect to advance our lead IMiD, CDC
501, into a Phase II pilot trial in a blood cancer during 2000. The U.S. Patent
and Trademark Office has issued composition of matter and use patents to us
relating to our IMiDs.
SELCIDS
We have designed, synthesized and tested a large number of SelCIDs. These
compounds have demonstrated the ability to be highly specific inhibitors of
TNF-- overproduction in in vitro bioassays of human cells. SelCIDs appear to
have a specific inhibitory effect on PDE 4, which is linked to the
overproduction of TNF--. Studies have determined that many of the SelCIDs
decrease synthesis of TNF-- through selective inhibition of PDE 4. Preclinical
and animal tests have shown this class of compounds to be up to 10,000 times
more active with a longer half-life than THALOMID. We believe that control of
TNF-- 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
humans.
Our lead SelCID, CDC 801, was found to be well tolerated in two Phase I
trials completed in 1999 in the United Kingdom. A Phase II pilot trial for this
compound in Crohn's disease commenced in 1999 at the Cedars-Sinai Medical
Center and results are expected in the first half of 2000. In addition, we
expect to initiate a Phase II pilot trial for CDC 801 in a blood cancer during
2000. Other SelCIDs have been identified and the most advanced of these is
undergoing toxicological evaluation in preparation for the initiation of Phase
I trials. Unlike many therapeutics which inhibit PDE 4, SelCIDs have not shown
any evidence of acute nausea and vomiting in patients. The U.S. Patent and
Trademark Office has issued to us composition of matter and use patents
relating to our SelCIDs.
CHIRAL CHEMISTRY
Many human pharmaceuticals and agrochemicals exist in two different
three-dimensional configurations that are identical in chemical structure but
are mirror images of each other. These conformations, known as enantiomers, or
isomers, 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 which contain both isomers, 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.
Our 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 us 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.
Our biocatalytic process for producing chirally pure compounds differs
from the more common approach of producing racemic mixtures followed by
separation 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
substantial amounts of raw materials and involve the disposition of waste
product. Traditional approaches also are generally less economical than our
process. We believe that our biocatalytic process can be applied to the
manufacture of a wide variety of organic chemicals.
9
We believe there is a significant incremental opportunity in developing
selected, 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:
- the cost and duration of preclinical evaluations and 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;
- the risk of not obtaining regulatory approval may be reduced; and
- marketing risks may also be reduced due to the established market for the
parent compound.
We have made significant progress over the past year in the development of
ATTENADE, the chirally pure version of Ritalin. We have also made significant
progress in the development and production of chirally pure agrochemicals. We
believe that the agrochemical market presents a substantial opportunity because
many agrochemicals produced in racemic form could be manufactured in chirally
pure form.
ATTENADE
We have completed two pivotal Phase III efficacy trials for ATTENADE.
These trials found that ATTENADE met all efficacy parameters for controlling
symptoms of ADD and ADHD in school-age children. Drugs containing
dl-methylphenidate such as Ritalin have been used for decades for the treatment
of ADD and ADHD. We believe that one million children in the United States were
treated with dl-methylphenidate and other psychostimulants in 1998. Total U.S.
sales in 1998 of drugs used to treat the symptoms of ADD and ADHD were
approximately $500 million.
More than 200 children participated in our pivotal trials. Both
multi-center trials compared ATTENADE to placebo; the second trial directly
compared the efficacy of both ATTENADE and dl-methylphenidate to placebo. As
compared to placebo, ATTENADE demonstrated a statistically significant longer
duration of action than dl-methylphenidate. ATTENADE controlled the symptoms of
ADD and ADHD at all times measured in the study while dl-methylphenidate did
not control the symptoms at the last measurement. In both trials, behavioral
and objective measures were examined. ATTENADE had favorable scores over
dl-methylphenidate in all parameters measured. The results of the primary
efficacy analysis indicated that ATTENADE was significantly more effective than
placebo as evaluated by a behavioral scale, signifying an improvement in the
clinical status of the children. The results of the second trial confirmed the
drug's efficacy and indicated a significantly longer duration of action for
ATTENADE compared to dl-methlyphenidate as measured by a behavioral scale. The
Phase III safety trial is scheduled for completion in the first quarter of 2000
and an NDA submission is anticipated later in the year. Clinical trials on a
pulsed release formulation are planned to commence in the first half of 2000.
We are in discussions regarding partnerships for ATTENADE in the United
States and Europe. In Canada, where it is awaiting registration, ATTENADE is
licensed to Biovail Corporation, which purchased $2.5 million dollars worth of
our stock and will pay to us licensing fees, milestone payments and royalties.
We have been issued patents for the use of ATTENADE for the treatment of ADD
and ADHD, and for the once-a-day administration of methylphenidate drugs in a
controlled or pulsed release formulation that includes both the chirally pure
d-methylphenidate and the racemic form. In addition, we have been issued
process patents covering our manufacturing process for the active substance.
CHIRALLY PURE AGROCHEMICALS
Celgro is applying our proprietary biocatalytic synthesis technology to
agrochemicals. Celgro's approach is to work with agrochemical companies to
adapt our 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. We expect that these arrangements typically will
10
include milestone payments, reimbursement of research and development expenses
and royalty arrangements. We have entered into research and development
agreements with two leading agrochemical companies and initiatives are underway
to secure additional collaborations.
We also believe that our 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 our 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 our business. It is
our policy to seek patent protection for our inventions, and also to rely upon
trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
Under an agreement with The Rockefeller University, we have obtained
certain exclusive rights and licenses to manufacture, have manufactured, use
and sell products that are based on compounds that were identified in research
carried out by The Rockefeller University and us, that have activity associated
with TNF(alpha). The Rockefeller University 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. In 1995, The
Rockefeller University was issued a U.S. patent which claims such methods. This
U.S. patent expires in 2012 and is included in the patent rights exclusively
licensed to us under the license from The Rockefeller University. However, The
Rockefeller University did not seek corresponding patents in any other country
in respect of this invention. The Rockefeller University has filed an
additional U.S. patent application and an international patent application
relating to the activity of thalidomide related to interleukin-12. Under the
license from The Rockefeller University, we were obligated to pay certain
specified royalties to The Rockefeller University on net sales of licensed
products for covered indications. In November 1999, we agreed with The
Rockefeller University to substitute a lump sum payment and issue stock options
to The Rockefeller University and the inventors in lieu of the royalties
previously payable under the license. The license from The Rockefeller
University is coterminous with the last to expire of the licensed patents and
is terminable by The Rockefeller University only in the event of a breach of
the agreement's terms by us which breach shall fail to be remedied for more
than sixty days after notice thereof. Any termination of the license from The
Rockefeller University could have a material adverse effect on our business,
financial condition and results of operations.
In 1998, we were granted an exclusive sublicense to all of the thalidomide
patents and patent applications worldwide, exclusively licensed to EntreMed by
the Children's Medical Center Corp., which is affiliated with Harvard
University, related to the anti-angiogenic action of thalidomide. Three U.S.
patents issued to Children's Medical Center Corp. will expire in 2014.
Corresponding foreign patent applications and additional U.S. patent
applications are still pending. Further, we have also exclusively sublicensed
pending U.S. and foreign patent applications related to the use of thalidomide
in combination with other therapeutic agents. There can be no assurance that
additional patents will issue, or that if patents issue, that such patents will
provide us with significant proprietary protection or commercial advantage. The
license from EntreMed is coterminous with the last to expire of the licensed
patents and we must pay royalties for at least 12 years from our first
commercial sale in the United States. The EntreMed license is terminable in the
event of a breach by us, which breach shall fail to be remedied for 60 days
after notice thereof. Any termination of the license from EntreMed could have a
material adverse affect on our business, financial condition and results of
operations.
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We have been issued a total of 36 U.S. patents and have filed an
additional 15 U.S. patent applications. Of the issued patents, 14 relate to our
oncologic or immunologic compounds and uses and six are directed to
methylphenidate therapeutic compositions and processes. Our U.S. patents expire
between 2001 and 2019. We have filed patient applications and in some instances
have obtained patents in certain other countries which correspond to some, but
not all of our U.S. patents. We expect to continue to file patent applications
covering the use of our 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, 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 will 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 we will be able to take advantage of this law.
Our success will depend, in part, on our ability to obtain and enforce
patents, protect trade secrets, obtain licenses to technology owned by third
parties when necessary and conduct its business without infringing the
proprietary rights of others. The patent positions of pharmaceutical and
biotechnology firms, including ours, can be uncertain and involve complex legal
and factual questions. In addition, the coverage sought in a patent application
can be significantly reduced before the patent is issued. Consequently, we do
not know whether any of our owned or licensed pending 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 whether
they will be circumvented or infringed upon 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, we cannot be certain that we, or our
licensors, were the first to make the inventions covered by each of the pending
patent applications or that we, or our licensors, were the first to file patent
applications for such inventions. In the event a third party has also filed a
patent for any of its inventions, we, or our licensors, 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 a U.S.
patent or loss of any opportunity to secure U.S. patent protection for the
invention. Even if the eventual outcome is favorable to us, such interference
proceedings could result in substantial cost to us. Prosecution of patent
applications and litigation to establish the validity and scope of patents, to
assert patent infringement claims against others and to defend against patent
infringement claims by others can be expensive and time-consuming. There can be
no assurance that, in the event that claims of any of our owned or licensed
patents are challenged by one or more third parties, any court or patent
authority ruling on such challenge will determine that such patent claims are
valid and enforceable. An adverse outcome in such litigation could cause us to
lose exclusivity relating to the subject matter delineated by such patent
claims and may have a material adverse effect on our business. If a third party
is found to have rights covering products or processes used by us, we could be
forced to cease using the products or processes covered by the disputed rights,
subject to significant liabilities to such third party and/or required to
license technologies from such third party. Also, different countries have
different procedures for obtaining patents and patents issued by different
countries provide different degrees of protection against the use of a patented
invention by others. There can be no assurance, therefore, that the issuance to
us in one country of a patent covering an invention will be followed by the
issuance in other countries of patents covering the same invention or that any
judicial interpretation of the validity, enforceability or scope of the claims
in a patent issued in one country will be similar to the judicial
interpretation given to a corresponding patent issued in another country.
Furthermore, even if our owned or licensed patents are determined to be valid
and enforceable, there can be no assurance that competitors will not be able to
design around such patents and compete with us using the resulting alternative
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technology. We do not currently have, nor do we intend to seek, patent
protection relating to the use of THALOMID to treat ENL.
We also rely upon unpatented, proprietary and trade secret technology that
we seek to protect, in part, by confidentiality agreements with our
collaborative partners, employees, consultants, outside scientific
collaborators, sponsored researchers and other advisors. There can be no
assurance that these agreements provide meaningful protection or that they will
not be breached, that we would have adequate remedies for any such breach or
that our trade secrets, proprietary know-how and technological advances will
not otherwise become known to others. In addition, there can be no assurance
that, despite precautions taken by us, others have not and will not obtain
access to our proprietary technology or that such technology will not be found
to be non-proprietary or not a trade secret.
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GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacture and marketing of
pharmaceuticals and in our ongoing research and development activities. All of
our therapeutic products will require regulatory approval by governmental
agencies prior to commercialization. In particular, human therapeutic products
are subject to rigorous preclinical testing and clinical trials and other
pre-marketing approval requirements by the FDA and regulatory authorities in
other countries. In the United States, various federal, and in some cases state
statutes and regulations also govern or impact upon the manufacturing, 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 which may significantly limit the indicated uses for which a
product may be marketed. Further, approved drugs, as well as their
manufacturers, are subject to ongoing review and discovery of previously
unknown problems with such products may result in restrictions on their
manufacture, sale or use or in their withdrawal from the market. Any failure by
us, our collaborators or licensees to obtain or maintain, or any delay in
obtaining regulatory approvals could adversely affect the marketing of our
products, and our ability to receive product revenue, 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, or IND, which must be reviewed by
the FDA primarily for safety considerations before proposed clinical trials in
humans can begin.
Typically, clinical trials involve a three-phase process. In Phase I,
clinical trials are generally conducted with a small number of individuals to
determine the early safety and tolerability profile and the pattern of drug
distribution and metabolism within the body. If the Phase I trials are
satisfactory, Phase II clinical trials are conducted with groups of patients in
order to determine preliminary efficacy, dosing regimes and expanded evidence
of safety. In Phase III, large-scale, multi-center, adequately powered and
well-controlled, comparative clinical trials are conducted with patients in
effort 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 us to rely on historical data relating to
the natural course of disease in untreated patients. In some cases, as a
condition of NDA approval, confirmatory trials are required to be conducted
after the FDA's approval of an NDA in order to resolve any open issues. The FDA
requires monitoring of all aspects of clinical trials and reports of all
adverse events must be made to the agency, both before and after drug approval.
The results of the preclinical testing and clinical trials are submitted
to the FDA as part of an NDA for evaluation to determine if the product is
adequate for approval to commence commercial sales. In responding to an NDA,
the FDA may grant marketing approval, request additional information or deny
the application if it determines that the application does not satisfy its
regulatory approval criteria. When an NDA is approved, the manufacturer must
employ a system for obtaining reports of experience and side effects that are
associated with the drug and make appropriate submissions to the FDA.
Pursuant to the Orphan Drug Act, a sponsor may request that the FDA
designate a drug intended to treat a "rare disease or condition" as an "orphan
drug." A "rare disease or condition" is defined as one which affects less than
200,000 people in the United States or which affects more than 200,000 people,
but for which the cost of 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
14
FDA are the subject of frequent discussion. FDA regulations reflecting certain
definitions, limitations and procedures initially went into effect in January
1993 and were amended in certain respects in 1998. Therefore, there is no
assurance as to the precise scope of protection that may be afforded by orphan
drug status in the future or that the current level of exclusivity and tax
credits will remain in effect. We have received from the FDA orphan drug
approval for thalidomide for the treatment of ENL. Celgene also has received
orphan drug designations for thalidomide: for the treatment of multiple
myeloma; for the treatment of HIV-associated wasting syndrome; for the
treatment of the clinical manifestations of mycobacterial infection caused by
Mycobacterium tuberculosis and non-tuberculosis mycobacteria; for the treatment
of severe recurrent apthous stomatitis in severely, terminally compromised
patients; and for the treatment of Crohn's disease. We also obtained orphan
drug designation in Kaposi's sarcoma and primary brain malignancies as part of
our agreement with EntreMed. However, there can be no assurance that another
company also holding orphan drug designation will not receive approval prior to
us for the use of thalidomide for the treatment of one or more of these
indications, other than ENL. If that were to happen, our applications for that
indication could not be approved until the competing company's seven-year
period of exclusivity expired.
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 cGMP. In complying with cGMP, manufacturers
must devote extensive time, money and effort in the area of production and
quality control and quality assurance to maintain full technical compliance.
Manufacturing facilities and company records are subject to periodic
inspections by the FDA to ensure compliance. If a manufacturing facility is not
in substantial compliance with these requirements, regulatory enforcement
action may be taken by the FDA which may include seeking an injunction against
shipment of products from the facility and recall of products previously
shipped from the facility.
Failure to comply with applicable FDA regulatory requirements can result
in informal administrative enforcement actions such as warning letters, recalls
or adverse publicity issued by the FDA or in legal actions such as seizures,
injunctions, fines based on the equitable remedy of disgorgement, restitution
and criminal prosecution.
Steps similar to those in the United States must be undertaken in
virtually every other country comprising the market for our products before any
such product can be commercialized in those countries. The approval procedure
and the time required for approval vary from country to country and may involve
additional testing. There can be no assurance that approvals will be granted on
a timely basis or at all. In addition, regulatory approval of 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 us.
COMPETITION
The pharmaceutical and agrochemical industries in which we compete are
each highly competitive. Our competitors include major pharmaceutical and
biotechnology companies, most of which have considerably greater financial,
technical and marketing resources than us. We also experience competition in
the development of our products and processes from universities and other
research institutions and, in some instances, compete with others in acquiring
technology from such sources.
Competition in the pharmaceutical industry, and specifically in the
oncology and immunology areas being addressed by us, is particularly intense.
Numerous companies are pursuing techniques to modulate TNF-- production through
various combinations of monoclonal antibodies, TNF-- receptors and small
molecule approaches. Two U.S. companies, Centocor Inc., a wholly owned
subsidiary of Johnson & Johnson, and Immunex Corporation, have registered drugs
that block the disease-causing effects of TNF-- in inflammatory arthritis and
bowel disease. Both drug products are registered in the United States and in
Europe and have been marketed since 1998. In the United States the present cost
of TNF-- modulating drugs, not including medical or other charges, is between
$7,000 and $11,500 per patient year. Amgen Inc. is currently also developing a
soluble TNF-- receptor. BASF A.G. has a human antibody in development and
Celltech Group plc has a humanized antibody. In addition, a number of other
companies are attempting to address, with other technologies and products, the
disease states currently
15
being targeted by us. EntreMed is researching the effectiveness of its own
thalidomide analogues as anti-angiogenic agents in the treatment of retinal
disease and cancer. 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-methylphenidate and is working with Medeva plc, a leading
supplier of dl-methylphenidate 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-methylphenidate. The agrochemical market is large and, within this
market, efforts are underway by the 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, we will
be required to continually upgrade our scientific expertise and technology,
identify and retain capable management, and pursue scientifically feasible and
commercially viable opportunities.
Our competition will be determined in part by the indications for which
our products are developed and ultimately approved by regulatory authorities.
An important factor in competition will be the timing of market introduction of
our or our competitors' products. Accordingly, the relative speed with which we
can develop products, complete clinical trials and approval processes and
supply commercial quantities of products to the market 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 us by Penn Pharmaceuticals
Ltd. of Great Britain in an FDA approved facility 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 cGMP compliant. In certain instances, we may be required to make
substantial capital expenditures to access additional manufacturing capacity.
In addition, we have established a contract with another cGMP certified bulk
drug substance supplier for THALOMID that will begin in 2001 once the
regulatory process is completed. We are also actively seeking an alternate
manufacturer to provide additional capacity for the formulation and
encapsulation of THALOMID and expect that this will be concluded in 2000.
SALES AND COMMERCIALIZATION
We have established an organization of approximately 60 persons to sell
and commercialize THALOMID. These individuals have considerable experience in
the pharmaceutical industry and many have experience with oncological and
immunological products. We expect to expand our THALOMID sales and
commercialization group to support products we develop to treat oncological and
immunological diseases. We intend to market and sell the products we develop
for indications with accessible patient populations. For drugs with indications
with larger patient populations, we anticipate partnering with other
pharmaceutical companies. In addition, we are positioned to accelerate the
expansion of these sales resources as appropriate to take advantage of product
in-licensing and product acquisition opportunities. We intend to establish
commercial relationships with selected companies in other countries to market
THALOMID.
EMPLOYEES
As of March 15, 2000, we had 151 full-time employees, 47 of whom were
engaged primarily in research and development activities, 60 of whom were
engaged in sales and commercialization activities
16
and the remainder of whom were engaged in executive and administrative
activities. Of these employees, 55 have advanced degrees, including 26 who have
Ph.D. degrees. We also maintain consulting arrangements with a number of
scientists at various universities and other research institutions in Europe
and the United States.
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this annual
report are forward-looking statements concerning our business, financial
condition, results of operations, economic performance and financial condition.
Forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and within the meaning of Section 21E of the Securities Exchange
Act of 1934 are included, for example, in the discussions about:
- our strategy;
- new product development or product introduction;
- product sales, royalties and contract revenues;
- expenses and net income;
- our credit risk management;
- our liquidity;
- our asset/liability risk management; and
- our operational and legal risks.
These statements involve risks and uncertainties. Actual results may
differ materially from those expressed or implied in those statements. Factors
that could cause such differences include, but are not limited to, those
discussed under "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISK FACTORS
IF WE ARE UNSUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR PRODUCTS, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED.
Many of our 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 being ready for sale. We have not yet
sold any of our products other than THALOMID. All of our other products will
require further development, clinical testing and regulatory approvals, and
there can be no assurance that commercially viable products will result from
these efforts. If any of our products, even if developed and approved, cannot
be successfully commercialized, our business, financial condition and results
of operations could be materially adversely affected.
DURING THE NEXT SEVERAL YEARS, WE WILL BE VERY DEPENDENT ON THE COMMERCIAL
SUCCESS OF THALOMID.
At our present level of operations, we may not be able to attain
profitability if physicians prescribe THALOMID only for those who are diagnosed
with ENL. Under current FDA regulations, we are limited in our ability to
promote THALOMID outside this approved use. The market for the use of THALOMID
in patients suffering from ENL is relatively small. We have initiated clinical
studies to examine whether or not THALOMID is effective and safe when used to
treat disorders other than ENL, but we do not know whether these studies will
in fact demonstrate safety and efficacy, or if they do, whether we will succeed
in receiving regulatory approval to market THALOMID for additional indications.
If the results of these studies are negative, or if adverse experiences are
reported in these clinical studies or otherwise in connection with the use of
THALOMID by patients, this could undermine physician and patient comfort with
the product, could limit the commercial success of the product and
17
could even impact the acceptance of THALOMID in the ENL market. FDA regulations
restrict our ability to communicate the results of additional clinical studies
to patients and physicians without first obtaining approval from the FDA to
expand the authorized uses for this product.
IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED.
There can be no assurance that those of our products that receive
regulatory approval, including THALOMID, or those products for which no
regulatory approval is required, will achieve market acceptance. A number of
factors render the degree of market acceptance of our products uncertain,
including the extent to which we can demonstrate the products' efficacy, safety
and advantages, if any, over competing products, as well as the reimbursement
policies of third party payors, such as government and private insurance plans.
Failure of our products to achieve market acceptance would have a material
adverse effect on our business, financial condition and results of operations.
WE FACE A RISK OF PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
INSURANCE.
We may be subject to product liability or other claims based on
allegations that the use of our technology or products has resulted in adverse
effects, whether by participants in our clinical trials or by patients using
our products. Thalidomide, when used by pregnant women, has resulted in serious
birth defects. Therefore, necessary and strict precautions must be taken by
physicians prescribing the drug to women with childbearing potential, 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 we have product liability insurance that we believe is appropriate,
there can be no assurance that we will be able to obtain additional coverage if
required, or that such coverage will be adequate to protect us in the event
claims are asserted against us. Our obligation to defend against or pay any
product liability or other claim may have a material adverse effect on our
business, financial condition and results of operations.
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT AND MAY
NEED TO SEEK ADDITIONAL FUNDING.
We have sustained losses in each year since our incorporation in 1986. We
sustained net losses of $21.8 million, $25.1 million and $25.4 million for the
years ended December 31, 1999, 1998 and 1997. We had an accumulated deficit of
$166.4 million and $144.6 million at December 31, 1999 and 1998. We expect to
make substantial expenditures to further develop and commercialize our
products, and, based on these expenditures, it is probable that losses will
continue for at least the next six months. We expect that our rate of spending
will accelerate as the result of increased clinical trial costs and expenses
associated with regulatory approval and commercialization of products now in
development. In order to fund our future operations, we will likely seek
additional capital. We may not be able to raise additional capital on
reasonable terms, if at all. There can be no assurance, assuming we
successfully raise additional funds, that we will achieve profitability or
positive cash flow.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING
RESULTS.
We have historically experienced, and expect to continue for the
foreseeable future to experience, significant fluctuations in our quarterly
operating results. These fluctuations are due to a number of factors, many of
which are outside our control, and may result in volatility of our stock price.
Future operating results will depend on many factors, including:
- demand for our products;
- regulatory approvals for our products;
- the timing of the introduction and market acceptance of new products by
us or competing companies;
- the timing of certain research and development milestones; and
- our ability to control our costs.
18
WE HAVE NO MANUFACTURING CAPABILITIES AND WE ARE DEPENDENT ON ONE SUPPLIER
FOR THE RAW MATERIAL AND ONE MANUFACTURER FOR THE FORMULATION AND ENCAPSULATION
OF THALOMID.
We currently have no experience in, or our own facilities for,
manufacturing any products on a commercial scale. Currently, we obtain all of
our bulk drug material for THALOMID from a single supplier and rely on a single
manufacturer to formulate and encapsulate THALOMID. The FDA requires that all
suppliers of pharmaceutical bulk material and all manufacturers of
pharmaceuticals for sale in or from the United States achieve and maintain
compliance with the FDA's current Good Manufacturing Practice, or cGMP,
regulations and guidelines. If the operations of the sole supplier or the sole
manufacturer were to become unavailable for any reason, the required FDA review
and approval of the operations of a new supplier or new manufacturer could
cause a delay in the manufacture of THALOMID which could have a material
adverse effect on our business, financial condition and results of operations.
We intend to continue to utilize outside manufacturers if and when needed to
produce our other products on a commercial scale. If our outside manufacturers
do not meet our requirements for quality, quantity or timeliness, or do not
achieve and maintain compliance with all applicable regulations, our business,
financial condition and results of operations could be materially adversely
affected.
WE HAVE LIMITED MARKETING AND DISTRIBUTION CAPABILITIES.
Although we have a 60 person sales and commercialization group to sell
THALOMID, we may be required to seek a corporate partner to provide marketing
services with respect to our other products. Any delay in developing these
resources could have a material adverse impact on our results of operations. We
have contracted with a specialty distributor to distribute THALOMID. Failure of
this specialty distributor to perform its obligations could have a material
adverse effect on our business, financial condition and results of operations.
WE ARE DEPENDENT ON COLLABORATIONS AND LICENSES WITH THIRD PARTIES.
Our ability to fully commercialize our products, if developed, may depend
to some extent upon our entering into joint ventures or other arrangements with
established pharmaceutical companies with the requisite experience and
financial and other resources to obtain regulatory approvals and to manufacture
and market such products. Accordingly, our success may depend, in part, upon
the subsequent success of such third parties in performing preclinical and
clinical trials, obtaining the requisite regulatory approvals, scaling up
manufacturing, successfully commercializing the licensed product candidates and
otherwise performing their obligations to us. We cannot assure you that:
- we will be able to enter into joint ventures or other arrangements on
acceptable terms, if at all;
- our joint ventures or other arrangements will be successful;
- our joint ventures or other arrangements will lead to the successful
development and commercialization of any products;
- we will be able to obtain or maintain proprietary rights or licenses to
any technology or products developed in connection with our joint
ventures or other arrangements; or
- we will be able to preserve the confidentiality of any proprietary rights
or information developed in connection with our joint ventures or other
arrangements.
THE HAZARDOUS MATERIALS WE USE IN OUR RESEARCH AND DEVELOPMENT COULD
RESULT IN SIGNIFICANT LIABILITIES WHICH COULD EXCEED OUR INSURANCE COVERAGE AND
FINANCIAL RESOURCES.
We use some hazardous materials in our research and development
activities. While we believe we are currently in substantial compliance with
the federal, state and local laws and regulations governing the use of these
materials, we cannot assure you that accidental injury or contamination will
not occur. Any such accident or contamination could result in substantial
liabilities, which could exceed our insurance coverage and financial resources.
Additionally, we cannot assure you that the cost of compliance with
environmental and safety laws and regulations will not increase in the future.
19
RESIDUAL YEAR 2000 PROBLEMS COULD CAUSE A MATERIAL DISRUPTION IN OUR
BUSINESS.
Although all of our computer hardware and software has been upgraded for
Year 2000 compliance, all of our key vendors have provided assurance that they
are Year 2000 compliant and there were no related problems at the transition
into the Year 2000, any residual effect of the Year 2000 problem could cause a
material disruption in our business.
INDUSTRY RISKS
THE PHARMACEUTICAL AND AGROCHEMICAL INDUSTRIES ARE SUBJECT TO EXTENSIVE
GOVERNMENT REGULATION AND THERE IS 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 we will be able to obtain the necessary
approvals required to market our products in any of these markets. The testing,
marketing and manufacturing of our products will require regulatory approval,
including approval from the FDA and, in some cases, from the U.S. Environmental
Protection Agency, or the EPA, and the U.S. Department of Agriculture, or the
USDA, or governmental authorities outside of the United States that perform
roles similar to those of the FDA and EPA. Certain of our pharmaceutical
products in development also fall under the Controlled Substances Act of 1970,
or the CSA, which requires authorization by the U.S. Drug Enforcement Agency,
or the DEA, of the U.S. Department of Justice in order to handle and distribute
these products. It is not possible to predict how long the approval processes
of the FDA, EPA, DEA or any other applicable federal, state or foreign
regulatory authority or agency for any of our products will take or whether any
such approvals 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. Risks associated with the regulatory
approval process include:
- in general, preclinical tests and clinical trials can take many years,
and require the expenditure of substantial resources, and the data
obtained from these tests and trials can be susceptible to varying
interpretation that could delay, limit or prevent regulatory approval;
- 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, a regulatory agency's requirements for safety, efficacy
and quality or, in the case of a product seeking an orphan drug
indication, because another designee received approval first;
- requirements for approval may become more stringent due to changes in
regulatory agency policy, or the adoption of new regulations or
legislation;
- 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 continuing and on-going review, and discovery of previously
unknown problems with these products may result in restrictions on their
manufacture, sale or use or in their withdrawal from the market; and
- regulatory authorities and agencies may promulgate additional regulations
restricting the sale of our existing and proposed products.
Once approved, we cannot guarantee that the FDA will permit us to market
those products for broader or different applications, or that it will grant us
approval with respect to separate product applications which represent
extensions of our basic technology, or that existing approvals will not be
withdrawn or modified in a significant manner. In addition, it is possible that
the FDA will promulgate additional regulations restricting the sale of our
present or proposed products.
Labeling and promotional activities are subject to scrutiny by the FDA and
state regulatory agencies and, in some circumstances, by the Federal Trade
Commission. FDA enforcement policy prohibits the marketing of approved products
for unapproved, or off-label, uses. These regulations, and the FDA's
20
interpretation of them, may impair our ability to effectively market THALOMID
or other products which gain approval. The FDA actively enforces regulations
prohibiting promotion of off-label uses and the promotion of products for which
approval has not been obtained. Failure to comply with these requirements can
result in regulatory enforcement action by the FDA. The FDA is aware that
physicians prescribe THALOMID for off-label uses and has not, as of this date,
initiated any regulatory actions against us. FDA approval of THALOMID requires
that we distribute it under the rigid standards of our S.T.E.P.S. program in
order to maintain approval.
Delays in obtaining, or the failure to obtain and maintain, necessary
approvals from the FDA, EPA, DEA or other applicable regulatory authorities or
agencies for our proprietary products or regulatory enforcement actions by FDA
concerning our marketing practices would have a material adverse effect on our
business, financial condition and results of operations.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY.
Our success will depend, in part, on our ability to obtain and enforce
patents, protect trade secrets, obtain licenses to technology owned by third
parties, when necessary, and conduct our business without infringing upon the
proprietary rights of others. The patent positions of pharmaceutical firms,
including ours, can be uncertain and involve complex legal and factual
questions. In addition, the coverage sought in a patent application may not be
obtained or may be significantly reduced before the patent is issued.
Consequently, we do not know whether any of our 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. If any
of our issued or licensed patents are infringed, we cannot guarantee that we
will be successful in enforcing our intellectual property rights. Moreover, we
cannot assure you that we can successfully defend against any patent
infringement suit that may be brought against us by a third party. Patent
infringement lawsuits in the pharmaceutical and biotechnology industries can be
complex, lengthy and costly to both parties. Further, we rely upon unpatented
proprietary and trade secret technology that we try to protect, in part, by
confidentiality agreements with our collaborative partners, employees,
consultants, outside scientific collaborators, sponsored researchers and other
advisors. There can be no assurance that these agreements will not be breached
or that we would have adequate remedies for any such breach. We cannot assure
you that, despite precautions taken by us, others have not and will not obtain
access to our proprietary technology or that such technology will not be found
to be non-proprietary or not a trade secret. Our right to practice the
inventions claimed in some patents which relate to products under development
and THALOMID arises under licenses granted to us by others, including EntreMed,
Inc. and The Rockefeller University. While we believe these agreements to be
valid and enforceable, we cannot assure you that our rights under these
agreements will continue or that disputes concerning these agreement will not
arise. In addition, certain of the grants contained in the licenses granted to
us depend upon the validity and enforceability of other agreements to which we
are not a party.
THE PHARMACEUTICAL AND AGROCHEMICAL INDUSTRIES ARE HIGHLY COMPETITIVE AND
SUBJECT TO RAPID AND SIGNIFICANT TECHNOLOGICAL CHANGE.
The pharmaceutical and agrochemical industries in which we operate are
highly competitive and subject to rapid and significant technological change.
Our present and potential competitors include major chemical and pharmaceutical
companies, as well as specialized pharmaceutical firms. Most of these companies
have considerably greater financial, technical and marketing resources than us.
We also experience competition from universities and other research
institutions and, in some instances, we compete with others in acquiring
technology from these sources. The pharmaceutical and agrochemical industries
have undergone, and are expected to continue to undergo, rapid and significant
technological change, and we expect competition to intensify as technical
advances in each field are made and become more widely known. The development
of products or processes with significant advantages over those that we are
seeking to develop could have a material adverse effect on our business,
financial condition and results of operations.
21
SALES OF OUR PRODUCTS ARE DEPENDENT ON THIRD-PARTY REIMBURSEMENT.
Sales of our products will depend, in part, on the extent to which the
costs of our products will be paid by health maintenance, managed care,
pharmacy benefit and similar health care management organizations, or
reimbursed by government health administration authorities, private health
coverage insurers and other third-party payors. These health care management
organizations and third-party payors are increasingly challenging the prices
charged for medical products and services. Additionally, the containment of
health care costs has become a priority of federal and state governments, and
the prices of drugs have been targeted in this effort. We cannot assure you
that our 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 us to sell our products on a
profitable basis.
ITEM 2. PROPERTIES
We lease 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, and a 29,000-square foot
facility which has a term ending in July 2010 with two five-year renewal
options. We also lease an 18,000-square foot laboratory and office facility in
North Brunswick, New Jersey, under a lease with an unaffiliated party which has
a term ending in December 2009 with two five-year renewal options. We believe
that our laboratory facilities are adequate for our research and development
activities for at least the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
We are not engaged in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"CELG." The following table sets forth, for the periods indicated, the
intra-day high and low sale prices per share of common stock on the Nasdaq
National Market:
HIGH LOW
---------- ----------
1999 ...........................
Fourth Quarter ............... $72 5/8 $24 3/4
Third Quarter ................ 29 14
Second Quarter ............... 20 1/16 13 9/16
First Quarter ................ 18 5/8 11 5/16
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
The last reported sales price per share of common stock on the Nasdaq
National Market on March 21, 2000 was $117 13/16. As of March 21, 2000, there
were approximately 450 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate paying any cash dividends on our common stock in
the foreseeable future.
23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data should be read in
conjunction with the our Consolidated Financial Statements and the related
Notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial information included elsewhere in
this Annual Report. The data set forth below with respect to our Consolidated
Statements of Operations for the years ended December 31, 1997, 1998 and 1999
and the balance sheet data as of December 31, 1998 and 1999 are derived from
our Consolidated Financial Statements which have been audited by KPMG LLP,
independent certified public accountants, and which are included elsewhere in
this Annual Report and are qualified by reference to such Consolidated
Financial Statements and related Notes thereto. Some information has been
derived from other audited consolidated financial statements. Our historical
results are not necessarily indicative of future results of operations.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------------- ---------------- ---------------- ---------------- ----------------
Statements of Operations Data:
Total revenues .......................... $ 472,000 $ 881,665 $ 1,122,193 $ 3,800,490 $ 26,209,624
Loss from continuing operations ......... (8,366,380) (17,057,521) (25,019,844) (32,022,873) (21,781,200)
Discontinued operations:
Loss from operations .................... (2,150,143) (761,461) (427,183) (59,837) --
Gain on sale of chiral assets ........... -- -- -- 7,014,830 --
Net loss applicable to common
stockholders .......................... $ (10,516,523) $ (21,609,640) $ (26,921,501) $ (25,092,528) $ (21,781,200)
============= ============= ============= ============= =============
Per share of common stock-- basic
and diluted:
Loss from continuing operations ......... $ (1.04) $ (1.81) $ (2.05) $ (1.98) $ (1.20)
Discontinued operations:
Loss from operations .................... (0.27) (0.08) (0.03) -- --
Gain on sale of chiral assets ........... -- -- -- 0.43 --
Net loss applicable to common
stockholders .......................... (1.30) $ (2.29) $ (2.20) $ (1.55) $ (1.28)
============= ============= ============= ============= =============
Weighted average number of shares
outstanding ........................... 8,073,000 9,450,000 12,215,000 16,160,000 17,012,000
DECEMBER 31,
---------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------------- ---------------- ----------------- ----------------- -----------------
Balance Sheet Data:
Cash and cash equivalents, and
marketable securities ................ $ 11,712,905 $ 17,814,984 $ 13,583,445 $ 5,123,843 $ 19,526,643
Assets held for disposal ............... -- -- 485,170 -- --
Total assets ........................... 14,211,218 20,937,862 18,217,456 11,927,997 32,333,670
Convertible debentures ................. 4,592,366 2,026,043 -- -- --
Convertible notes ...................... -- -- -- 8,348,959 38,494,795
Accumulated deficit .................... (70,989,400) (92,599,039) (119,520,540) (144,613,068) (166,394,268)
Stockholders' equity (deficit) ......... 7,142,501 16,065,009 15,425,092 (3,732,624) (15,709,386)
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We were organized in 1980 as a unit of Celanese Corporation, a chemical
company. Our 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, we were spun off as an independent company.
In July 1987, we completed an initial public offering of our common stock and
commenced the development of chemical and biotreatment processes for the
chemical and pharmaceutical industries. We discontinued the biotreatment
operations in 1994 to focus on our targeted small molecule cancer and
immunology compound development programs and our biocatalytic chiral chemistry
program.
Since 1990, our revenues have been generated primarily through 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 we
developed our cancer and immunology programs, sales of chirally pure
intermediates became a less integral part of our strategic focus. Accordingly,
on January 9, 1998, we completed the sale of our chiral intermediate business
to Cambrex Corporation for $15.0 million. The terms of the sale provided for a
payment of $7.5 million at closing and an additional amount of future royalties
not to exceed the net present value on the date of contract of $7.5 million,
with a guarantee of certain minimum payments beginning in the third year after
closing.
In late September 1998, we commenced sales of our first commercial
product, THALOMID.
We have sustained losses in each year since our inception in 1986. In
1999, we had a net loss of $21.8 million and at December 31, 1999, had an
accumulated deficit of $166.4 million. We expect to make substantial
expenditures to further commercialize and develop THALOMID, develop our
oncology and immunology programs and expand our chiral business. Based on these
expenditures, it is likely that losses will continue for at least the next six
months.
Subject to the risks described elsewhere in this Annual Report on Form
10-K, we believe that there are significant market opportunities for the
products and processes under development by us. To address these opportunities
in a timely and effective manner, we intend to seek out collaborations and
licensing arrangements with third parties. We have entered into agreements
covering the manufacture and distribution for us of certain compounds, such as
THALOMID, and the development by us of processes for producing chirally pure
crop protection agents for license to agrochemical manufacturers. This
development is performed through Celgro Corporation, our wholly owned
subsidiary.
We have established a commercial organization to sell THALOMID and we
currently employ 60 persons in this capacity. We intend to develop and market
our own pharmaceuticals for indications with accessible patient populations.
For drugs with indications for larger patient populations, we anticipate
partnering with other pharmaceutical companies. We also anticipate partnering
with companies for the development and commercialization of our chirally pure
pharmaceutical and agrochemical products. We expect that these arrangements
typically will include milestone payments, reimbursement of research and
development expenses and royalty arrangements.
Future operating results will depend on many factors, including demand for
our products, regulatory approvals of our products, the timing of the
introduction and market acceptance of new products by us or competing
companies, the timing of research and development milestones and our ability to
control costs.
RESULTS OF OPERATIONS
Fiscal Years Ended December 31, 1999, 1998 and 1997
Total revenues. Total revenues in 1999 increased significantly to
approximately $26.2 million from $3.8 million in 1998. The increase resulted
from our first full year of product sales of THALOMID in 1999 of approximately
$24.1 million compared with $3.3 million of THALOMID sales in 1998. The 1998
sales
25
of THALOMID reflected only a partial year of sales, starting from the launch
date at the end of the third quarter. Revenue from research contracts increased
to $2.2 million in 1999 from $535,000 in 1998 and included a milestone payment
of $500,000 related to ATTENADE. The 1998 revenues increased by 238% 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 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.
Cost of goods sold. Cost of goods sold in 1999 was approximately $3.0
million compared with approximately $282,000 in 1998. The cost of goods sold in
both years does not reflect raw material or formulation and encapsulation costs
of Thalomid, as these costs were charged as research and development expenses
prior to receiving FDA approval. There was no cost of goods sold in 1997.
Research and development expenses. Research and development expenses for
1999 were slightly lower at approximately $19.6 million compared with
approximately $19.8 million in 1998. Increased spending for clinical trials,
primarily for ATTENADE, was offset by a decrease in regulatory consulting fees,
university research program spending, and spending for THALOMID capsules which
was charged as research and development expense prior to receiving FDA approval
in July of 1998. Research and development expenses for 1998 increased by 14% to
approximately $19.8 million from approximately $17.4 million in 1997. This
increase was primarily due to an increase of approximately $1.5 million for the
our chiral pharmaceutical program primarily for clinical trials and preclinical
toxicology studies and approximately $780,000 relating to the our
immunotherapeutic program, primarily for clinical trials for potential new NDA
filings for THALOMID.
Selling, general and administrative expenses. Selling, general and
administrative expenses for 1999 increased by 62% over 1998, from approximately
$16.2 million to approximately $26.2 million. The increase was primarily in
sales and marketing expenses, approximately $3.6 million, warehousing and
distribution expenses, approximately $3.4 million, and expenditures relating to
medical affairs and drug safety costs, approximately $730,000, all to support
the commercialization and distribution of THALOMID.
Selling, general and administrative expenses for 1998 increased by 77% 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 primarily 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.
Interest income and interest expense. Interest income for 1999 of $694,000
was slightly down from $705,000 in 1998 as average cash balances were
approximately the same in both years. 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 expense in 1999 was significantly higher than 1998, at
approximately $2.8 million compared with approximately $256,000 in 1998. The
higher interest expense resulted from the interest on the three convertible
notes which were issued in September 1998, January 1999 and July 1999. 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 notes
issued in September 1998.
Loss from continuing operations. The loss from continuing operations
decreased 32% in 1999 compared with 1998, to approximately $21.8 million from
approximately $32.0 million. The decreased loss resulted from the higher gross
profit on THALOMID sales and an income tax benefit of $3.0 million from the
sale of a portion of our New Jersey state net operating loss carryforwards,
offset by increased selling, general and administrative costs and higher
interest expense. The loss from continuing operations increased 28% to
approximately $32.0 million in 1998 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.
26
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 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in 1986, we have financed our working capital
requirements primarily through private and public sales of our 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. As of
December 31, 1999, we have raised approximately $100.0 million in net proceeds
from three public and three private offerings, including our initial public
offering in July 1987. We also issued convertible notes in September 1998,
January 1999, and July 1999 with net proceeds aggregating approximately $38.0
million.
Our net working capital at December 31, 1999 increased significantly to
approximately $18.5 million (primarily cash and cash equivalents) from
approximately $2.5 million at December 31, 1998. The increase in working
capital was primarily due to the cash received from the issuance of the
convertible notes in 1999 and 1998 as well as collection of receivables on
sales of THALOMID.
Cash and cash equivalents increased by $12.2 million in 1999 while
marketable securities increased by $2.2 million from 1998. This reflects the
receipt of funds from the issuance of the convertible notes and collection of
receivables from sales of THALOMID.
We expect that our rate of spending will increase as the result of
increased clinical trial costs, increased expenses associated with the
regulatory approval process and commercialization of products currently in
development, increased costs related to the commercialization of THALOMID and
increased working capital requirements. On February 16, 2000, we completed a
public offering of 3,450,000 shares of our common stock. Proceeds from the
transaction net of expenses, were approximately $278.0 million. These funds
plus the increasing revenues from sales of THALOMID should fund our operations
for the foreseeable future.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements ("SAB 101"). SAB 101 summarizes certain of the staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements, including the recognition of
non-refundable fees received upon entering into arrangements. We are in the
process of evaluating this SAB and the effect it will have on our future
consolidated financial statements and future revenue recognition policy.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
All of our computer hardware and software has been upgraded for Year 2000
compliance. All of our key vendors have provided assurance that they are Year
2000 compliant. While there were no Year 2000 related problems at the
transition into the Year 2000, we are maintaining our contingency plans in the
event any problems arise in the future.
The statement contained in the foregoing Year 2000 readiness disclosures
is subject to protection under the Year 2000 Information and Readiness
Disclosure Act.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We do not use derivative financial instruments. Our convertible notes have
a fixed interest rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14 of this Annual Report.
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
- --------------------------------------- ----- --------------------------------------------------
John W. Jackson* ...................... 55 Chairman of the Board and Chief Executive
Officer
Sol J. Barer, Ph.D.* .................. 52 President, Chief Operating Officer, Director
Robert J. Hugin* ...................... 45 Chief Financial Officer and Senior Vice President
Jack L. Bowman ........................ 67 Director
Frank T. Cary ......................... 79 Director
Arthur Hull Hayes, Jr., M.D. .......... 66 Director
Gilla Kaplan, Ph.D. ................... 52 Director
Richard C. E. Morgan .................. 55 Director
Walter L. Robb, Ph.D. ................. 71 Director
Lee J. Schroeder ...................... 71 Director
- ----------
* Executive Officer
JOHN W. JACKSON has been our Chairman of the Board and Chief Executive
Officer since January 1996. From February 1991 to January 1996, Mr. Jackson was
President of Gemini Medical, a consulting firm that he founded and which
specialized in services and investment advice to start-up medical device and
biotechnology companies. 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. Mr. Jackson
received a B.A. degree from Yale University and an M.B.A. from INSEAD, France.
SOL J. BARER, PH.D. has been our President since October 1993 and our
Chief Operating Officer and one of our directors since March 1994. Dr. Barer
was our Senior Vice President -- Science and Technology and Vice
President/General Manager -- Chiral Products from October 1990 to October 1993
and our Vice President -- Technology from September 1987 to October 1990. Dr.
Barer received a Ph.D. in organic and physical chemistry from Rutgers
University.
ROBERT J. HUGIN has been our Senior Vice President and Chief Financial
Officer since June 1999. Previously, Mr. Hugin had been a Managing Director at
J.P. Morgan & Co. Inc., which he joined in 1985. Mr. Hugin received an A.B.
degree from Princeton University and an M.B.A. from the University of Virginia.
JACK L. BOWMAN, one of our directors 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.
FRANK T. CARY has been Chairman of the Executive Committee of our board of
directors since July 1990 and has been one of our directors 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., Lexmark
International Inc., Vion Pharmaceuticals Inc. and Teltrend, Inc.
ARTHUR HULL HAYES, JR., M.D., one of our directors since 1995, has been
President and Chief Operating Officer of MediScience Associates, 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
29
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 United States Food and
Drug Administration. Dr. Hayes also is a director of Myriad Genetics, Inc.,
NaPro BioTherapeutics, Inc. and Premier Research Worldwide.
GILLA KAPLAN, PH.D., one of our directors 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, and 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.
RICHARD C. E. MORGAN, one of our directors since 1987, is a co-founder,
Chairman and Chief Executive Officer of incuVest LLC and a Managing Partner and
co-founder of Amphion Capital Management LLC. Prior to founding Amphion, he was
Managing General Partner of Wolfensohn Partners, L.P., the predecessor to
Amphion Ventures L.P. Mr. Morgan also serves as Chairman of AXCESS, Inc.,
Quidel Corp., ONTOS, Inc., IVEX Corporation and Quantrad, Inc. In addition, he
serves on the Board of Directors of ChromaVision Medical Systems, Inc. and
Indigo NV.
WALTER L. ROBB, PH.D., one of our directors 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 Capital District Sports and a director of
Cree Research Inc., Mechanical Technology, Inc. and Plug Power, Inc.
LEE J. SCHROEDER, one of our directors 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 Bryan LGH Hospital, MGI Pharmaceutical, Inc.,
Ascent Pediatrics, Inc. and Interneuron Pharmaceuticals, Inc.
ELECTION OF DIRECTORS
Each director holds office (subject to our 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.
30
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 1999 300,000 390,000 19,200(1) 0 220,000 13,390(2)
Chairman and 1998 285,000 79,800 19,200(1) 0 100,000 13,390(2)
Chief Executive 1997 270,000 97,200 9,500(1) 0 0 13,390(2)
Officer
Sol J. Barer, Ph.D. 1999 255,833 230,250 19,200(1) 0 70,000 0
President and 1998 243,333 51,100 19,200(1) 0 50,000 0
Chief Operating 1997 232,500 63,647 9,500(1) 0 0 0
Officer
Robert J. Hugin 1999 127,385(3) 168,000 7,200 0 150,000 0
Sr. V. P. & Chief
Financial Officer
- ----------
(1) Reflects matching contributions under the Company's 401K plan.
(2) Reflects life insurance premiums for a life insurance policy for Mr.
Jackson.
(3) Mr. Hugin commenced his employment with the Company in June, 1999.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
John W. Jackson, Sol J. Barer and Robert J. Hugin (each an "Executive")
are employed pursuant to substantially similar employment agreements (the
"Employment Agreements") providing for their continued employment until January
1, 2003 (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 six months prior to the expiration of the Employment
Period. The Employment Agreements provide Messrs. Jackson, Barer and Hugin with
a base salary (which may be increased by the Board of Directors, or a committee
thereof) of $300,000, $258,000 and $240,000, respectively, per annum. In
addition, each of the Employment Agreements provides for an annual bonus in an
amount equal to 65%, 45% and 35%, respectively, of Executive's base salary
measured against objective criteria to be determined by the Board of Directors,
or a committee thereof after good faith consultation with each Executive. The
Employment Agreements also provide that Messrs. Jackson, Barer and Hugin 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 or due to Executive's
disability, he shall be entitled to receive a lump-sum payment in an amount
equal to Executive's annual base salary and a pro rata share of Executive's
annual target bonus. Upon the occurrence of a change in control (as defined in
the Employment Agreements) and thereafter, each Employment Agreement provides
that if, (a) at any time within one year of a change in control Executive's
employment is terminated by the Company without cause or for disability or by
Executive for good reason (as defined in the Employment Agreement) or (b) at
any time within 90 days prior to a change in control, Executive's employment is
terminated by the Company without cause or by Executive for good reason,
Executive shall be entitled to receive: (i) a lump sum payment in an amount
equal to three times Executive's base salary and three
31
times Executive's highest annual bonus within the three years prior to the
change in control; (ii) any accrued benefits; (iii) payment of health and
welfare premiums for Executive and his dependants; and (iv) full and immediate
vesting of all stock options and equity awards; provided, however, that such
payment shall be reduced by any payments made to Executive prior to the change
in control pursuant to Sections 10(a)(iv) and (v) of the Employment Agreements.
Each Employment Agreement also provides that Executive shall be entitled to
receive a gross-up payment on any payments made to Executive that are subject
to the excise tax imposed by Section 4999 of the Internal Revenue Code, except
that a gross-up will not be made if the payments made to Executive do not
exceed 105% of the greatest amount that could be paid to Executive such that
the receipt of payments would not give rise to the excise tax. Each Executive
is subject to a non-compete which applies during the period the Executive is
employed and until the first anniversary of the date Executive's employment
terminates (the non-compete applies to the second anniversary of the date
Executive's employment terminates if the Executive receives change in control
payments and benefits).
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, 1999 and the value of outstanding and unexercised options held as
of December 31, 1999. There were no SARs exercised during 1999 and none were
outstanding as of December 31, 1999.
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, 1999 AT DECEMBER 31, 1999
ON EXERCISE REALIZED ----------------------------- ----------------------------
NAME ($) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ------------- --------- ------------- --------------- ------------- --------------
John W. Jackson ............. -- -- 206,423 286,667 $11,850,905 $15,640,820
Sol J. Barer, Ph.D. ......... -- -- 250,746 103,334 $10,205,964 $ 5,740,441
Robert J. Hugin ............. -- -- -- 150,000 -- $ 8,156,250
- ----------
(1) Represents the difference between the closing market price of the Common
Stock as reported by Nasdaq on December 31, 1999 of $70 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 our executive compensation policies.
The Compensation Committee determines the compensation of our 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
Our 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, commercial, and individual goals.
We do 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.
32
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 we compete for our 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 and third party industry surveys.
Under our 1998 incentive program, it was agreed that each year, subject to
the achievement of certain goals by the Company, we would grant at certain
dates pursuant to approval of the compensation committee of the Board of
Directors, 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 $300,000 for 1999. Mr. Jackson also received a bonus of $390,000 for
1999. Factors considered in determining Mr. Jackson's bonus included the
successful attainment of several important milestones in the development of our
products, as well as comparisons to total compensation packages of chief
executive officers at corporations within our 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.
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.
33
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 1999, pursuant to the 1995 Directors' Plan, each of Messrs. Bowman,
Cary, Hayes, Morgan, Robb, Schroeder and Dr. Kaplan received an option to
purchase 10,000 shares of Common Stock at an exercise price of $15.625 per
share, the fair market value of the stock on the date of the grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth the beneficial ownership of the Common Stock as
of February 29, 2000 (i) by each director, (ii) by each of the named executive
officers, (iii) by all directors and executive officers of Celgene 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 BENEFICIAL PERCENT OF
NAME OWNERSHIP CLASS
- ---------------------------------------------------------------- ---------------------- -----------
John W. Jackson ................................................ 388,133(1) 1.8%
Sol J. Barer, Ph.D. ............................................ 232,427(1)(2) 1.1%
Robert J. Hugin ................................................ 11,667(1) *
Frank T. Cary .................................................. 97,780 *
Arthur Hull Hayes, Jr., M.D .................................... 40,000(1) *
Richard C. E. Morgan ........................................... 79,090(1)(3) *
Walter L. Robb, Ph.D. .......................................... 100,000(1) *
Lee J. Schroeder ............................................... 56,000(1) *
Gilla Kaplan, Ph.D. ............................................ 16,700(1) *
Jack L. Bowman ................................................. 12,700(1) *
All directors and current executive officers of the Company as a
group (ten persons) ........................................... 1,034,497(4) 4.7%
Donald P. Moriarty (5)
c/o McGrath, Doyle & Phair
150 Broadway
New York, NY 10038 ............................................ 1,122,500 (5) 5.3%
Pilgrim Baxter & Associates Ltd.
825 Duportail Road
Wayne, PA 19087 ............................................... 1,084,500(6) 5.1%
- ----------
* 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 February 29, 2000, as follows: John W. Jackson -- 327,123; Sol J. Barer
-- 232,412; Robert J. Hugin -- 11,667; Frank T. Cary -- 0; Arthur Hull
Hayes, Jr. -- 40,000; Richard C. E. Morgan -- 25,000 shares; Walter L.
Robb -- 64,000; Lee J. Schroeder -- 20,000; Gilla Kaplan -- 16,700; Jack
Bowman -- 11,700. 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
34
of February 29, 2000, as follows: John W. Jackson -- 246,667; Sol J. Barer
-- 96,668; Robert J. Hugin -- 173,333; Frank T. Cary -- 10,000; Arthur Hull
Hayes, Jr. -- 10,000; Richard C. E. Morgan -- 10,000; Walter L. Robb --
10,000; Lee J. Schroeder -- 10,000; Gilla Kaplan -- 25,333; and Jack L.
Bowman -- 20,000.
(2) 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 with respect to Mr. Morgan, 90 shares owned by the son of Mr.
Morgan, as to which shares Mr. Morgan disclaims beneficial ownership.
(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 was obtained from a Schedule 13D,
as amended, filed with the Securities and Exchange Commission. Such
Schedule 13D states that Mr. Moriarty is deemed to be the beneficial owner
of and to have sole dispositive power over all such shares of Common
Stock, and that such shares are held by Mr. Moriarty, his family members,
and Twin Oaks Partners, a partnership in which Mr. Moriarty is a general
partner.
(6) Information regarding Pilgrim Baxter & Associates Ltd. was obtained from a
Schedule 13G, filed by it with the Securities and Exchange Commission.
Such Schedule 13G states that Pilgrim Baxter & Associates Ltd. is the
beneficial owner of and has the sole dispositive power over all such
shares of Common Stock and has sole voting power over 852,500 of those
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(a)(1), (a)(2) See Index to Consolidated Financial Statements and
Consolidated Financial Statement Schedule immediately following Exhibit Index.
(b) None
(c) Exhibits
The following exhibits are filed with this report:
EXHIBIT
NO. EXHIBIT DESCRIPTION
- -------- ---------------------------------------------------------------------------------------
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 A
to the Company's Proxy Statement, dated May 24, 1999).
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).
35
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
10.5 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 Employment Agreement dated as of January 1, 2000 between the Company and John W.
Jackson.
10.11 Employment Agreement dated as of January 1, 2000 between the Company and Sol J.
Barer.
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.
10.18 Employment Agreement dated as of January 1, 2000 between the Company and Robert
J. Hugin.
10.19 Convertible Note Purchase Agreement, dated September 16, 1998 between the
Company and Warburg Dillon Read LLC.
10.20 9.25% Convertible Note Due September 16, 2003.
10.21 Registration Rights Agreement dated as of September 16, 1998 between the Company
and Warburg Dillon Read LLC.
36
10.22 Note Purchase Agreement dated January 20, 1999 between the Company and the
Purchasers named on Schedule I to the agreement in connection with the purchase of
$15,000,000 principal amount of the Company's 9.00% Senior Convertible Note Due
January 20, 2004.
10.23 Form of 9.00% Senior Convertible Note Due January 20, 2004.
10.24 Registration Rights Agreement dated as of January 20, 1999 between the Company and
the Purchasers in connection with the issuance of the Company's 9.00% Senior
Convertible Note Due January 20, 2004.
10.25 Note Purchase Agreement dated July 6, 1999 between the Company and the Purchasers
named in Schedule I to the agreement in connection with the purchase of $15,000,000
principal amount of the Company's 9.00% Senior Convertible Note Due June 30, 2004.
10.26 Form of 9.00% Senior Convertible Note Due June 30, 2004.
10.27 Registration Rights Agreement dated as of July 6, 1999 between the Company and the
Purchasers in connection with the issuance of the Company's 9.00% Senior Convertible
Note Due June 30, 2004.
23.1 Consent of KPMG LLP
24.1 Power of Attorney (included in Signature Page).
* 27. Financial Data Schedule
- ------------------
* Previously Filed
37
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person or entity whose signature
appears below constitutes and appoints John W. Jackson, Sol J. Barer and Robert
J. Hugin, and each of them, its true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for it and in its name,
place and stead, in any and all capacities, to sign any and all amendments to
this Form 10-K and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all contents and purposes as it might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CELGENE CORPORATION
By /s/ John W. Jackson
-----------------------------
John W. Jackson
Chairman of the Board and
Chief Executive Officer
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- -------------------------------- --------------------------------------- ---------------
/s/ John W. Jackson Chairman of the Board and March 30, 2000
--------------------------- Chief Executive Officer
John W. Jackson
/s/ Sol J. Barer President and Chief Operating Officer March 30, 2000
---------------------------
Sol J. Barer
/s/ Jack L. Bowman Director March 30, 2000
---------------------------
Jack L. Bowman
/s/ Frank T. Cary Director March 30, 2000
---------------------------
Frank T. Cary
Director March 30 2000
---------------------------
Arthur Hull Hayes, Jr.
/s/ Gilla Kaplan Director March 30, 2000
---------------------------
Gilla Kaplan
/s/ Richard C.E. Morgan Director March 30, 2000
---------------------------
Richard C. E. Morgan
/s/ Walter L. Robb
- ---------------------------
Walter L. Robb Director March 30, 2000
Director March 30, 2000
---------------------------
Lee J. Schroeder
/s/ Robert J. Hugin Senior Vice President & Chief March 30, 2000
--------------------------- Financial Officer
Robert J. Hugin
/s/ James R. Swenson Controller (Chief Accounting Officer) March 30, 2000
---------------------------
James R. Swenson
The foregoing constitutes a majority of the directors.
CELGENE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Consolidated Financial Statements
Independent Auditors' Report ............................................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 ............................ F-3
Consolidated Statements of Operations - Years Ended December 31, 1997, 1998, and 1999 ... F-4
Consolidated Statements of Stockholders' Equity (Deficit) - Years Ended December 31,
1997,98 and 1999 ......................................................................... F-5
Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1998 and 1999 .... F-6
Notes to Consolidated Financial Statements .............................................. F-8
Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts ......................................... F-20
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CELGENE CORPORATION:
We have audited the consolidated financial statements of Celgene
Corporation and subsidiary as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the consolidated financial statement schedule as listed in the accompanying
index. These consolidated financial statements and consolidated financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Celgene
Corporation and subsidiary as of December 31, 1998 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
Short Hills, New Jersey
January 27, 2000, except
as to note 14, which is as
of February 16, 2000
F-2
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------------
1998 1999
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 3,066,953 $ 15,255,422
Marketable securities available for sale ........................... 2,056,890 4,271,221
Accounts receivable, net of allowance of $43,386 and $121,437 at
December 31, 1998 and 1999, respectively .......................... 2,662,389 4,928,472
Inventory .......................................................... 1,571,408 2,456,059
Other current assets ............................................... 229,060 895,602
-------------- --------------
Total current assets ............................................ 9,586,700 27,806,776
Plant and equipment, net ........................................... 2,262,130 2,336,242
Other assets ....................................................... 79,167 2,190,652
-------------- --------------
Total assets .................................................... $ 11,927,997 $ 32,333,670
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ................................................... $ 3,848,853 $ 2,358,563
Accrued expenses ................................................... 3,041,859 6,761,889
Capitalized lease obligation ....................................... 225,372 179,885
-------------- --------------
Total current liabilities ....................................... 7,116,084 9,300,337
Capitalized lease obligation-net of current portion ................ 195,578 22,924
Other non-current liabilities ...................................... -- 225,000
Long term convertible notes ........................................ 8,348,959 38,494,795
-------------- --------------
Total liabilities ............................................... 15,660,621 48,043,056
-------------- --------------
Stockholders' deficit:
Preferred stock,$.01 par value per share 5,000,000 authorized; none
outstanding at December 31,1998 and 1999 ..........................
Common stock, $.01 par value per share 30,000,000 authorized; issued
and outstanding 16,612,973 and 17,703,646 shares at December 31,
1998 and December 31,1999, respectively ........................... 166,130 177,036
Additional paid-in capital ......................................... 140,714,314 150,599,750
Accumulated deficit ................................................ (144,613,068) (166,394,268)
Accumulated other comprehensive loss ............................... -- (91,904)
-------------- --------------
Total stockholders' deficit ..................................... (3,732,624) (15,709,386)
-------------- --------------
Total liabilities and stockholders' deficit ..................... $ 11,927,997 $ 32,333,670
============== ==============
See accompanying notes to consolidated financial statements.
F-3
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1998 1999
---------------- ---------------- -----------------
Revenues:
Product sales ............................... $ -- $ 3,265,490 $ 24,052,124
Research contracts .......................... 1,122,193 535,000 2,157,500
------------- ------------- -------------
Total revenues ............................ 1,122,193 3,800,490 26,209,624
------------- ------------- -------------
Expenses: ....................................
Cost of goods sold .......................... -- 282,307 2,982,713
Research and development .................... 17,380,390 19,771,953 19,646,129
Selling, general and administrative ......... 9,145,456 16,218,486 26,235,802
------------- ------------- -------------
Total expenses ........................... 26,525,846 36,272,746 48,864,644
------------- ------------- -------------
Operating loss ............................... (25,403,653) (32,472,256) (22,655,020)
Other income and expense:
Interest income ............................. 495,580 705,215 694,390
Interest expense ............................ 111,771 255,832 2,838,480
------------- ------------- -------------
Loss before tax benefit ...................... (25,019,844) (32,022,873) (24,799,110)
Tax benefit (note 9) ......................... -- -- 3,017,910
------------- ------------- -------------
Loss from continuing operations .............. (25,019,844) (32,022,873) (21,781,200)
Discontinued operations: (note 10)
Loss from operations ........................ (427,183) (59,837) --
Gain on sale of chiral assets ............... -- 7,014,830 --
------------- ------------- -------------
Net loss ..................................... (25,447,027) (25,067,880) (21,781,200)
Accretion of premium payable on
preferred stock and warrants ................ 521,397 24,648 --
Deemed dividend for preferred stock
conversion discount ......................... 953,077 -- --
------------- ------------- -------------
Net loss applicable to common
stockholders ................................ $ (26,921,501) $ (25,092,528) $ (21,781,200)
============= ============= =============
Per share basic and diluted: (note 2)
Loss from continuing operations ............. $ (2.05) $ (1.98) $ (1.28)
Discontinued operations:
Loss from operations ...................... ( 0.03) ( 0.00) --
Gain on sale of chiral assets ............. -- 0.43 --
Net loss applicable to common
stockholders .............................. $ (2.20) $ (1.55) $ (1.28)
============= ============= =============
Weighted average number of shares of
common stock outstanding .................... 12,215,000 16,160,000 17,012,000
============= ============= =============
See accompanying notes to consolidated financial statements.
F-4
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
COMMON STOCK PREFERRED STOCK TREASURY STOCK
------------------------ ---------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ----------- ----------- ---------------- ------------ --------------
Balances at January 1, 1997 ................. 10,611,422 $106,114 267 $ 13,883,416 (29,985) $ (100,239)
Exercised stock options ..................... 2,986 30
Shares issued in lieu of cash bonus ......... 5,000 50
Amortization of deferred compensation .
Conversion of convertible debenture ........ 441,248 4,412
Issuance of Series B Preferred Stock - net 5,000 4,046,923
Conversion of preferred stock ............... 2,166,193 21,662 (5,180) (14,654,071)
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 loss:
Net loss ...................................
Net change in unrealized gain (loss) on
investment securities ......................
Total comprehensive loss ....................
Treasury shares issued ...................... 7,097 23,704
Issuance of common stock, net ............... 2,201,100 22,011
---------- --------
Balances at December 31, 1997 ............... 15,427,949 $154,279 74 $ 4,029,455 (22,888) $ (76,535)
Exercised stock options ..................... 283,120 2,831
Exercise of warrants ........................ 118,230 1,183
Costs related to secondary offering .........
Conversion of preferred stock ............... 575,669 5,757 (74) (4,054,103)
Accretion of premium on preferred stock 24,648
Shares issued for employee benefit plans 8,317 83 22,888 76,535
Sale of common stock ........................ 199,688 1,997
Net loss and comprehensive loss .............
Balances at December 31, 1998 ............... 16,612,973 $166,130 -- $ -- -- $ --
Exercised stock options ..................... 949,323 9,493
Exercise of warrants ........................ 59,434 594
Shares issued for employee benefit plans 81,916 819
Issuance of options related to license
agreement ..................................
Comprehensive loss:
Net loss ...................................
Net change in unrealized gain (loss) on
investment securities ......................
Total comprehensive loss ...................
Balances at December 31, 1999 .............. 17,703,646 $177,036 -- $ -- -- $ --
========== ======== ====== ============== ======= ==========
ACCUMULATED
OTHER
ADDITIONAL UNAMORTIZED COMPREHENSIVE
PAID-IN DEFERRED ACCUMULATED INCOME
CAPITAL COMPENSATION DEFICIT (LOSS) TOTAL
--------------- -------------- ------------------ -------------- -----------------
Balances at January 1, 1997 ................. $ 94,770,176 $ (1,133) $ (92,599,039) $ 5,714 $ 16,065,009
Exercised stock options ..................... 20,187 20,217
Shares issued in lieu of cash bonus ......... 55,575 55,625
Amortization of deferred compensation . 1,133 1,133
Conversion of connvertible debenture ........ 2,326,892 2,331,304
Issuance of Series B Preferred Stock - net 793,825 4,840,748
Conversion of preferred stock ............... 14,632,409 --
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 loss:
Net loss ................................... (25,447,027) (25,447,027)
Net change in unrealized gain (loss) on
investment securities ...................... (5,714) (5,714)
-------------
Total comprehensive loss .................... (25,452,741)
-------------
Treasury shares issued ...................... 55,250 78,954
Issuance of common stock, net ............... 18,184,119 18,206,130
------------ -------------
Balances at December 31, 1997 ............... $130,838,433 $ -- $ (119,520,540) $ -- $ 15,425,092
Exercised stock options ..................... 2,028,715 2,031,546
Exercise of warrants ........................ 986,883 988,066
Costs related to secondary offering ......... (73,136) (73,136)
Conversion of preferred stock ............... 4,048,346 --
Accretion of premium on preferred stock (24,648) --
Shares issued for employee benefit plans 387,070 463,688
Sale of common stock ........................ 2,498,003 2,500,000
Net loss and comprehensive loss ............. (25,067,880) (25,067,880)
-------------- -------------
Balances at December 31, 1998 ............... $140,714,314 $ -- $ (144,613,068) $ -- $ (3,732,624)
Exercised stock options ..................... 8,028,139 8,037,632
Exercise of warrants ........................ 361,398 361,992
Shares issued for employee benefit plans 799,004 799,823
Issuance of options related to license
agreement .................................. 696,895 696,895
Comprehensive loss:
Net loss ................................... (21,781,201) (21,781,201)
Net change in unrealized gain (loss) on
investment securities ...................... (91,904) (91,904)
Total comprehensive loss ................... (21,873,105)
-------------
Balances at December 31, 1999 .............. $150,599,750 $ -- $ (166,394,269) $ (91,904) $ (15,709,387)
============ ========= ============== ========= =============
See accompanying notes to consolidated financial statements.
F-5
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
Cash flows from operating activities:
Loss from continuing operations ............................... $ (25,019,844) $ (32,022,873) $ (21,781,200)
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities:
Depreciation ............................................... 380,364 812,555 993,389
Provision for losses on accounts receivable ................ -- 43,386 78,051
Amortization of convertible debt costs ..................... 126,577 -- --
Amortization of deferred compensation ...................... 1,133 -- --
Interest on convertible debentures ......................... 68,736 -- --
Issuance of stock award .................................... 55,625 -- --
Amortization of debt issuance costs ........................ -- -- 250,000
Amortization of discount on convertible note ............... -- -- 145,836
Shares issued for employee benefit plans ................... 78,954 463,688 799,823
Change in current assets & liabilities:
Increase in inventory ........................................ -- (1,571,408) (884,651)
Increase(decrease) in accounts payable and accrued
expenses ................................................... (379,091) 4,659,517 2,454,740
Increase in accounts receivable .............................. (1,051,789) (1,275,391) (2,344,133)
(Increase)decrease in other assets ........................... 150,304 124,206 (416,544)
------------- ------------- -------------
Net cash used in continuing operations ........................ (25,589,031) (28,766,320) (20,704,689)
Net cash used in discontinued operations ...................... (302,996) (59,837) --
------------- ------------- -------------
Net cash used in operating activities ......................... (25,892,027) (28,826,157) (20,704,689)
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures .......................................... (1,240,775) (788,661) (1,782,090)
Proceeds from sales and maturities of marketable
securities available for sale ................................ 47,470,593 8,559,604 2,495,992
Purchases of marketable securities available for sale ......... (30,584,284) (10,616,494) (4,802,227)
Proceeds from sale of chiral assets ........................... -- 7,500,000 --
Purchase of license rights .................................... -- -- (450,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities ........... 15,645,534 4,654,449 (4,538,325)
------------- ------------- -------------
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 ..................................................... 20,217 3,019,612 8,399,624
Redemption of Series A preferred stock ........................ (721,287) -- --
Net proceeds from issuance of preferred stock ................. 4,840,748 -- --
Capital lease buyout .......................................... -- (400,414) (218,141)
Capital lease funding ......................................... 561,169 260,195 --
Debt issuance costs ........................................... -- -- (750,000)
Net proceeds from issuance of convertible notes ............... -- 8,348,959 30,000,000
------------- ------------- -------------
Net cash provided by financing activities ..................... 22,906,977 13,655,216 37,431,483
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents .......... 12,660,484 (10,516,492) 12,188,469
Cash and cash equivalents at beginning of year ................ 922,961 13,583,445 3,066,953
------------- ------------- -------------
Cash and cash equivalents at end of year ...................... $ 13,583,445 $ 3,066,953 $ 15,255,422
============= ============= =============
F-6
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999
--------------- -------------- --------------
Non-cash investing activity:
Change in net unrealized gain(loss) on marketable
securities available for sale ........................... $ (5,714) $ -- $ (91,904)
=========== =========== ==========
Issuance of options related to license agreement ......... $ -- $ -- $ 696,895
=========== =========== ==========
Non-cash financing activities:
Issuance of common stock upon the conversion of
convertible debentures and accrued interest thereon,
net ..................................................... $ 2,331,304 $ -- $ --
=========== =========== ==========
Accretion of premium payable on preferred stock and
warrants ................................................ $ 521,397 $ 24,648 $ --
=========== =========== ==========
Deemed dividend for preferred stock conversion discount $ 953,077 $ -- $ --
=========== =========== ==========
Issuance of common stock upon the conversion of
convertible preferred stock and accrued accretion
thereon, net ............................................ $14,654,071 $ 4,054,103 $ --
=========== =========== ==========
Supplemental disclosure of cash flow information:
Interest paid ............................................ $ 20,599 $ 19,766 $1,504,441
=========== =========== ==========
Cash received related to tax benefit ..................... $ -- $ -- $3,017,910
=========== =========== ==========
See accompanying notes to consolidated financial statements.
F-7
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999
(1) NATURE OF BUSINESS AND LIQUIDITY
Celgene Corporation and its subsidiary (collectively "Celgene" or the
"Company") is an independent biopharmaceutical company engaged in the
discovery, development and commercialization of novel human pharmaceuticals for
the treatment of cancer and immunological diseases. The Company's primary
therapeutic focus is on the development of orally administered, small molecule
pharmaceuticals that regulate tumor necrosis factor alpha, or TNF--, and are
anti-angiogenic. TNF-- has been linked to the cause and symptoms of many
chronic inflammatory and immunological diseases. Anti-angiogenic drugs inhibit
the growth of undesirable blood vessels, including those that promote tumor
growth. Our lead product, THALOMID(TM) (thalidomide), was approved for sale in
the United States by the U.S. Food and Drug Administration, ("FDA"), on July
16, 1998. THALOMID is approved for the treatment of erythema nodosum leprosum,
("ENL"), an inflammatory complication of leprosy. Our cancer and immunology
pharmaceutical pipeline is highlighted by two classes of novel and proprietary
oral therapeutic agents, IMiDs, or ImmunoModulatory Drugs, and SelCIDs, or
Selective Cytokine Inhibitory Drugs. Both classes are being developed for the
treatment of cancer, chronic inflammatory diseases, such as inflammatory bowel
disease and rheumatoid arthritis, and other diseases of the immune system.
The Company expects that its rate of spending will increase as the result
of increased clinical trial costs, increased expenses associated with the
regulatory approval process and commercialization of products now in
development, increased costs related to the commercialization of THALOMID, and
increased working capital requirements. This increased spending will be
mitigated by the collection of receivables resulting from sales of THALOMID. It
is anticipated that the increasing sales of THALOMID, as well as existing cash
resources, will be sufficient to fund operations through 2000.
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, 1998 and 1999, 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 classifies all of its marketable securities as securities
available for sale. Such securities are 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. Prior to FDA approval, the raw material, formulation
and encapsulation costs related to THALOMID production were recorded as
research and development expense.
F-8
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999 - (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 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 OPTION PLAN
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, in accounting for
its fixed plan stock options. As such, compensation expense would be recorded
on the date of grant only if the current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting Standard
("SFAS") No. 123, Accounting for Stock-Based Compensation, established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic value-based
method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 123.
(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
F-9
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED )
of stock options, and warrants, and the conversion of convertible debentures
and preferred stock are all anti-dilutive. The amount of common stock
equivalents excluded from the calculation were 3,770,954 in 1997, 3,863,535 in
1998 and 5,296,624 in 1999.
(J) COMPREHENSIVE INCOME
Comprehensive income (loss) consists of net losses and the change in net
unrealized gains (losses) on securities and is presented in the consolidated
statements of stockholders' equity (deficit).
(K) PRESENTATION
In connection with the disposition of the Company's chiral intermediate
operation in January 1998 (see note 10), the 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 equals carrying value, of marketable securities
available for sale is based on quoted market prices. For all other financial
instruments, excluding convertible notes (see note 6), their carrying value
approximates fair value due to the short maturity of these instruments.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities was issued and, as amended, is effective for all fiscal
years beginning after June 15, 2000. SFAS No. 133 standardizes the accounting
for derivative instruments including certain derivative instruments embedded in
other contracts and requires derivative instruments to be recognized as assets
and liabilities and be recorded at fair value. The Company is currently not
party to any derivative instruments. Any future transactions involving
derivative instruments will be evaluated based on SFAS No. 133.
(M) OTHER ASSETS
Other assets include certain patent rights, the cost of which is amortized
using the straight line method over the life of the patents. The weighted
average remaining patent life at December 31, 1999 is 12 years.
(3) INVENTORY
DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
Raw materials ........... $ 440,400 $ 1,411,663
Work in process ......... 535,494 647,841
Finished goods .......... 595,514 396,555
----------- -----------
$ 1,571,408 $ 2,456,059
=========== ===========
Inventory costs prior to FDA approval of THALOMID on July 16, 1998 were
expensed as research and development costs.
F-10
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED )
(4) PLANT AND EQUIPMENT
Plant and equipment consists of the following:
DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
Leasehold improvements ..................... $ 4,008,246 $ 4,375,013
Laboratory equipment and machinery ......... 4,874,733 5,323,897
Furniture and fixtures ..................... 470,667 605,623
Leased equipment ........................... 675,304 675,304
----------- -----------
10,028,950 10,979,837
Less: accumulated depreciation ............. 7,766,820 8,643,595
----------- -----------
$ 2,262,130 $ 2,336,242
=========== ===========
(5) ACCRUED EXPENSES
Accrued expenses consists of the following:
DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
Professional and consulting fees ......... $ 787,381 $ 905,072
Accrued compensation ..................... 1,650,048 3,098,540
Accrued interest and royalties ........... 361,809 1,989,394
Other .................................... 242,621 768,883
----------- -----------
$ 3,041,859 $ 6,761,889
=========== ===========
(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 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.
On January 20, 1999, the Company issued to an institutional investor a
convertible note in the amount of $15,000,000. The note has a five year term
and a coupon rate of 9% 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 $18 per share. The Company can redeem the
note after three years at 103% of the principal amount (two years under certain
conditions). Issuance costs of $750,000 incurred in connection with this note
are being amortized over three years.
On July 6, 1999, the Company issued to a third institutional investor a
convertible note in the amount of $15,000,000. The note has a five year term
and a coupon rate of 9% 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 $19 per share. The Company can redeem the
note after three years at 103% of the principal amount (two years under certain
conditions). There was no fee or discount associated with this note.
F-11
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED )
At December 31, 1999, the fair value of the Company's convertible notes
exceeded their carrying value, reflecting the increase to $70 per share in the
market value of the Company's common stock at that date.
(7) STOCKHOLDERS' EQUITY
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.
SERIES A CONVERTIBLE PREFERRED STOCK
During 1996, in a private placement, the Company completed the sale of 503
shares of Series A Convertible Preferred Stock, par value $.01 per share, at an
issue price of $50,000 per share. All of the shares of the Series A Convertible
Preferred Stock with their respective accrued accretion, had been converted or
redeemed into 3,342,202 shares of common stock at December 31, 1998.
During 1996, the Company had issued warrants valued at $138,156, that
entitle certain stockholders of the Series A Convertible 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.
All these warrants either expired or were exercised for 3,418 shares of common
stock at December 31, 1998. 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. As of December 31, 1999, 35,039
warrants were exercised to purchase 23,322 shares of common stock.
SERIES B CONVERTIBLE PREFERRED STOCK
During 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. All
shares of the Series B Preferred had been converted into 788,469 shares of
common stock at December 31, 1998.
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, 1999) plus (ii) 37.5% of the conversion
shares issuable on such issuance date upon conversion of all shares of Series B
Preferred issued through the issuance date (288,461 warrants as of December 31,
1999). 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, 1999). The fair value of warrants at the
issuance date was $1.28 per warrant. As of December 31, 1999 no warrants have
been exercised.
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. In certain circumstances, the Rights Plan permits the
F-12
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED )
holders to purchase shares of the Company's common stock at a discounted rate.
The Company's Board of Directors retains the right at all times prior to
acquisition of 15% of our voting common stock by an acquiror, to discontinue
the Rights Plan through the redemption of all rights or to amend the Rights
Plan in any respect.
(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 Plans. 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
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 for service 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. On June 22, 1999, the
stockholders of the Company approved an amendment to the 1995 Non-Employee
Directors' Incentive Plan that a.) increased the number of shares to 600,000
and b.) provided for a discretionary grant upon the date of each annual meeting
of an additional option to purchase up to 5,000 shares to a non-employee
director who serves as a member (but not a chairman) of a committee of the
Board of Directors and up to 10,000 shares to a non-employee director who
serves as the chairman of a committee of the Board of Directors. All options
are granted at an exercise price that equals the fair market value of the
Company's common stock at the grant date and expire 10 years after the date of
grant. This plan terminates in 2005.
F-13
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED )
The weighted-average fair value per share for stock options granted was
$9.26 for the 1999 options, $3.97 for the 1998 options and $3.93 for those
granted in 1997. The Company estimated the fair values using the Black-Scholes
option pricing model and used the following assumptions:
1997 1998 1999
---------- ---------- ----------
Risk-free interest rate ....................... 6.37% 5.68% 6.38%
Expected stock price volatility ............... 55% 66% 46%
Expected term until exercise (years) .......... 3.09 2.86 4.98
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:
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA) 1997 1998 1999
- --------------------------------------------------------------- -------------- -------------- --------------
Net loss applicable to common stockholders:
As reported ............................................. $ (26,922) $ (25,093) $ (21,781)
Pro forma ............................................... (28,652) (26,745) (25,491)
Net loss per share applicable to common stockholders basic
and diluted:
As reported ............................................. (2.20) (1.55) (1.28)
Pro forma ............................................... (2.35) (1.66) (1.50)
The pro forma effects on net loss applicable to common stockholders and
net loss per share applicable to common stockholders (basic and diluted) for
1997, 1998 and 1999 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.
F-14
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED )
The following table summarizes the stock option activity for the
aforementioned Plans:
OPTIONS OUTSTANDING
SHARES -------------------------------
AVAILABLE WEIGHTED AVERAGE
FOR GRANT SHARES PRICE PER SHARE
------------- ------------- -----------------
Balance January 1, 1997 ........... 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
Authorized ....................... 250,000 -- --
Expired .......................... (70,047) -- --
Granted .......................... (890,530) 890,530 19.26
Exercised ........................ -- (949,323) 8.46
Cancelled ........................ 42,053 (42,053) 10.66
--------- --------- --------
Balance December 31, 1999 ......... 1,022,424 2,327,267 $ 13.76
========= ========= ========
The following table summarizes information concerning options outstanding
under the Plans at December 31, 1999:
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING EXERCISE REMAINING EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/99 PRICE TERM (YRS.) AT 12/31/99 PRICE
- ---------------- ------------- ---------- ------------- ------------- -----------
5.00 -- 9.00 627,518 $ 7.78 6.8 322,966 $ 7.25
9.01 --13.00 450,920 10.69 6.9 294,861 10.69
13.01--18.00 1,137,329 15.93 8.2 349,407 14.43
18.01 + 111,500 37.74 9.8 -- --
--------- -------- --- ------- --------
2,327,267 $ 13.76 7.6 967,234 $ 10.89
========= ======== === ======= ========
(B) STOCK AWARDS
On January 1, 1997, the Company awarded 5,000 shares to the Company's
Chairman and Chief Executive Officer, 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 the Series A Convertible Preferred Stock, the Company, in
1996 granted to such firm, warrants to purchase until March 10, 2001, 66,853
shares of common stock at a price of $20.52. There were 31,814 warrants
outstanding as of December 31, 1999.
F-15
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED )
In connection with the placement of the Series B Convertible Preferred
Stock in June, 1997, the Company has an obligation to issue warrants to
purchase 519,230 shares of common stock until June 1, 2002, at a price of $7.48
per share. As of December 31, 1999 these warrants were outstanding.
(9) INCOME TAXES
At December 31, 1998 and 1999, the tax effects of temporary differences
that give rise to deferred tax assets are as follows:
1998 1999
--------------- ---------------
Deferred assets:
Federal and state net operating loss carryforwards ...................... $ 54,779,000 $ 73,147,000
Research and experimentation tax credit carryforwards ................... 3,235,000 3,984,000
Plant and equipment, principally due to differences in depreciation ..... 772,000 1,075,000
Patents, principally due to differences in amortization ................. 62,000 58,000
Accrued expenses ........................................................ 665,000 560,000
------------- -------------
Total deferred tax assets ............................................ 59,513,000 78,824,000
Valuation allowance ..................................................... (59,513,000) (78,824,000)
------------- -------------
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, 1999, the Company had Federal net operating loss carryforwards of
approximately $184,000,000 and state net operating loss carryforwards of
approximately $121,000,000 that will expire in the years 2001 through 2019.
State net operating loss carryforwards differ from Federal net operating loss
carryforwards primarily due to the fact that the Company sold approximately
$39,000,000 of its state net operating loss carryforwards during 1999 and
approximately $24,000,000 has expired. The Company also has research and
experimentation credit carryforwards of approximately $3,984,000 that expire in
the years 2001 through 2019. Ultimate utilization/availability of such net
operating losses and credits may be curtailed if a significant change in
ownership occurs. Of the deferred tax asset related to the Federal and state
net operating loss carryforwards, approximately $12,500,000 relates to a tax
deduction for non qualified stock options. The Company will increase paid in
capital when these benefits are realized for tax purposes.
(10) DISCONTINUED OPERATION
On January 9, 1998, the Company concluded an agreement with Cambrex
Corporation ("Cambrex") 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.
(11) MARKETABLE SECURITIES AVAILABLE FOR SALE
Marketable securities available for sale at December 31, 1999 include debt
securities with maturities ranging from January 2000 to August 2004. A summary
of marketable securities at December 31, 1999 is as follows:
F-16
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED )
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------------- ------------ ------------ -------------
Government Bonds & Notes ......... $2,313,125 -- $ (25,579) $2,287,546
Government Agencies .............. 2,050,000 -- (66,325) 1,983,675
---------- -- --------- ----------
Total ........................... $4,363,125 -- $ (91,904) $4,271,221
========== == ========= ==========
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 U.S. Government and agency obligations ($1,050,000). The cost equaled fair
market value.
(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 $477,000, $486,000 and $479,000 in 1997, 1998 and
1999, respectively. Celgene 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 November, 1999, the Company leased an additional 29,000 square feet of
office and laboratory space in the same building facility in Warren, New Jersey
adjacent to our existing leased space. The initial term of the lease extends to
July 2010 with two five year renewal options.
In March 1999, the Company entered into a lease agreement with The New
Jersey Economic Development Authority (NJEDA) to lease approximately 18,000
square feet of office and laboratory space in North Brunswick, New Jersey for
Celgro, our agrochemical subsidiary. The lease agreement is for ten years
commencing January 1, 2000 and provides for two five year renewal terms.
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, 1999, the Company has leased $675,000 of
laboratory equipment under this agreement.
The following table shows the approximate minimum lease commitments for
the next five years:
2000 2001 2002 2003 2004 AFTER 2004
- ------------- ------------- ------------- ------------- ------------- -------------
$1,257,000 $1,106,000 $1,086,000 $1,122,000 $1,131,000 $4,903,000
(B) EMPLOYMENT AGREEMENTS
Celgene has employment agreements with certain officers and employees. The
related outstanding commitment for 2000 is approximately $1.3 million.
Employment contracts provide for an increase in compensation reflecting annual
reviews and related salary adjustments.
F-17
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED )
(C) CONTRACTS
Pursuant to the terms of a research and development agreement with The
Rockefeller University ("Rockefeller"), the Company has purchased for cash and
stock options 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. The portion of the agreement that
provides for research services to be performed by Rockefeller is renewable for
one year terms upon agreement of both parties. Under terms of the current
research agreement extension, the Company is committed to pay Rockefeller
$504,000 annually for research.
The Company has an agreement with Penn Pharmaceutical, Ltd. of Great
Britain ("Penn") for the production of THALOMID. Penn manufactures THALOMID and
sells it exclusively to the Company. The agreement is renewable for one year
terms and has been renewed for 2000, for facility payments totaling
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. (System for THALOMID
Education and Prescribing Safety) program for all THALOMID patients. The
contract has been renewed for 2000. Under the terms of the agreement, quarterly
payments of approximately $395,000 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, the Company agreed
to pay the University approximately $200,000 in two annual installments. The
term of the original agreement was for two years and has been extended through
2000.
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 $5.0 million over the
life of the agreement.
In December 1998, the Company entered into an exclusive license agreement
with EntreMed, Inc. ("EntreMed") whereby EntreMed granted to us an exclusive
license to its patent and technology rights for thalidomide. In return,
EntreMed will receive royalties on all sales of THALOMID.
(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.
(13) SEGMENTS
Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. As discussed in Note
1, the Company manages its operations as one line of business of discovery,
development and commercialization of orally administered, small molecule drugs
for the treatment of cancer and immunological diseases. Additionally, our
chiral chemistry program develops chirally pure versions of existing compounds
for both pharmaceutical and agrochemical markets. The Company markets and sells
its products in the United States. During 1999, no single customer accounted
for more than 3% of the Company's product sales.
F-18
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999 - (CONTINUED )
(14) SUBSEQUENT EVENT
On February 16, 2000, the Company completed an offering to sell 3,450,000
shares of its common stock at a price of $101 per share. 2,934,000 shares were
for the account of the Company and 516,000 shares were for the account of a
selling shareholder pursuant to the conversion of $9,288,000 of the 9%, January
1999 convertible notes held by that shareholder. Proceeds to the Company, net
of expenses, were approximately $278 million.
F-19
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
CELGENE CORPORATION
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
YEAR EXPENSE DEDUCTIONS YEAR
-------------- ------------ ------------ -----------
Year ended December 31, 1998
Allowance for doubtful accounts .......... -- 43,386 -- 43,386
-- ------ -- ------
-- 43,386 -- 43,386
Year ended December 31, 1999
Allowance for doubtful accounts .......... 43,386 58,051 -- 101,437
Allowance for customer discounts ......... -- 453,208 433,208 20,000
------ ------- ------- -------
43,386 511,259 433,208 121,437
====== ======= ======= =======