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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, 2000
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
For the transition period from ___________ to ___________
Commission File No. 0-16132
CELGENE CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-2711928
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(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
7 Powder Horn Drive
Warren, New Jersey 07059
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(Address of principal executive offices) (Zip Code)
(732) 271-1001
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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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
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Aggregate market value of voting stock held by non-affiliates of
registrant as of March 1, 2001: $1,847,889,460
Number of shares of Common Stock outstanding as of March 1, 2001:
74,506,974
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CELGENE CORPORATION ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM NO. PAGE
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Part I
1. Business ................................................ 1
2. Properties .............................................. 25
3. Legal Proceedings ....................................... 25
4. Submission of Matters to a Vote of Security Holders...... 25
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters ..................................... 26
6. Selected Consolidated Financial Data .................... 27
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 28
7a. Quantitative and Qualitative Disclosures About
Market Risk ............................................. 31
8. Financial Statements and Supplementary Data ............. 32
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ..................... 32
Part III
10. Directors and Executive Officers of the Registrant ...... 33
11. Executive Compensation .................................. 35
12. Security Ownership of Certain Beneficial Owners and
Management .............................................. 39
13. Certain Relationships and Related Transactions .......... 39
Part IV
14. Exhibits, Financial Statements, Supplementary Data
and Reports on Form 8-K ................................. 40
Signatures and Power of Attorney......................... 42
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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 inflammatory diseases via gene regulation. The
key mechanisms of action for our drugs are modulation of the overproduction of
tumor necrosis factor alpha ("TNF(alpha)"), modulation of intracellular
signaling pathways and inhibition of angiogenesis. We had total revenues of
$84.2 million in 2000.
The Food and Drug Administration ("FDA") approved our first commercialized
product THALOMID(Reg. TM) (thalidomide), 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 erythema nodosum leprosum
("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 98 person sales and
commercialization organization.
Our pipeline of new drugs is highlighted by four classes of orally
administered therapeutic agents: Immunomodulatory Drugs ("IMiDs(TM)"), Selective
Cytokine Inhibitory Drugs ("SelCIDs(TM)"), Selective Estrogen Receptor
Modulators ("SERMs") and cJun N-terminal kinase ("JNK") inhibitors. The IMiD
class is based on the activity of THALOMID in modulating the overproduction of
TNF(alpha) 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. As announced in
February 2000, two IMiDs were well-tolerated in healthy human volunteers of
Phase I trials. Two Phase I/II clinical studies of the lead IMiDs in multiple
myeloma were initiated in 2000 at the Dana-Farber Cancer Institute and the
University of Arkansas Cancer Research Center.
The second class of compounds, SelCIDs, is designed to modulate TNF(alpha)
by selectively inhibiting phosphodiesterase ("PDE") 4, a key cell-signaling
enzyme. Our SelCIDs are targeted to control inflammation without broad
suppression of the immune system. Our lead SelCID compound, CDC 801, was safe
and well tolerated in human Phase I trials. Common side effects of known PDE 4
inhibitors such as nausea or vomiting did not occur. CDC 801 is currently being
tested in a Phase II trial for Crohn's disease and the results are expected in
2001. A Phase I trial was initiated for the second-generation SelCID compound,
CDC 998, which is significantly more potent than CDC 801.
The SERMs are a class of drugs designed to mimic the positive effects of
estrogen by inhibiting bone loss in postmenopausal women, while avoiding some of
estrogen's adverse effects such as increasing risk of breast and uterine cancer.
We intend to file an IND for the next generation SERM-(alpha) as an anti-cancer
agent in 2001.
The fourth class of compounds are the JNK inhibitors. The JNK pathway
controls the expression of specific sets of genes involved in cancer and
inflammation. Drugs that inhibit JNK activation are expected to selectively
block the over-activation of inducible genes and not affect normal cellular
functions. We anticipate initiating a Phase I clinical trial for the lead JNK
inhibitor in 2002.
Our chiral chemistry program develops chirally pure versions of existing
compounds for both pharmaceutical and agrochemical markets, including
d-methylphenidate ("d-MPH"), our chirally pure version of Ritalin(Reg. TM), for
the treatment of attention deficit disorder ("ADD") and attention deficit
hyperactivity disorder ("ADHD") . In April 2000, we announced that we had
granted Novartis Pharma AG an exclusive worldwide license (except Canada) for
the development and marketing of d-MPH in return for substantial milestone
payments and royalties on d-MPH and all products in the Ritalin family of
drugs. We have retained the rights to develop d-MPH for cancer-associated
disorders.
CELGENE PRODUCT OVERVIEW
The target disease states for, and the 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(Reg. TM) Erythema Nodosum Leprosum Approved.
(ENL)
Multiple Myeloma Phase III pivotal trial underway.
Renal Cancer Phase III trial underway.
Colorectal Cancer Phase II trial completed.
Phase II/III trial protocol in preparation.
Myelodysplastic Syndromes (MDS) Phase II trial completed.
Phase III trial protocol in preparation.
Glioblastoma Initial Phase II trials completed.
Other Phase II trials underway.
Prostate Cancer Initial Phase II trials completed.
Other Phase II trials underway.
Recurrent Aphthous Stomatitis Phase III pivotal trial completed in AIDS
(RAS) patients.
Crohn's Disease Phase II trial completed and initial data
published.
Ulcerative Colitis Phase II trial underway.
Sarcoidosis Initial Phase II trial completed.
SelCIDs(TM)
CDC 801 Crohn's Disease Phase II trial underway.
CDC 998 Anti-Inflammatory Phase I trial underway.
IMiDs(TM)
CDC 501 Safety tolerability/Cancer Phase I trial completed.
CDC 501 Multiple Myeloma Phase I/II trials underway.
CDC 394 Safety tolerability/Cancer Phase I trial completed.
SERMs
SERM-alpha Cancer Preclinical studies underway.
SERM-alpha Osteoporosis Preclinical studies underway.
SERM-beta Cancer Preclinical studies underway.
SERM-beta Other Preclinical studies underway.
Kinases
JNK Cancer/Inflammatory Diseases Preclinical studies underway.
NF-kB Cancer/Inflammatory Diseases Preclinical studies underway.
p38 Cancer/Inflammatory Diseases Drug discovery underway.
Ligases Cancer/Inflammatory Diseases Target and drug discovery underway.
d-methylphenidate Attention Deficit Disorder and New drug application filed.
(d-MPH) Attention Deficit Hyperactivity
Disorder
OVERVIEW OF GENES AND DISEASE
The human body contains an estimated 40,000 genes. Genes control all
cellular functions responsible for maintaining human health by serving as
blueprints for the production of proteins in cells, a process known as gene
expression. Proteins, which control a cell's biological function, include
hormones, enzymes and cytokines, which are proteins secreted by cells that
mediate the inflammatory response. Critical cell functions regulated by
proteins include growth, differentiation and survival.
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Recent advances in cellular and molecular biology have shown that
malfunctions in gene regulation either cause or predispose humans to most
diseases. These malfunctions cause cells to produce inappropriate amounts or
types of proteins. For example, the uncontrolled proliferation of cells
characteristic of cancer and inflammatory diseases is the result of
over-activation of multiple genes and the proteins they produce, such as
cytokines and enzymes. Alternatively, under-activation of critical genes and
their protein products, such as tumor suppressors and growth factors, also may
give rise to disease, including cancer and neurological disorders. These
complex, multi-genic diseases include cancer, obesity, diabetes and
inflammatory, cardiovascular and neurological diseases.
Gene regulation is a highly controlled process in which specific sets of
genes are switched on and off in select tissues to maintain the body's
essential functions. Genes are controlled by networks of proteins inside cells
that relay information through pathways from a cell's surface to its nucleus
where genes are expressed. These pathways consist of several large and distinct
classes of gene regulating proteins, or gene switches, which include
transcription factors, kinases and ligases. Transcription factors are molecular
switches that bind to the regions of genes that control the level and duration
of gene expression and protein production. Kinases are enzymes that transmit
information within cells and ultimately lead to gene expression. Ligases
control the proper levels of gene regulating proteins in cells. Each of these
three classes of gene switches can control not just one but multiple genes that
contribute to disease. Therefore, drugs designed to target these gene switches
at pivotal points in a gene regulating pathway can have a major impact on the
subsequent expression of entire sets of genes that contribute to disease.
Genomics is the large-scale identification and sequencing of the genes that
comprise the human genome. The sequencing of the entire human genome was
completed in 2000 and currently this information is being compiled in databases.
These genomic databases provide a starting point for understanding the
underlying role of genes in disease, but by themselves are inadequate to
identify key disease-related gene switches. To realize the substantial potential
of genomics initiatives, key gene switches involved in disease need to be
identified in order to permit the rapid development of superior drug therapies.
Conventional drug discovery efforts principally are focused on identifying
compounds that affect targets outside the cell, such as cell surface receptors
and secreted proteins, and provide only symptomatic relief without treating the
underlying molecular causes of disease. For example, in rheumatoid arthritis,
aspirin and related compounds only relieve the symptom of pain and
inflammation. These drugs do not address the destruction of arthritic joints
caused by the disease. Drugs directed toward targets outside the cell also have
a number of potential limitations in treating complex diseases where the
underlying molecular mechanisms are located within cells. These drugs often do
not control the specific sets of genes that are responsible for the onset and
progression of disease and may also result in side effects due to their
non-specific action. Further, by focusing principally on the receptors and
other proteins located outside the cell, these drugs are directed toward only a
limited number of the total potential disease targets. An additional limitation
is that many current drugs or drugs in development, especially proteins, must
be injected and are not available in pill form.
Recent advances in genomics have the potential to significantly improve
drug discovery. Most genomics efforts have been directed principally toward the
identification and sequencing of the large number of genes that comprise the
human genome. These developments have not enabled the rapid identification of
drug targets because the gene sequence data by itself provides limited
information, if any, about a gene's relationship to a specific disease. To fully
capitalize on the therapeutic potential of genomics, there is a need to map
critical gene regulating pathways and identify key gene switches as drug targets
for disease therapy.
OVERVIEW OF OUR GENE REGULATING TECHNOLOGY
We have developed and integrated a large set of proprietary target and
drug discovery technologies to accelerate the application of genomics to the
discovery of important new classes of gene regulating drugs. We first map the
gene regulating pathways to identify drug targets, or gene switches, that
control specific genes and result in disease. This information is then used to
discover novel gene regulating drugs
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by applying our drug discovery engine. We believe our discovery and development
capabilities provide us and our collaborators with a highly advanced and
competitive technology platform for target and drug discovery. This engine
consists of :
- ADVANCED CELLULAR, MOLECULAR AND GENOMIC TECHNOLOGIES
We use information produced from human genomics initiatives to map gene
regulating pathways and identify clinically important drug targets for specific
diseases. We have generated proprietary human cell lines, from multiple tissues
of the body, to create in vitro, or test tube, models of disease and to evaluate
the activity and selectivity of drug candidates. We also use functional genomics
and proteomics, which is the large-scale linking of genes and their protein
products to their biological functions, for mapping gene regulating pathways and
identifying disease targets for use in drug discovery.
- PROPRIETARY HIGH THROUGHPUT SCREENING SYSTEMS AND DIVERSE COMPOUNDS
LIBRARIES
We have assembled a library of more than 300,000 distinct small molecule
compounds and natural products which we screen using our proprietary
biochemical and cell-based screening technologies. Our screening systems
include a proprietary screening technology that simultaneously screens multiple
kinases to provide drug activity and specificity data across multiple drug
targets.
- A PROPRIETARY, SPECIALLY DESIGNED KINASE INHIBITOR LIBRARY
We identified the active sites, or molecular locks, on a number of gene
regulating kinase targets using our extensive knowledge of the three
dimensional structures of these targets. We believe gene regulating targets
identified in the future will contain similar locks. Our kinase inhibitor
library is designed to contain compounds expected to fit like molecular keys
into these locks, enhancing our ability to identify effective inhibitors of
current as well as yet-undiscovered gene regulating targets. In addition, we
design these compounds to have attractive pharmaceutical properties, such as
solubility, chemical stability, non-reactivity and the ability to be taken in
pill form, which accelerates the development of viable drug candidates.
- STRUCTURE-BASED DRUG DESIGN
We use our proprietary three-dimensional models of drug targets, combined
with advanced chemistry technologies, to efficiently generate drug leads and
advance drug candidates into preclinical and clinical development.
Our drug discovery and development programs are focused in several disease
areas in which gene dysregulation plays a major role in the onset and
progression of disease, including cancer and inflammatory diseases.
OVERVIEW OF ONCOLOGY AND IMMUNOLOGY
Our clinical and commercial focus is to produce a portfolio of highly
potent and selective small molecule drugs that have the potential to regulate
the overproduction of TNF(alpha) and are anti-angiogenic via gene regulation.
TNF(alpha), 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(alpha) 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(alpha) has been
implicated in a number of acute and chronic inflammatory diseases. These disease
states, which are inadequately treated with existing therapies, may include
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,
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teratogenicity and various endocrine abnormalities. We believe that selective
control and reduction of TNF(alpha) represents a promising new strategy for
treating chronic inflammatory diseases. In pursuit of this strategy, two broad
classes of compounds have been investigated: proteins and small synthetic
molecules.
Anti-TNF(alpha) proteins, including anti-TNF(alpha) antibodies and
TNF(alpha) 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(alpha) 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(alpha) 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(alpha) 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 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.
THALOMID
In July 1998, we received FDA approval to market THALOMID for the
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 patented System for Thalidomide
Education and Prescribing Safety ("S.T.E.P.S.(TM)") 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 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, and one solid tumor.
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, myelodysplastic syndromes, colorectal cancer and prostate
cancer.
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(alpha) and,
therefore, could be of potential benefit in treating 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
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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(alpha) 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, until 1998, 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 formulation 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. Currently we estimate that approximately 92% of THALOMID prescriptions
are in oncological indications.
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
each year.
At the 42nd annual meeting of the American Society of Hematology (ASH) in
December 2000 over twenty abstracts studying thalidomide in the setting of
multiple myeloma were presented, including results on thalidomide as treatment
for newly diagnosed and refractory multiple myeloma patients and results on
thalidomide in combination with conventional therapies for relapsed or
refractory multiple myeloma. The clinical data presented was consistent with
previously published results on the potential use of THALOMID in treating
refractory multiple myeloma and included survival data of patients.
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In 2000, it was reported by prescribers on our S.T.E.P.S. program
enrollment surveys that approximately 46% of the oncology-related THALOMID
prescriptions were for multiple myeloma. Based on this information and on the
growing volume of clinical trial data, our plan is to file a supplemental NDA
for THALOMID for the treatment of multiple myeloma in 2001.
Myelodysplastic Syndromes. Myelodysplastic Syndromes (MDS) are a group of
conditions caused by abnormalities of the blood-forming cells in the bone
marrow resulting in a shortage of blood cells and, ultimately, low blood
counts. The five types of MDS are refractory anemia, refractory anemia with
ringed sideroblasts, refractory anemia with excess blasts, refractory anemia
with excess blasts in formation, and chronic myelomonocytic leukemia. According
to the American Cancer Society 14,000 new cases of MDS are diagnosed each year
in the US, with survival rates ranging from six months to five years for the
different types of MDS.
Azra Raza, M.D. of the Rush Cancer Institute at Rush-Presbyterian-St.
Luke's Medical Center presented results of two studies evaluating the use of
THALOMID as a single agent and in combination treatment for patients with MDS
at the ASH meeting in December 2000. Dr. Raza's group also presented data on
the use of THALOMID in combination with topotecan, pentoxifylline,
ciprofloxacin, dexamethasone, or etanercept for patients with low risk MDS.
Initial results suggest that the use of thalidomide as part of combination
treatment for MDS may cause a reduction of pro-inflammatory cytokines, cell
death and angiogenesis.
Other Oncology Indications. We have seen encouraging results with the use
of THALOMID as treatment for renal cell cancer and malignant melanoma which
account for seven and three percent respectively of the oncology-related
THALOMID prescriptions written in 2000. We are currently conducting other
evaluations of THALOMID as renal cell cancer and malignant melanoma therapy
that could lead to regulatory submissions. In addition, large, randomized
prostate cancer trials are ongoing at the National Cancer Institute and MD
Anderson and we are awaiting the results.
INFLAMMATORY DISEASES
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(alpha), stimulation of the anti-inflammatory cytokine IL-10 and activation
of T-cell function. These types of activities could prove to have therapeutic
benefit in a variety of inflammatory, infectious and autoimmune diseases. The
two key areas of investigation at present involve inflammatory bowel disease and
serious complications associated with HIV/AIDS. 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 of 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. Side effects were mild and
mostly transient and included drowsiness, peripheral neuropothy, edema and
dermatitis. All patients
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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.
Another study conducted at the University of Chicago and University of Toronto
with a similar thalidomide formulation to Celgene's demonstrated that
thalidomide can close fistulas associated with Crohn's Disease.
S.T.E.P.S(TM) 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.(TM) 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 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.
In April 2000, we were granted a method of business patent on the
S.T.E.P.S system. The patent covers controlled distribution systems that
register pharmacists, patients and physicians who have agreed to follow the
safety program. It includes systems that track compliance and authorize each
prescription based on confirmation of compliance. It is designed as a blueprint
for pharmaceutical products, which offer life-saving or other important
therapeutic benefits, but have potentially serious side effects.
IMIDS
We have designed and synthesized a number of novel structural analogues of
thalidomide called IMiDs that have been demonstrated in in vitro tests to be
substantially more potent in inhibiting TNF(alpha) 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. IMiDs may have the 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 interleukin-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 2 and 10 as well as interferon gamma. T-cell activation is enhanced
by the compound up to 100,000 times more than with thalidomide. The U.S. Patent
and Trademark Office has issued Celgene composition of matter and use patents
relating to its IMiDs.
Two Phase I/II clinical trials in multiple myeloma were initiated for the
lead IMiD in 2000 at the Dana-Farber Cancer Institute and the University of
Arkansas Cancer Research Center. Laboratory study results published in the
November 1, 2000 issue of BLOOD reported results of a study conducted at the
Dana-Farber Cancer Institute on the activity of the IMiDs on multiple myeloma
cells. The results of this laboratory study and a similar study conducted at
the Harvard Medical School were also presented at the 42nd annual meeting of
the American Society of Hematology in December 2000. These results show that
there is a dose dependent antibody effect of IMiDs on multiple myeloma cells.
In addition, the data highlights that the IMiDs were found to have direct
anti-tumor effects that include enhancement of multiple myeloma cell death
(apoptosis) and cell cycle arrest.
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(alpha) overproduction in in vitro bioassays of human cells. SelCIDs appear
to have a specific inhibitory effect on PDE 4, which is linked to the
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overproduction of TNF(alpha). Studies have determined that many of the SelCIDs
decrease synthesis of TNF(alpha) through selective inhibition of PDE 4.
Preclinical and animal tests have shown this class of compounds to be up to
100,000 times more active with a longer half-life than THALOMID. We believe that
control of TNF(alpha) at its source, versus simple removal of plasma 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. Unlike many therapeutics that 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 Celgene composition of matter and use patents
relating to its SelCIDs.
A Phase II pilot trial in Crohn's disease for the lead SelCID compound,
CDC 801, is ongoing at a number of centers including Cedars-Sinai Medical
Center and results are expected in 2001. A Phase I clinical trial was initiated
in 2000 for the second-generation SelCID compound, CDC 998. CDC 998 is
significantly more potent than CDC 801.
SERMS
Estrogen Gene Regulation in Cancer
Estrogen is a hormone that has a broad spectrum of effects on tissues in
both women and men. Many of these biological effects are beneficial, including
maintenance of bone density and cardiovascular and neurological protection. In
addition to estrogen's positive effects, however, the hormone is also a potent
growth factor in the breast and uterus that has been demonstrated to increase
significantly the risk of cancer in women. In addition, estrogen contributes to
prostate cancer in men.
Two distinct estrogen receptors exist in the body, the estrogen
receptor-alpha, or ER--, and the estrogen receptor-beta, or ER--, each of which
has a distinct tissue distribution in the body. ER-- is found predominately in
bone and in cardiovascular, breast and reproductive tissue, while ER-- is the
predominately expressed estrogen receptor in the prostate and hippocampus
region of the brain. Given the tissue-selective expression of ER-- and ER--,
estrogen receptor modulators potentially can be designed to mimic the positive
effects and block the negative effects of estrogen in different tissues. Drugs
that modulate these receptors are termed selective estrogen receptor modulators
or SERMs.
Unlike chemotherapeutic agents, which often cause significant toxic side
effects, SERMs act through different, primarily non-toxic mechanisms.
Currently, two SERMs are marketed for treatment of breast cancer. One of these
SERMs, tamoxifen, is the most widely prescribed anti-hormonal therapy for
cancer today. However, tamoxifen is associated with a number of adverse side
effects, including an increased risk for uterine cancer, blood clotting and hot
flashes. In addition, virtually all patients receiving tamoxifen become
resistant to the drug.
We are using Signal's gene regulation expertise to design new classes of
ER-- and ER-- selective SERMs with efficacy and safety profiles that we believe
will be superior to those of many current chemotherapies and tamoxifen. We
believe these SERMs will have significant potential for preventing and treating
breast, endometrial, prostate, colon and other cancers whose growth is
dependent on estrogen.
SP8490 - AN ER-(alpha) MODULATOR
Using Signal's drug discovery engine and expertise in estrogen gene
regulating pathways, we have discovered and are developing a series of SERMs
with improved efficacy and safety in animal models when compared with
tamoxifen. In animal studies, these drug leads were orally effective in
preventing breast cancer and demonstrated equal or superior efficacy to
tamoxifen. Additionally, these compounds displayed a superior safety profile on
uterine tissue compared to tamoxifen. A potential drug candidate, SP8490,
currently is in preclinical development.
ER-(beta) MODULATORS
We have discovered and are developing a novel series of ER-(beta)-selective
SERMs, which currently are undergoing lead optimization. Our SERM-(beta) drug
leads represent a novel series of SERMs that, if successfully commercialized,
may be useful in treating the larger number of cancer patients that develop
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ER-positive cancers such as prostate, colon, ovarian and tamoxifen-resistant
breast cancer. In October 1999, we entered into a collaboration with Axys
Pharmaceuticals to discover and develop ER-beta-selective SERMs for cancer
therapy.
JNK INHIBITORS
ONCOLOGY
The cJun N-terminal kinase, or JNK, pathway controls the expression of
specific sets of genes involved in cancer, including:
- cytokines and growth factors that promote the growth of cancer cells;
- molecules on the surface of cells that are responsible for cell-to-cell
attachment;
- tissue destructive enzymes that enable tumors to spread to distant sites
in the body and invade normal tissues and organs, referred to as
metastasis; and
- factors that lead to the growth of new blood vessels and aid in
establishing new tumors, referred to as angiogenic factors.
We are applying our expertise in the JNK gene-regulating pathway to
identify novel cancer targets that play a fundamental role in tumor growth and
to design new classes of drugs that target abnormalities in the JNK gene
regulating pathway to inhibit the transformation, growth and spread of cancer.
Using our drug discovery engine, we have identified potent and selective small
molecule inhibitors of the JNK pathway, which have demonstrated
anti-proliferative activity in tumor cell lines in vitro.
INFLAMMATORY DISEASES
Activation of the JNK gene-regulating pathway increases the expression of a
set of clinically important inflammatory genes, including tumor necrosis factor
alpha, or TNF(alpha), interleukin-2, or IL-2, and gamma interferon. There are
multiple types of the JNK regulatory enzyme, each of which controls the
expression of genes in specific cells and in response to specific stimuli. We
have eight issued United States patents, four issued foreign patents and related
patent applications covering JNK, its use in drug discovery and JNK inhibitors.
Over-activation of JNK causes or exacerbates several inflammatory and autoimmune
diseases, including rheumatoid arthritis, asthma and multiple sclerosis.
We have developed and initiated high throughput screening for JNK1, JNK2 and
JNK3 inhibitors using proprietary biochemical and cell-based screens. Using our
kinase-focused inhibitor library, we have identified several potent compounds
that inhibit JNKl, JNK2 and JNK3 activity. In addition to significantly reducing
inflammation, one of these drug leads prevents the destruction of joints in an
animal model of arthritis. This drug lead also demonstrates potent
disease-modifying activity in animal models of asthma, liver ischemia
reperfusion injury and epilepsy. We currently are optimizing drug leads to
improve the potency, selectivity and other pharmaceutical properties of its JNK
inhibitors. We also are developing additional high throughput drug screens for
several other drug targets in the JNK pathway, including JNKKl and JNKK2.
NF-kB INHIBITORS
NF-kB plays a pivotal role in inflammatory disease processes by regulating
cytokine genes, such as TNF(alpha), IL-l, IL-2, IL-6, IL-8, along with genes
that code for molecules on the surface of cells and the cyclooxygenase-2 or,
COX-2, inflammatory enzyme. Our researchers and collaborators have identified
six drug targets that regulate NF-kB activation. Our discovery of three of these
targets was reported in the journals Science, Nature and Cell. We believe drugs
that inhibit NF-kB and the activation of select disease-associated genes will
have potential disease modifying effects. We have been issued four United States
patents and we, along with our collaborators, have filed related patent
applications for targets in this pathway.
We have developed and initiated high throughput screening for NF-kB
inhibitors using proprietary biochemical and cell-based screens. We also have
developed technology for profiling the effects of active compounds on a number
of immune-inflammatory genes and proteins in cells and animals. Using our
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kinase inhibitor library, we have identified several small molecule drug leads
that selectively inhibit a kinase target in the NF-kB pathway. One of these drug
leads potently inhibits expression of the TNF(alpha) inflammatory response gene
in an animal model. We are optimizing these drug leads to further enhance
potency, specificity and bioavailability and are developing additional high
throughput drug screens for other targets in the NF-kB pathway. In November
1997, we initiated a collaborative development and license agreement with Serono
to discover novel NF-kB inhibitors for inflammatory and other diseases.
P38 INHIBITORS
Activation of the p38 gene regulating pathway causes the expression of
multiple cytokine genes, including IL-l, IL-6, IL-8 and TNF(alpha), which
regulate the development and proliferation of cells in response to disease and
tissue injury. When inappropriately activated, the p38 pathway is believed to
play an important role in diseases arising from abnormal production of
cytokines, including cardiovascular and autoimmune diseases. To date, Celgene
and its academic collaborators have identified five proprietary drug targets in
the p38 pathway. One of these targets is p38-2, a subtype of p38, which is
highly expressed in heart and skeletal muscle and not in most other tissues.
Celgene and its collaborators have been issued four United States patents for
three drug targets in the p38 pathway, MKK3, MKK6 AND p38-2, and have filed
related patent applications with regard to other potential drug targets in this
pathway. In the p38 pathway, Celgene has screened two targets using its kinase
inhibitor compound library and has identified novel inhibitors which it plans to
optimize as drug leads.
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 enatiomers, 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.
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.
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- 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
d-methylphenidate, 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.
D-MPH
On April 26, 2000, we announced that we had entered into an agreement with
Novartis Pharma AG wherein we granted to Novartis an exclusive worldwide
license (except Canada) for the development and marketing of d-methylphenidate.
We also granted rights to all of our related intellectual property and patents,
including new formulations of the currently marketed Ritalin. We received an
upfront payment of $10 million in July 2000 and a milestone payment of $5
million in December 2000. We are entitled to receive substantial milestone
payments in addition to royalties on the entire family of Ritalin drugs. We
have retained the rights to develop d-MPH for cancer-associated disorders.
D-methylphenidate is licensed to Biovail Corporation in Canada, which purchased
$2.5 million dollars worth of our stock and will pay Celgene licensing fees,
milestone payments and royalties.
We have been issued patents for the use of d-methylphenidate for the
treatment of ADD and ADHD, and for the once-a-day administration of
methlyphenidate drugs in a controlled or pulsed release formulation that
includes both the chirally pure d-methlyphenidate and the racemic form. In
addition, we have been issued process patents covering the manufacturing
process of the active substance. In December 2000, we announced that the FDA
accepted for filing the New Drug Application, or NDA, for d-methylphenidate.
Ritalin controls the symptoms of ADD and ADHD in school-age children. The
Journal of the American Medical Association has reported that three to six
percent of school-age children (elementary to high school) have ADD/ADHD. The
condition is characterized by symptoms of inappropriate inattention,
hyperactivity and impulsiveness. It is estimated that between one and two
million children in the U.S. are now being treated for these conditions. North
American sales of drugs treating the symptoms of ADD and ADHD are estimated to
exceed $600 million per year.
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 include
milestone payments, reimbursement of research and development expenses and
royalty arrangements. We have entered into research and development
arrangements with two leading agrochemical companies and initiatives are
underway to secure additional collaborations.
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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 to chirally pure form of an
agrochemical could be substantially less than the racemic form and achieve the
same or better results, thereby reducing the 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 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. There can be no assurance that this issued patent will provide us
with proprietary protection or commercial advantage. Nor can we guarantee that
this patent will not be either infringed or circumvented by others. 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 patents and patent
applications, worldwide, exclusively licensed to EntreMed Inc. ("EntreMed") by
the Children's Medical Center Corporation, which is affiliated with Harvard
University, that relate to the anti-angiogenic action of thalidomide. Several
U.S. patents have issued to Children's Medical Center Corporation in this
patent family, each of which is set to expire in 2014. Corresponding foreign
patent applications and additional U.S. patent applications are still pending.
Further, we have also exclusively sublicensed from EntreMed 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 to Children's Medical Center Corporation from any of the
pending applications or that, if patents issue, that such patents will provide
us with significant proprietary protection or commercial advantage. Moreover,
there can be no assurance that any of the existing licensed patents will
provide us with proprietary protection or commercial advantage. Nor can we
guarantee that these licensed patents will not be either infringed or
circumvented by others. 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 40 U.S. patents and has filed an additional
31 U.S. patent applications. Of the issued patents, 18 relate to our oncologic
or immunologic compounds and uses and 6 are directed to methylphenidate
therapeutic compositions and processes. We have filed patent applications and
in some instances has 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. Our
U.S. patents include a patent for a method of delivering a teratogenic drug to
a patient without delivering the drug to pregnant patients. We have not filed
for corresponding foreign patents; however, we intend to seek protection
worldwide on improvements to this method. We do not currently have, nor do we
intend to seek, patent protection relating to the use of THALOMID to treat ENL.
Signal, which is our research division, seeks patent protection for the
molecular targets we discover, as well as therapeutic products and processes,
drug discovery technologies and other inventions. Specifically, our research
division has developed proprietary technology for use in molecular target
discovery, regulatory pathway identification, assay design and potential
product candidates. As of February 28, 2001, our research division owned, in
whole or in part, 14 issued U.S. patents, one corresponding issued foreign
patent and 24 pending U.S. patent applications. An increasing percentage of our
recent patent applications has been related to potential product candidates, or
compounds, that our research division has discovered. Our research division
also holds licenses to 13 U.S. patents and 12 pending U.S. patent applications.
Some of our research division's issued patents and pending applications are
licensed exclusively to third parties in connection with sponsored or
collaborative research relationships.
We are also aware of U.S. patents, which have issued to a third party
claiming subject matter relating to the NF-kB pathway which appears to overlap
with technology claimed in some of Signal's pending NF-kB patent applications.
We beleive that one or more interference proceedings may be initiated by the
U.S. Patent and Trademark Office to determine priority of invention for this
subject matter. While we cannot predict the outcome of any such proceedings, in
the event we do not prevail, we believe that we can use alternative methods for
our NF-kB drug discovery program for which we have issued U.S. patents that are
not claimed by the subject matter of the third party patents.
We are also aware of two additional issued U.S. patents relating to the
NF-kB pathway. We believe that we have not infringed, and are not currently
infringing, the claims of the patents. Nonetheless, we may in the future have
to prove that we are not infringing these patents or we may be required to
obtain licenses to one or more of these patents. However, we do not know
whether such licenses will be available on commercially reasonable terms, or at
all.
Prior to the enactment in the U.S. 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 our business without infringing the
proprietary rights of others. The patent positions of pharmaceutical and
biotechnology firms, including ours, can be uncertain and involve complex legal
and factual questions. In addition, the coverage sought in a patent application
can be significantly reduced before the patent is issued.
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Consequently, we do not know whether any of our owned or licensed pending
patent applications will result in the issuance of patents or, if any patents
are issued, whether they will provide significant proprietary protection or
commercial advantage, or whether they will be circumvented or infringed upon by
others.
Since patent applications filed in the United States on or before November
28, 2000 are maintained in secrecy until patents issue and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, we cannot be certain that we, or our licensors, were the first to
make the inventions covered by each of the 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 technology.
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.
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
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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 an
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 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. We also have 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
16
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(alpha) production
through various combinations of monoclonal antibodies, TNF(alpha) 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(alpha) 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(alpha) 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(alpha) 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 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.
17
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 2001.
SALES AND COMMERCIALIZATION
We have established an organization of approximately 98 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
inflammatory 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 February 15, 2001, we had 316 full-time employees, 153 of whom were
engaged primarily in research and development activities, 98 of whom were
engaged in sales and commercialization activities and the remainder of whom
were engaged in executive and administrative activities. Of these employees,
112 have advanced degrees, including 68 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;
18
-- 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 precluded from promoting
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 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
19
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 applicable to common stockholders of $16.3 million, $30.5
million and $29.4 million for the years ended December 31, 2000, 1999 and 1998,
respectively. We had an accumulated deficit of $220.5 million at December 31,
2000. We expect to make substantial expenditures to further develop and
commercialize our products. 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.
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 and recognition of certain research and development
milestones and license fees; and
-- our ability to control our costs.
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 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 98 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
20
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.
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;
21
-- 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
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 on April 21, 2000, we
received an FDA Warning Letter regarding off-label promotions. We have
responded to the FDA and believe we have taken all actions necessary to ensure
that THALOMID is properly and safely commercialized. 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, or any
pending application we have licensed-in from third parties, will result in the
issuance of patents or, if any patents are issued, whether they will provide
significant proprietary protection or commercial advantage. Since, under the
current patent laws, patent applications in the United States are maintained in
secrecy until patents issue, and since publications of discoveries in the
scientific and patent literature often lag behind actual discoveries, we cannot
be certain that we were, or that the third parties from whom we have licensed
patents or patent applications were, the first to make the inventions covered
by the patents and patent applications in which we have rights, or that such
patents and patent applications were the first to be filed
22
on such inventions. In the event that a third party has also filed a patent
application for any of the inventions described in our patents or patent
applications, or those we have licensed-in, we could become involved in an
interference proceeding declared by the United States Patent and Trademark
Office to determine priority of invention. Such an interference could result in
the loss of a United States patent or loss of any opportunity to secure United
States patent protection for that invention. Even if the eventual outcome is
favorable to us, such interference proceedings could result in substantial cost
to us. Moreover, different countries have different procedures for obtaining
patents, and patents issued in different countries provide different degrees of
protection against the use of a patented invention by others. There can be no
assurance, therefore, that the issuance to us or our licensor, in a given
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 interpretation given to the
corresponding patent issued in another country. Furthermore, even if our
patents, or those we have licensed are found valid and enforceable, there can
be no assurance that competitors will not be able to design around such patents
and compete with us using the resulting alternative technology. 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. An adverse outcome in such a 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 these products or processes, subject to significant
liabilities to such third party and/or required to license technologies from
such third party. 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. We cannot assure you
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 THALOMID arises under licenses granted to us by others,
including The Rockefeller University and EntreMed, Inc. 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
agreements 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.
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
23
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.
THE PRICE OF OUR COMMON STOCK HAS EXPERIENCED SUBSTANTIAL VOLATILITY AND
MAY CONTINUE TO DO SO IN THE FUTURE.
There has been significant volatility in the market prices for publicly
traded shares of pharmaceutical companies, including ours. In 2000, the price
of our common stock fluctuated from a high of $74.75 to a low of $18.92 (as
adjusted for a three-for-one stock split in April 2000). On March 14, 2001, our
common stock closed at a price of $21.8125. The price of our common stock may
not remain at or exceed current levels. The following factors may have an
adverse impact on the market price of our common stock:
-- announcements of technical or product developments by us or our
competitors;
-- market conditions for pharmaceutical and biotechnology stocks;
-- market conditions generally;
-- governmental regulation;
-- healthcare legislation;
-- public announcements regarding medical advances in the treatment of the
disease states that we are targeting;
-- patent or proprietary rights developments;
-- changes in third-party reimbursement policies for our products; or
-- fluctuations in our operating results.
THE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE COULD
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Future sales of substantial amounts of our common stock could adversely
affect the market price of our common stock. As of February 15, 2001, there
were outstanding stock options for 7,821,206 shares of common stock, of which
3,446,261 were currently exercisable, and warrants outstanding that are
exercisable for 1,076,680 shares of common stock. These amounts include
outstanding options and warrants of Signal Pharmaceuticals, Inc. ("Signal")
which we assumed as part of a merger (the "Merger") with Signal on August 31,
2000 and which were converted into outstanding options and warrants of our
common stock pursuant to an exchange ratio. In addition, as of February 15,
2001, the remaining outstanding 9.0% convertible notes issued on January 20,
1999 can be converted into 285,801 shares of common stock and the remaining
outstanding 9.0% convertible notes issued on July 6, 1999 can be converted into
1,578,876 shares of common stock. Upon issuance or conversion, all of these
shares of common stock will be freely tradable.
WE MAY NOT REALIZE THE BENEFITS OF THE COMBINED BUSINESSES, OPERATIONS AND
PERSONNEL AS A RESULT OF THE MERGER, WHICH COULD DIMINISH THE EXPECTED BENEFITS
OF THE MERGER.
Achieving the expected benefits of the Merger will depend in large part on
the successful integration of the combined businesses, operations and personnel
in a timely and efficient manner. We must integrate the information systems,
product development, administration and other operations of the combined
company and the geographical distance between our facilities in Warren, New
Jersey, and Signal's facilities in San Diego, California. This may be difficult
and unpredictable because of possible cultural conflicts and different opinions
on technical, operational and other integration decisions. We must also
integrate the employees of the combined company. The operations, management and
personnel of the combined company may not be compatible, and we may also
experience the loss of key personnel for that reason.
24
The diversion of management attention and any difficulties or delays
encountered in the transition and integration process following the Merger
could have a material adverse effect on the combined company's business,
financial condition and operating results.
We expect to incur costs from integrating Signal's operations and
personnel. These costs may be substantial and may include costs for:
-- employee redeployment or severance; and
-- conversion of information systems.
We cannot assure you that we will be successful in these integration
efforts or that we will realize the expected benefits of the Merger.
OUR SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BY-LAW PROVISIONS MAY
DETER A THIRD PARTY FROM ACQUIRING US.
Our board of directors has adopted a shareholder rights plan, the purpose
of which is to protect stockholders against unsolicited attempts to acquire
control of us that do not offer a fair price to all of our stockholders. The
rights plan may have the effect of dissuading a potential acquirer from making
an offer for our common stock at a price that represents a premium to the then
current trading price.
Our board of directors has the authority to issue, at any time, without
further stockholder approval, up to 5,000,000 shares of preferred stock, and to
determine the price, rights, privileges and preferences of those shares. Any
issuance of preferred stock could discourage a third party from acquiring a
majority of our outstanding voting stock. Additionally, our board of directors
has adopted certain amendments to our by-laws intended to strengthen the
board's position in the event of a hostile takeover attempt.
Furthermore, we are subject to the provisions of Section 203 of the
Delaware General Corporation Law, an anti-takeover law, which may also dissuade
a potential inquiror of our common stock.
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 also lease 45,500 square feet of laboratory and office space in San
Diego, California, under three operating lease agreements for our Signal
Research operations which have terms ending on December 31, 2003. The minimum
annual rents are subject to specified annual rental increases. Signal also
reimburses the lessor for taxes, insurance and operating costs associated with
the leases. Under the terms of the lease, we have an outstanding letter of
credit for $150,000 in favor of the lessor, which is fully collateralized by
cash.
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
25
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 (as adjusted for the three-for-one stock split effected in
April 2000):
HIGH LOW
------------ ------------
2000
Fourth Quarter ............... $ 74.875 $ 26.875
Third Quarter ................ 76.00 41.75
Second Quarter ............... 68.50 25.00
First Quarter ................ 62.33 18.92
1999
Fourth Quarter ............... $ 24.21 $ 8.65
Third Quarter ................ 9.67 4.875
Second Quarter ............... 6.69 5.13
First Quarter ................ 6.21 3.83
The last reported sales price per share of common stock on the Nasdaq
National Market on March 2, 2001 was $26.563. As of March 2, 2001, there were
approximately 812 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.
26
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data should be read in
conjunction with our Consolidated Financial Statements and the related Notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial information included elsewhere in
this Annual Report. The data set forth below with respect to our Consolidated
Statements of Operations for the years ended December 31, 2000, 1999 and 1998
and the Balance Sheet as of December 31, 2000 and 1999 are derived from our
Consolidated Financial Statements which are included elsewhere in this Annual
Report and are qualified by reference to such Consolidated Financial Statements
and related Notes thereto. Our historical results are not necessarily
indicative of future results of operations.
On August 31, 2000, we completed our merger with Signal Pharmaceuticals,
Inc. (Signal) which was accounted for as a pooling-of-interests. All prior
period consolidated financial statements of Celgene have been restated to
include the results of operations, financial position, and cash flows of
Signal.
YEAR ENDED DECEMBER 31,
2000 1999 1998 1997 1996
IN THOUSANDS, EXCEPT PER SHARE DATA ------------ -------------- -------------- -------------- ------------
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total revenue .............................. $ 84,249 $ 37,958 $ 19,215 $ 8,701 $ 4,815
Costs and operating expenses ............... 118,558 68,623 56,644 39,654 29,119
Interest income/(expense), net ............. 15,496 (1,990) 1,050 193 1,037
Tax benefit ................................ 1,810 3,018 -- -- --
--------- ---------- ---------- ---------- ---------
Loss from continuing operations ............ (17,003) (29,637) (36,379) (30,760) (23,267)
Preferred stock dividend (including
accretion and imputed dividends) ......... -- 818 25 1,474 3,791
--------- ---------- ---------- ---------- ---------
Loss from continuing operations applicable
to common stockholders ................... $ (17,003) $ (30,455) $ (36,404) $ (32,234) $ (27,058)
========= ========== ========== ========== =========
Per share of common stock--basic and diluted:
Loss from continuing operations applicable
to common stockholders (1) ............... $ (0.25) $ (0.59) $ (0.75) $ (0.87) $ (0.95)
========= ========== ========== ========== =========
Weighted average number of shares of
common stock outstanding (1) ............. 66,598 51,449 48,811 36,900 28,561
========= ========== ========== ========== =========
DECEMBER 31,
2000 1999 1998 1997 1996
IN THOUSANDS ------------ ------------- ------------- ------------- -------------
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents, and marketable
securities ................................ $ 306,162 $ 28,947 $ 18,076 $ 34,449 $ 23,275
Total assets ................................ 346,726 46,873 31,486 42,055 29,985
Long-term obligations under capital leases
and equipment notes payable ............... 633 1,828 2,656 1,899 2,746
Convertible debentures ...................... -- -- -- -- 2,026
Convertible notes ........................... 11,714 38,495 8,349 -- --
Accumulated deficit ......................... (220,455) (204,170) (173,715) (144,266) (111,604)
Stockholders' equity (deficit) .............. 295,533 (9,727) 8,393 30,589 17,577
(1) Amounts are adjusted for the three-for-one stock split effected in April
2000.
27
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
biopharmaceutical company. In July 1987, we completed an initial public
offering of our common stock and commenced the research and 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.
Between 1990 and 1998, our revenue had been generated primarily through
the development 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 revenue from
THALOMID sales, license agreements and milestone payments related to our cancer
and immunology programs increased, 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 intermediates business to Cambrex
Corporation for $15.0 million. Terms of the sale provided for a payment to
Celgene of $7.5 million at closing and future royalties on product sales not to
exceed the net present value on the initial date of the sale of $7.5 million,
with a guarantee of certain minimum payments to Celgene beginning in the third
year following the close of the agreement.
In July 1998, we received approval from the FDA to market THALOMID
(thalidomide) for use in ENL, a side effect of leprosy, and in late September
1998, we commenced sales of THALOMID in the United States. Sales have grown
rapidly each year since the launch and in 2000, we recorded net sales of
THALOMID of $62.0 million.
On February 16, 2000, we completed a follow-on public offering to sell
10,350,000 shares of our common stock at a price of $33.67 per share. 8,802,000
shares were for our account and 1,548,000 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
offering expenses, were approximately $278.0 million.
On April 19, 2000, we signed a license and development agreement with
Novartis Pharma AG in which we granted to Novartis a world wide license for
d-methylphenidate, our chirally pure version of Ritalin. The agreement provides
for up to $100 million in up front and milestone payments based on achieving
various regulatory approvals and royalties on the entire family of Ritalin
products upon approval of d-MPH by the FDA. We have retained the rights for the
use of d-MPH in oncology indications.
On August 31, 2000, we completed a merger, accounted for as a
pooling-of-interests, with Signal Pharmaceuticals, Inc., ("Signal"), a
privately held biopharmaceutical company focused on the discovery and
development of drugs that regulate genes associated with disease.
We have sustained losses in each year since our inception as an
independent biopharmaceutical company in 1986. In 2000, we had a net loss
applicable to common stockholders of $16.3 million and at December 31, 2000,
had an accumulated deficit of $220.5 million. We expect to make substantial
expenditures to further develop and commercialize THALOMID, develop our other
oncology and immunological disease programs, and advance the drug discovery and
development programs at Signal. We also expect increased sales of THALOMID,
revenues from various research collaborations and license agreements with other
pharmaceutical and biopharmaceutical companies, and continued investment
income.
Subject to the risks described elsewhere in this Annual Report on Form
10-K, we believe there are significant market opportunities for the
pharmaceutical products and processes under development by us. To address these
and potential future opportunities in a timely and competitive manner, we
intend to
28
seek out drug discovery and development 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. The latter development
activities are performed through Celgro Corporation, our wholly owned
agrochemical subsidiary.
We have established a commercial sales, marketing and customer service
organization to sell and support THALOMID and as of February 15, 2001, we
employ 98 persons in this capacity. We intend to develop and market our own
pharmaceuticals for indications with economically accessible patient
populations in our disease franchises. For drugs with indications outside the
oncology and immunological disease fields and for larger patient populations,
we anticipate partnering with other pharmaceutical companies. We currently
partner with companies such as Novartis for the development and
commercialization of our chirally pure pharmaceutical and agrochemical
products. We expect these arrangements typically will include some combination
of license fees, milestone payments, reimbursement of research and development
expenses and royalty arrangements. We also may acquire products or companies to
expand our product portfolio and to augment our development and
commercialization resources.
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, 2000, 1999 and 1998
Total revenues. Our total revenue for the year ended December 31, 2000
increased 122% to $84.2 million compared with $38.0 million for the same period
in 1999. Revenue in 2000 consisted of net THALOMID sales of $62.0 million,
research contract revenue of $15.9 million and related party collaborative
agreement revenue of $6.3 million compared with net THALOMID sales of $24.1
million, research contract revenue of $9.4 million and revenue from related
party collaborative agreements of $4.5 million in 1999. The growth in THALOMID
sales primarily is related to increased use in oncology. Research contract
revenue increased in 2000 primarily as a result of the recognition of $4.6
million of the $10.0 million nonrefundable upfront license fee payment received
in connection with a collaborative agreement entered into with Novartis Pharma
AG in April 2000, and a $5.0 million milestone payment related to the same
agreement with Novartis. Total revenue in 1999 increased significantly to
approximately $38.0 million from $19.2 million in 1998. The increase primarily
was the result of 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 following FDA marketing approval in July 1998. Revenue from research
contracts decreased to $9.4 million in 1999 from $12.9 million in 1998, while
related party collaborative agreements increased to $4.5 million in 1999 from
$3.0 million in 1998. The decrease in research contract revenue was primarily
due to the termination of the Tanabe Agreement in 1998.
Cost of goods sold. Cost of goods sold in the year ended December 31,
2000, was approximately $9.3 million compared with approximately $3.0 million
in 1999. The increase in cost of goods sold reflects the higher volume of
THALOMID sales in 2000. In addition, the cost of goods sold during the first
quarter of 2000 and the full year of 1999 does not reflect raw material or
formulation and encapsulation costs of THALOMID, as these costs were incurred
and charged as research and development expenses prior to receiving FDA
marketing approval. Increase in cost of goods sold for 1999 compared to 1998 is
primarily the result of increased sales volume.
Research and development expenses. Research and development expenses
increased by 45% for the year ended December 31, 2000 to approximately $52.7
million compared to $36.4 million in 1999. The increase was primarily due to
spending for preclinical toxicology and pharmacology studies and phase I and
phase II clinical trials for our SelCIDs and IMiDs, completion of the pivotal
clinical trials and preparation for filing the NDA for d-methylphenidate
(d-MPH), our chirally pure version of Ritalin, and preclinical product
development for our SERM (selective estrogen receptor modulators) cancer
program.
29
Additionally, there was an increase in the recognition of compensation expense
recorded for stock options granted by Signal during the first quarter of 2000.
Research and development expenses for 1999 increased approximately 3% to $36.4
million from $35.3 million in 1998. Increased spending for clinical trials,
primarily for d-MPH, and research and preclinical development of drug leads in
our kinase and SERM programs was offset by a decrease in regulatory consulting
fees, university research program spending, and production of THALOMID capsules
which was charged as research and development expense prior to receiving FDA
marketing approval in July of 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses for 2000 increased 70% to $49.9 million from $29.2
million in 1999. The increase was due primarily to the expansion of our sales
and marketing organization and related expenses, and spending for customer
service, warehousing and distribution, all to support the growth in THALOMID
sales. Selling, general and administrative expenses for 1999 increased by 39%
over 1998, from approximately $21.0 million to approximately $29.2 million. The
increase was primarily in sales and marketing expenses, warehousing and
distribution expenses and expenditures relating to medical affairs and drug
safety costs, all to support the commercialization and distribution of
THALOMID.
Merger-related costs. We incurred one-time costs of $6.7 million
associated with the merger with Signal Pharmaceuticals, Inc. in 2000. These
costs were primarily related to fees for financial advisors, accountants,
lawyers and financial printers.
Interest income and interest expense. Interest income in 2000 increased
significantly to $17.6 million from $1.3 million in 1999. The increase was due
to the investment of the net proceeds of approximately $278.0 million from the
follow-on public offering in February 2000, and $10.0 million received from
Novartis Pharma AG in July 2000 related to the license and development
agreement entered into in the second quarter of 2000. Interest income for 1999
of $1.3 million was slightly lower than the $1.8 million in 1998 as average
cash balances were lower in 1999.
Interest expense decreased significantly in 2000 to $2.1 million from $3.3
million in 1999. The decrease was primarily the result of the conversion to
equity of a significant portion of the outstanding long-term convertible notes
throughout 2000. Also, in September 2000, we entered into an agreement with the
remaining convertible noteholders which allows the noteholders to take a "short
position" in our common stock. In return the noteholders waive the right to the
receipt of any interest after the effective date of August 24, 2000. Interest
expense in 1999 was significantly higher than 1998, at approximately $3.3
million compared with approximately $0.7 million in 1998. The higher interest
expense resulted from the interest incurred on the three convertible notes
issued in September 1998, January 1999 and July 1999.
Loss from continuing operations. The loss from continuing operations
decreased 43% to $17.0 million in 2000 from $29.6 million in 1999. The
decreased loss was primarily the result of higher THALOMID sales and increased
revenues from research contracts and collaborative agreements partially offset
by higher cost of goods sold, research and development expenses, selling,
general and administrative expenses and one-time merger-related costs. The loss
from continuing operations decreased 19% in 1999 compared with 1998, to
approximately $29.6 million from approximately $36.4 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 in part by increased selling, general and
administrative costs and higher interest expense.
Loss from discontinued operations. The loss from discontinued operations
of $60,000 in 1998 resulted from the sale of the chiral intermediates business
in January of 1998. The Company recorded a gain on the sale of the chiral
intermediate business 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. In
February 2000, we raised approximately $278.0 million in a follow-on public
offering of our common stock. We also received
30
$20.0 million in two separate research and license agreements during 2000.
Prior to 2000, we had 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, 2000 increased significantly to
approximately $298.2 million (primarily cash and cash equivalents and
marketable securities available for sale) from approximately $22.5 million at
December 31, 1999. The increase in working capital was primarily due to the
cash received from the proceeds of the follow-on offering in February 2000,
funds received from research and collaborative agreements, as well as
collection of receivables on sales of THALOMID.
Cash and cash equivalents increased to $161.4 million in 2000 from $21.9
million in 1999 while investments in marketable debt securities increased to
$144.8 million in 2000 from $7.1 million in 1999. This reflects the receipt of
funds from the follow-on offering, revenue received from research contracts and
collection of receivables from sales of THALOMID.
We expect that our rate of spending will increase as the result of
research and product development spending at Signal, 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 capital investments. On
February 16, 2000, we completed a public offering of 10,350,000 shares of our
common stock. Proceeds from the transaction net of expenses, were approximately
$278.0 million. These funds, combined with the increasing revenue from sales of
THALOMID and various research agreements and collaborations are expected to
provide sufficient capital for our operations for the foreseeable future.
RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 2001, we adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an amendment of SFAS No. 133 and
SFAS No. 133, Accounting for Certain Derivative Instruments and Certain Hedging
Activities. SFAS No. 138 amends the accounting and reporting standards of SFAS
No. 133 for certain derivative instruments and certain hedging activities. SFAS
No. 133 requires a company to recognize all derivative instruments as assets or
liabilities in its balance sheet and measure them at fair value. We do not
expect the adoption of these statements to have a material impact on our
consolidated financial position, results of operations or cash flows, as we are
currently not party to any derivative instruments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Our holdings of financial instruments comprise a mix of securities that
may include U.S. corporate debt, U.S. government debt, and commercial paper.
All such instruments are classified as securities available for sale.
Generally, we do not invest in portfolio equity securities or commodities or
use financial derivatives for trading purposes. Our debt security portfolio
represents funds held temporarily pending use in our business and operations.
We manage these funds accordingly. We seek reasonable assuredness of the safety
of principal and market liquidity by investing in investment grade fixed income
securities while at the same time seeking to achieve a favorable rate of
return. Our market risk exposure consists principally of exposure to changes in
interest rates. Our holdings are also exposed to the risks of changes in the
credit quality of issuers. We invest in securities that have a range of
maturity dates. Typically, those with a short-term maturity are fixed-rate,
highly liquid, debt instruments and those with longer-term maturities are
highly liquid debt instruments with fixed interest rates or with periodic
interest
31
rate adjustments. Due to the limited number of foreign currency transactions,
our foreign exchange currency risk is minimal. The table below presents the
principal amounts and related weighted average interest rates by year of
maturity for our investment portfolio as of December 31, 2000:
2001 2002 2003 2004 2005 2006 TOTAL FAIR VALUE
------------ ------------ ------------ ------ ----------- ----------- ------------- -----------
(in Thousands $)...............
Fixed Rate .................... $ 88,235 $ 25,550 $ 15,400 -- $ 8,000 $ 6,557 $ 143,742 $144,768
Average Interest Rate ......... 6.56% 6.73% 6.84% -- 6.875% 7.125% 6.66% --
At December 31, 2000, our 9% January 1999 and July 1999 convertible notes
with outstanding principal amounts of $1,713,600 and $10,000,000, respectively
no longer accrue interest, as disclosed in Note 8 of the Consolidated Financial
Statements included elsewhere in this annual report. These convertible notes
are convertible into the Company's common stock at a conversion price $6.00 and
$6.33 per share, respectively. The fair value of fixed interest rate
instruments are affected by changes in interest rates and in the case of the
convertible notes by changes in the price of the Company's common stock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
- --------------------------------------- ----- ---------------------------------------------
John W. Jackson* ...................... 56 Chairman of the Board and Chief Executive
Officer
Sol J. Barer, Ph.D.* .................. 53 President, Chief Operating Officer, Director
Robert J. Hugin* ...................... 46 Chief Financial Officer and Senior Vice
President
Jack L. Bowman ........................ 68 Director
Frank T. Cary ......................... 80 Director
Arthur Hull Hayes, Jr., M.D. .......... 67 Director
Gilla Kaplan, Ph.D. ................... 53 Director
Richard C. E. Morgan .................. 56 Director
Walter L. Robb, Ph.D. ................. 72 Director
Lee J. Schroeder ...................... 72 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 of the Company since October
1993 and our Chief Operating Officer and one of our directors since March 1994.
Dr. Barer was 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, Targeted Genetics and Osiris
Pharmaceuticals.
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. and Vion Pharmaceuticals 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, and clinical professor of medicine and
pharmacology at the Pennsylvania State University College of Medicine. From
1986 to 1990,
33
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 the Chairman and
Chief Executive Officer of incuVest LLC and a Managing Partner of Amphion
Capital Management LLC, formerly Wolfensohn Partners, L.P. Mr. Morgan serves on
the Board of Directors of Indigo, N.V., ChromaVision Medical Systems, Inc.,
Axcess Inc. and Orbisi International, Inc.
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 is
Chairman of the Board of Directors of Capital District Sports. He is also a
director of Cree, Inc., Mechanical Technology, Inc., Plug Power, Inc.,
Molecular OptoElectronics, Nextec, R2 Technology and X-Ray Optical Systems.
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 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.
34
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 2000 372,500 338,975 14,280 (1) 0 450,000 13,390 (2)
Chairman and 1999 300,000 390,000 19,200 (1) 0 660,000 13,390 (2)
Chief Executive 1998 285,000 79,800 19,200 (1) 0 300,000 13,390 (2)
Officer
Sol J. Barer, Ph.D. 2000 308,550 194,387 14,280 (1) 0 255,000 0
President and 1999 255,833 230,250 19,200 (1) 0 210,000 0
Chief Operating 1998 243,333 51,100 19,200 (1) 0 150,000 0
Officer
Robert J. Hugin (3) 2000 270,500 132,545 14,280 (1) 0 180,000 0
Senior Vice President 1999 127,385 168,000 7,200 (1) 0 450,000 0
and 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 has been employed by the Company since 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 target 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. 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 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
35
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 provides information concerning grants of stock
options to the following named executive officers in fiscal 2000.
OPTION GRANTS DURING FISCAL 2000
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
DATE OF OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------------
NAME GRANT GRANTED (1) IN 2000(2) PER SHARE DATE 5% 10%
- ---------------------------- --------- ------------- ------------ ------------- ----------- ------------- -------------
John W. Jackson ............ 2/03/00 300,000 9.2% $ 25.7917 2/03/10 $3,868,755 $7,737,510
9/19/00 150,000 4.6% $ 65.3750 9/19/10 $4,903,125 $9,806,250
Sol J. Barer, Ph.D ......... 2/03/00 150,000 4.6% $ 25.7917 2/03/10 $1,934,378 $3,868,755
9/19/00 105,000 3.2% $ 65.3750 9/19/10 $3,432,188 $6,864,375
Robert J. Hugin ............ 2/03/00 105,000 3.2% $ 25.7917 2/03/10 $1,354,065 $2,708,129
9/19/00 75,000 2.3% $ 65.3750 9/19/10 $2,451,563 $4,903,125
- ----------
(1) All options granted in 2000 were granted pursuant to the Company's 1998
Long-Term Incentive Plan or the 1992 Long-Term Incentive Plan. The grants
to Mr. Jackson, Dr. Barer and Mr. Hugin are exercisable in annual
increments of 33 1/3% of each total grant, beginning on the date of grant.
All options were granted at the fair market value of Common Stock on the
effective date of grant.
(2) The total number of options granted to employees in 2000 was 3,266,281.
The following table sets forth information for each of the named executive
officers with respect to the value of options exercised during the year ended
December 31, 2000 and the value of outstanding and unexercised options held as
of December 31, 2000. There were no SARs exercised during 2000 and none were
outstanding as of December 31, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES VALUE AT FISCAL YEAR-END AT FISCAL YEAR-END(2)
ACQUIRED REALIZED ----------------------------- ----------------------------
NAME ON EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ----------------- -------------- ------------- --------------- ------------- --------------
John W. Jackson ..... 580,400 $26,454,173 508,869 840,001 $10,639,547 $16,036,257
Sol J. Barer, Ph.D .. 338,764 $12,876,982 398,579 354,899 $ 8,980,377 $ 6,746,513
Robert J. Hugin ..... 100,700 $ 4,945,930 109,300 420,000 $ 1,580,271 $ 8,657,091
- ----------
(1) Represents the difference between the average high and low trading price of
the Common Stock on the Nasdaq National Market on the date the shares were
acquired and the average high and low exercise price of the options
exercised multiplied by the number of shares acquired upon exercise.
(2) Represents the difference between the closing market price of the Common
Stock as reported by the Nasdaq National Market on December 29, 2000 of
$32.50 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.
36
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.
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 2000 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 January 1, 2000, Mr. Jackson received base
salary of $372,500 for 2000. Mr. Jackson also received a bonus of $338,975 for
2000. 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
37
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 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") receive $1,500 for each Board Meeting attended and 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 "Directors'
Option Plan").
The Directors' Option 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. At the Annual Meeting of the Company held in 1997, the
Director's Option Plan was amended to increase the number of shares of the
Company's Common Stock that may be issued upon exercise of options granted
thereunder from 750,000 shares to 1,050,000. At the Annual Meeting of the
Company held in 1999, the Directors' Option Plan was amended to increase the
number of shares of the Company's Common Stock that may be issued upon exercise
of options granted thereunder from 1,050,000 shares to 1,800,000 shares. The
Directors' Option Plan currently provides for the granting to Non-Employee
Directors of non-qualified options to purchase an aggregate of not more than
1,800,000 shares (subject to adjustment in certain circumstances) of Common
Stock.
Under the Directors' Option Plan, each Non-Employee Director as of April
5, 1995 was granted a non-qualified option to purchase 60,000 shares of Common
Stock, and each new Non-Employee Director upon the date of his or her election
or appointment will be granted a non-qualified option to purchase 20,000 shares
of Common Stock. These initial options vest in four equal annual installments
commencing on the first anniversary of the date of grant, assuming the
Non-Employee Director remains a director.
Upon the date of each Annual Meeting of Stockholders, each Non-Employee
Director is granted a non-qualified option to purchase 10,000 shares of Common
Stock (or a pro rata portion thereof if the director did not serve the entire
year since the date of the last annual meeting). These options vest in full on
the date of the first Annual Meeting of Stockholders held following the date of
the grant, assuming the Non-Employer Director is a director on that date.
All options granted pursuant to the Directors' Option 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 2000, pursuant to the 1995 Directors' Option Plan, each of Messrs.
Bowman, Cary, Hayes, Morgan, Robb, Schroeder and Dr. Kaplan received an option
to purchase 15,000 shares of Common Stock at an exercise price of $59.6875 per
share, the fair market value of the stock on the date of the grant.
38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth the beneficial ownership of the Common Stock as
of February 15, 2001 (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 PERCENT OF
NAME BENEFICIAL OWNERSHIP CLASS
- ---------------------------------------------------------------- ------------------------------ -----------
John W. Jackson ................................................ 1,015,626 (1)(2) 1.4%
Sol J. Barer, Ph.D. ............................................ 630,171 (1)(2)(3) *
Robert J. Hugin ................................................ 163,831 (1)(2) *
Frank T. Cary .................................................. 323,340 (1)(4) *
Arthur Hull Hayes, Jr., M.D. ................................... 150,000 (1) *
Richard C.E. Morgan. ........................................... 267,270 (1)(5) *
Walter L. Robb, Ph.D. .......................................... 281,000 (1)(6) *
Lee J. Schroeder ............................................... 162,000 (1)(7) *
Gilla Kaplan ................................................... 30,000 (1) *
Jack L. Bowman ................................................. 58,100 (1) *
All directors and current executive officers of the Company as a
group (ten persons) ........................................... 3,081,338 (8) 4.0%
FMR Corp. ("FMR") .............................................. 10,904,170 (9) 14.1%
- ----------
* 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 15, 2001, as follows: John W. Jackson -- 643,868; Sol J. Barer
-- 528,477; Robert J. Hugin -- 144,300; Frank T. Cary -- 30,000; Arthur
Hull Hayes, Jr. -- 150,000; Richard C.E. Morgan -- 0; Walter L. Robb --
198,000; Lee J. Schroeder -- 0; Gilla Kaplan -- 30,000; Jack Bowman
--55,100. Does not include shares of Common Stock which the directors and
executive officers have the right to acquire through the exercise of
options not exercisable within 60 days of February 15, 2001, as follows:
John W. Jackson -- 570,002; Sol J. Barer -- 225,000; Robert J. Hugin --
385,000; Frank T. Cary -- 15,000; Arthur Hull Hayes, Jr. -- 15,000;
Richard C.E. Morgan -- 15,000; Walter L. Robb -- 15,000; Lee J. Schroeder
-- 15,000; Gilla Kaplan -- 60,999; and Jack L. Bowman -- 45,000.
(2) Includes shares of Common Stock reflecting matching contributions under the
Company's 401(k) Plan in which the executive officers will vest within 60
days of February 15, 2001.
(3) Includes with respect to Dr. Barer, 45 shares owned by the daughter of Dr.
Barer, as to which shares Dr. Barer disclaims beneficial ownership.
(4) Includes with respect to Mr. Cary, 75,000 shares owned by a trust in which
Mr. Cary is one of the trustees and holds a pecuniary interest.
(5) Includes with respect to Mr. Morgan, 270 shares owned by the son of Mr.
Morgan, as to which shares Mr. Morgan disclaims beneficial ownership. In
addition, Mr. Morgan has entered into two "zero cost collars", one
involving 60,000 shares of Common Stock and one involving 102,000 shares
of Common Stock.
(6) Includes with respect to Mr. Robb, 30,000 shares owned by a trust in which
Mr. Robb is a trustee.
(7) Includes with respect to Mr. Schroeder, 16,500 shares owned by the spouse
of Mr. Schroeder, as to which shares Mr. Schroeder disclaims beneficial
ownership.
(8) Includes or excludes, as the case may be, shares of Common Stock as
indicated in the preceding footnotes.
(9) Information regarding FMR was obtained from a questionnaire and from a
Schedule 13G, filed by FMR with the Securities and Exchange Commission.
Such Schedule 13G states that, through two wholly owned subsidiaries
(Fidelity Management & Research Company and Fidelity Management Trust
Company) and a former indirect subsidiary (Fidelity International Limited)
FMR beneficially owns 10,904,170 shares of Common Stock, and has sole
dispositive power over all 10,904,170 shares and sole voting power over
284,340 of such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND REPORTS ON FORM
8-K.
(a)(1),(1)(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
8-K, 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 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).
10.5 Form of indemnification agreement between the Company and each officer and director of the
Company (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
10.6 Employment Agreement dated as of January 1, 2000 between the Company and John W. Jackson
(incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999).
10.7 Employment Agreement dated as of January 1, 2000 between the Company and Sol J. Barer
(incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999).
10.8 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)).
10.9 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)).
10.10 Form of Stock Option Agreement to be issued in connection with the Celgene Corporation
Replacement Stock Option Plan (incorporated by reference to Exhibit 99.2 of the Company's
Registration Statement on Form S-3 dated May 18, 1998 (No. 333-52963)).
10.11 1998 Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company's Proxy
Statement, dated May 18, 1998).
10.12 Stock Purchase Agreement dated June 23, 1998 between the Company and Biovail Laboratories
Incorporated (incorporated by reference in the Company's Current Report on Form 8-K filed on
July 17, 1998.)
40
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ---------- -----------------------------------------------------------------------------------------------
10.13 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) (incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.14 Employment Agreement dated as of January 1, 2000 between the Company and Robert J. Hugin
(incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999).
10.15 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 (incorporated
by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.16 Form of 9.00% Senior Convertible Note Due January 20, 2004 (incorporated by reference to
Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31,
1999).
10.17 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 (incorporated by reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999).
10.18 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 (incorporated by reference
to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.19 Form of 9.00% Senior Convertible Note Due June 30, 2004 (incorporated by reference to Exhibit
10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999).
10.20 Registration Rights Agreement dated as of July 6, 1999 between the Company and the
Purchasers in connection with the issuance of the Company's 9.00% Senior Convertible Note
Due June 30, 2004 (incorporated by reference to Exhibit 10.27 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999).
10.21 Development and License Agreement between the Company and Novartis Pharma AG, dated
April 19, 2000.
10.22 Collaborative Research and License Agreement between the Company and Novartis Pharma
AG, dated December 20, 2000.
23.1 Consent of KPMG LLP
23.2 Consent of Ernst & Young LLP, Former Independent Auditors of Signal Pharmaceuticals, Inc.
24.1 Power of Attorney (included in Signature Page).
41
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 20, 2001
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 20, 2001
--------------------------- Chief Executive Officer
John W. Jackson
/s/ Sol J. Barer Director, President and Chief March 20, 2001
--------------------------- Operating Officer
Sol J. Barer
/s/ Robert J. Hugin Chief Financial Officer and Senior March 20, 2001
--------------------------- Vice President
Robert J. Hugin
/s/ Jack L. Bowman Director March 20, 2001
---------------------------
Jack L. Bowman
/s/ Frank T. Cary Director March 20, 2001
---------------------------
Frank T. Cary
/s/ Arthur Hull Hayes, Jr. Director March 20, 2001
---------------------------
Arthur Hull Hayes, Jr.
42
SIGNATURE TITLE DATE
- ------------------------------ --------------------------------------- ---------------
/s/ Gilla Kaplan Director March 20, 2001
---------------------------
Gilla Kaplan
/s/ Richard C.E. Morgan Director March 20, 2001
---------------------------
Richard C.E. Morgan
/s/ Walter L. Robb Director March 20, 2001
---------------------------
Walter L. Robb
/s/ Lee J. Schroeder Director March 20, 2001
---------------------------
Lee J. Schroeder
/s/ James R. Swenson Controller (Chief Accounting Officer) March 20, 2001
---------------------------
James R. Swenson
The foregoing constitutes a majority of the directors.
43
CELGENE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Consolidated Financial Statements
Independent Auditors' Report ............................................................ F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 ............................ F-4
Consolidated Statements of Operations - Years Ended December 31, 2000, 1999 and 1998 .... F-5
Consolidated Statements of Stockholders' Equity (Deficit) - Years Ended December 31,
2000,
1999 and 1998 ......................................................................... F-6
Consolidated Statements of Cash Flows - Years Ended December 31, 2000, 1999 and 1998 .... F-9
Notes to Consolidated Financial Statements .............................................. F-11
Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts ......................................... F-30
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Celgene Corporation:
We have audited the consolidated financial statements of Celgene
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the consolidated financial statement schedule as listed 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.
The consolidated financial statements of Celgene Corporation and
subsidiaries as of December 31, 1999 and for the years ended December 31, 1999
and 1998, have been restated to reflect the pooling-of-interests transaction
with Signal Pharmaceuticals, Inc. as described in note 1 to the consolidated
financial statements. We did not audit the 1999 and 1998 financial statements
of Signal Pharmaceuticals, Inc., which statements reflect total assets
constituting 31% in 1999 and total revenues constituting 31% and 80%, in 1999
and 1998, respectively, of the related consolidated totals. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Signal
Pharmaceuticals, Inc. as of December 31, 1999 and for the years ended December
31, 1999 and 1998, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Celgene
Corporation and subsidiaries as of December 31, 2000 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, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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
February 1, 2001
F-2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Signal Pharmaceuticals, Inc.
We have audited the balance sheets of Signal Pharmaceuticals, Inc. as of
December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Signal Pharmaceuticals,
Inc. at December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
February 4, 2000
F-3
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------------
2000 1999*
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 161,393,835 $ 21,869,256
Marketable securities available for sale ................................... 144,767,777 7,077,314
Accounts receivable, net of allowance of $382,577 and $121,437 at
December 31, 2000 and 1999, respectively .................................. 9,846,000 5,037,431
Inventory .................................................................. 4,266,257 2,456,059
Other current assets ....................................................... 11,747,727 1,322,996
-------------- --------------
Total current assets .................................................... 332,021,596 37,763,056
Plant and equipment, net ................................................... 8,395,902 5,741,389
Other assets ............................................................... 6,308,417 3,368,090
-------------- --------------
Total assets ............................................................ $ 346,725,915 $ 46,872,535
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ........................................................... $ 10,868,473 $ 3,254,823
Accrued expenses ........................................................... 9,511,507 7,284,343
Current portion of capital leases and note obligation ...................... 929,258 1,307,467
Current portion of deferred revenue ........................................ 12,473,574 3,449,790
-------------- --------------
Total current liabilities ............................................... 33,782,812 15,296,423
Long term convertible notes ................................................ 11,713,600 38,494,795
Capitalized leases and note obligation, net of current portion ............. 632,946 1,828,221
Deferred revenue, net of current portion ................................... 4,866,000 650,002
Other non-current liabilities .............................................. 197,685 329,918
-------------- --------------
Total liabilities ....................................................... 51,193,043 56,599,359
-------------- --------------
Stockholders' equity (deficit):
Preferred stock, $.01 par value per share 5,000,000 authorized; none
outstanding at December 31, 2000 and 1999 ................................. -- --
Signal convertible preferred stock, 24,742,639 shares authorized; issued
and outstanding none and 24,492,639 shares at December 31, 2000 and
1999, respectively. ....................................................... -- 41,330,800
Common stock, $.01 par value per share 120,000,000 shares authorized;
issued and outstanding 73,999,889 and 17,858,476 shares at
December 31, 2000 and 1999, respectively. ................................. 739,999 178,584
Additional paid-in capital .................................................... 519,290,323 154,393,662
Accumulated deficit ........................................................... (220,454,722) (204,170,352)
Deferred compensation ......................................................... (4,890,607) (1,272,014)
Notes receivable from stockholders ............................................ (62,000) (95,600)
Accumulated other comprehensive income (loss) ................................. 909,879 (91,904)
-------------- --------------
Total stockholders' equity (deficit) .................................... 295,532,872 (9,726,824)
-------------- --------------
Total liabilities and stockholders' equity (deficit) .................... $ 346,725,915 $ 46,872,535
============== ==============
* Restated-see note 1
See accompanying notes to consolidated financial statements.
F-4
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
2000 1999* 1998*
----------------- ----------------- ----------------
Revenue:
Product sales ............................... $ 62,017,411 $ 24,052,124 $ 3,265,490
Research contracts .......................... 15,882,112 9,380,825 12,949,242
Related-party collaborative agreement
revenue ................................... 6,349,996 4,525,000 3,000,000
------------- ------------- -------------
Total revenue ............................ 84,249,519 37,957,949 19,214,732
------------- ------------- -------------
Expenses:
Cost of goods sold .......................... 9,328,275 2,982,713 282,307
Research and development .................... 52,711,609 36,393,756 35,344,580
Selling, general and administrative ......... 49,850,550 29,246,777 21,016,748
Merger-related costs ........................ 6,668,110 --
------------- -------------
Total expenses ........................... 118,558,544 68,623,246 56,643,635
------------- ------------- -------------
Operating loss ............................... (34,309,025) (30,665,297) (37,428,903)
Other income and expense:
Interest income ............................. 17,576,856 1,301,803 1,758,069
Interest expense ............................ 2,080,981 3,291,364 708,441
------------- ------------- -------------
Loss before tax benefit ...................... (18,813,150) (32,654,858) (36,379,275)
Tax benefit .................................. 1,809,677 3,017,910 --
------------- ------------- -------------
Loss from continuing operations .............. (17,003,473) (29,636,948) (36,379,275)
Discontinued operations:
Loss from operations ........................ -- -- (59,837)
Gain on sale of chiral assets ............... 719,103 -- 7,014,830
------------- ------------- -------------
Net loss ..................................... (16,284,370) (29,636,948) (29,424,282)
Accretion of premium payable on
preferred stock and warrants ................ -- -- 24,648
Deemed dividend for preferred stock
conversion discount ......................... -- 818,487 --
------------- ------------- -------------
Net loss applicable to common
stockholders ................................ $ (16,284,370) $ (30,455,435) $ (29,448,930)
============= ============= =============
Per share of common stock - basic and
diluted:
Loss from continuing operations ............. $ (0.25) $ (0.59) $ (0.75)
Discontinued operations:
Loss from operations ...................... -- -- (0.00)
Gain on sale of chiral assets ............. 0.01 -- 0.14
------------- ------------- -------------
Net loss applicable to common
stockholders .............................. $ (0.24) $ (0.59) $ (0.60)
============= ============= =============
Weighted average number of shares of
common stock outstanding .................... 66,598,000 51,449,000 48,811,000
============= ============= =============
* Restated-see note 1
See accompanying notes to consolidated financial statements.
F-5
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2000, 1999* AND 1998*
SIGNAL CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------------ --------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- --------------- ------------ -------------- ------------ ------------
Balances at January 1, 1998 ............. 74 $ 4,029,455 24,203,931 $39,519,431 15,539,270 $ 155,392
Exercise of stock options and
warrants ............................... 426,982 4,270
Issuance of common stock for
technology ............................. 11,103 111
Deferred compensation ...................
Amortization of deferred
compensation ...........................
Costs related to secondary offering .....
Conversion of preferred stock ........... (74) (4,054,103) 575,669 5,757
Accretion of premium on preferred
stock .................................. 24,648
Issuance of common stock for
employee benefit plans ................. 8,317 83
Sale of common stock .................... 199,688 1,997
Comprehensive loss:
Net loss ...............................
Net change in unrealized gain
(loss) on available for sale
securities .............................
Total comprehensive loss ...............
Balances at December 31, 1998 .......... -- $ -- 24,203,931 $39,519,431 16,761,029 $ 167,610
=== ============= ========== =========== ========== =========
TREASURY STOCK ADDITIONAL
-------------------------- PAID-IN ACCUMULATED DEFERRED
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION
------------ ------------- --------------- ------------------ --------------
Balances at January 1, 1998 ............. (22,888) $ (76,535) $131,690,219 $ (144,265,987) $ (511,510)
Exercise of stock options and
warrants ............................... 3,136,394
Issuance of common stock for
technology ............................. 726,889
Deferred compensation ................... 1,019,170 (1,019,170)
Amortization of deferred
compensation ........................... 607,788
Costs related to secondary offering ..... (73,136)
Conversion of preferred stock ........... 4,048,346
Accretion of premium on preferred
stock .................................. (24,648)
Issuance of common stock for
employee benefit plans ................. 22,888 76,535 387,070
Sale of common stock .................... 2,498,003
Comprehensive loss:
Net loss ............................... (29,424,282)
Net change in unrealized gain
(loss) on available for sale
securities .............................
Total comprehensive loss ...............
Balances at December 31, 1998 .......... -- $ -- $143,432,955 $ (173,714,917) $ (922,892)
======= ========= ============ ============== ============
ACCUMULATED
NOTES OTHER
RECEIVABLE COMPREHENSIVE
FROM INCOME
STOCKHOLDERS (LOSS) TOTAL
-------------- -------------- ---------------
Balances at January 1, 1998 ............. $ -- $ 48,341 $ 30,588,806
Exercise of stock options and
warrants ............................... (95,600) 3,045,064
Issuance of common stock for
technology ............................. 727,000
Deferred compensation ................... --
Amortization of deferred
compensation ........................... 607,788
Costs related to secondary offering ..... (73,136)
Conversion of preferred stock ........... --
Accretion of premium on preferred
stock .................................. --
Issuance of common stock for
employee benefit plans ................. 463,688
Sale of common stock .................... 2,500,000
Comprehensive loss:
Net loss ............................... (29,424,282)
Net change in unrealized gain
(loss) on available for sale
securities ............................. (42,115) (42,115)
-------------
Total comprehensive loss ............... (29,466,397)
-------------
Balances at December 31, 1998 .......... $ (95,600) $ 6,226 $ 8,392,813
========== ========= =============
* Restated-see note 1
See accompanying notes to consolidated financial statements.
F-6
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2000, 1999* AND 1998* -- (CONTINUED)
SIGNAL CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
----------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- ------------ --------------
Balances at January 1, 1999 .............................. -- $ -- 24,203,931 $39,519,431
Exercise of stock options and warrants ...................
Issuance of Series F-1 preferred stock ................... 288,708 992,882
Imputed dividend on Series F-1 preferred stock ........... 818,487
Issuance of common stock and options for services ........
Deferred compensation ....................................
Amortization of deferred compensation ....................
Expense related to non-employee stock options ............
Issuance of common stock for employee benefit plans.
Issuance of options related to license agreement .........
Comprehensive loss:
Net loss ................................................
Net change in unrealized gain (loss) on available for
sale securities .........................................
Total comprehensive loss ................................
Balances at December 31, 1999 ........................... -- $ -- 24,492,639 $41,330,800
== ==== ========== ===========
COMMON STOCK TREASURY STOCK ADDITIONAL
------------------------- ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ -------- -------- ----------------
Balances at January 1, 1999 .............................. 16,761,029 $ 167,610 -- $ -- $ 143,432,955
Exercise of stock options and warrants ................... 1,015,471 10,154 8,415,647
Issuance of Series F-1 preferred stock ...................
Imputed dividend on Series F-1 preferred stock ...........
Issuance of common stock and options for services ........ 60 1 4,271
Deferred compensation .................................... 1,024,244
Amortization of deferred compensation ....................
Expense related to non-employee stock options ............ 20,646
Issuance of common stock for employee benefit plans. 81,916 819 799,004
Issuance of options related to license agreement ......... 696,895
Comprehensive loss:
Net loss ................................................
Net change in unrealized gain (loss) on available for
sale securities .........................................
Total comprehensive loss ................................
Balances at December 31, 1999 ........................... 17,858,476 $ 178,584 -- $ -- $ 154,393,662
========== ========= == ==== =============
ACCUMULATED
NOTES OTHER
RECEIVABLE COMPREHENSIVE
ACCUMULATED DEFERRED FROM INCOME
DEFICIT COMPENSATION STOCKHOLDERS (LOSS)
------------------ ----------------- -------------- --------------
Balances at January 1, 1999 .............................. $ (173,714,917) $ (922,892) $ (95,600) $ 6,226
Exercise of stock options and warrants ...................
Issuance of Series F-1 preferred stock ...................
Imputed dividend on Series F-1 preferred stock ........... (818,487)
Issuance of common stock and options for services ........
Deferred compensation .................................... (1,024,244)
Amortization of deferred compensation .................... 675,122
Expense related to non-employee stock options ............
Issuance of common stock for employee benefit plans.
Issuance of options related to license agreement .........
Comprehensive loss:
Net loss ................................................ (29,636,948)
Net change in unrealized gain (loss) on available for
sale securities ......................................... (98,130)
Total comprehensive loss ................................
Balances at December 31, 1999 ........................... $ (204,170,352) $ (1,272,014) $ (95,600) $ (91,904)
============== ============= ========== ==========
TOTAL
----------------
Balances at January 1, 1999 .............................. $ 8,392,813
Exercise of stock options and warrants ................... 8,425,801
Issuance of Series F-1 preferred stock ................... 992,882
Imputed dividend on Series F-1 preferred stock ........... --
Issuance of common stock and options for services ........ 4,272
Deferred compensation .................................... --
Amortization of deferred compensation .................... 675,122
Expense related to non-employee stock options ............ 20,646
Issuance of common stock for employee benefit plans. 799,823
Issuance of options related to license agreement ......... 696,895
Comprehensive loss:
Net loss ................................................ (29,636,948)
Net change in unrealized gain (loss) on available for
sale securities ......................................... (98,130)
-------------
Total comprehensive loss ................................ (29,735,078)
-------------
Balances at December 31, 1999 ........................... $ (9,726,824)
=============
* Restated-see note 1
See accompanying notes to consolidated financial statements.
F-7
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2000, 1999* AND 1998* -- (CONTINUED)
SIGNAL CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
----------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- ---------------- ----------------
Balances at January 1, 2000 .............................. -- $ -- 24,492,639 $ 41,330,800
Exercise of stock options and warrants ...................
Issuance of common stock for employee benefit plans .
Issuance of common stock in follow-on offering ...........
Costs related to follow-on offering ......................
Conversion of long term convertible notes ................
Shares issued for stock split ............................
Conversion of Signal preferred stock ..................... (24,492,639) (41,330,800)
Deferred compensation ....................................
Amortization of deferred compensation ....................
Expense related to non-employee stock options ............
Collection of notes receivable from stockholders .........
Issuance of Signal preferred stock warrants for
promissory note .........................................
Comprehensive loss:
Net loss ................................................
Net change in unrealized gain (loss) on -- available
for sale securities .....................................
Total comprehensive loss ................................
Balances at December 31, 2000 ........................... -- $ -- -- $ --
== ==== =========== ==============
COMMON STOCK TREASURY STOCK ADDITIONAL
------------------------ ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ----------- -------- -------- ---------------
Balances at January 1, 2000 .............................. 17,858,476 $178,584 -- $ -- $154,393,662
Exercise of stock options and warrants ................... 2,424,930 24,250 10,433,512
Issuance of common stock for employee benefit plans . 40,394 404 1,047,351
Issuance of common stock in follow-on offering ........... 2,934,000 29,340 278,524,620
Costs related to follow-on offering ...................... (885,160)
Conversion of long term convertible notes ................ 4,358,260 43,583 26,780,983
Shares issued for stock split ............................ 43,305,104 433,051 (433,051)
Conversion of Signal preferred stock ..................... 3,078,725 30,787 41,301,823
Deferred compensation .................................... 6,706,274
Amortization of deferred compensation ....................
Expense related to non-employee stock options ............ 970,309
Collection of notes receivable from stockholders .........
Issuance of Signal preferred stock warrants for
promissory note ......................................... 450,000
Comprehensive loss:
Net loss ................................................
Net change in unrealized gain (loss) on -- available
for sale securities .....................................
Total comprehensive loss ................................
Balances at December 31, 2000 ........................... 73,999,889 $739,999 -- $ -- $519,290,323
========== ======== == ==== ============
ACCUMULATED
NOTES OTHER
RECEIVABLE COMPREHENSIVE
ACCUMULATED DEFERRED FROM INCOME
DEFICIT COMPENSATION STOCKHOLDERS (LOSS)
------------------ ----------------- -------------- --------------
Balances at January 1, 2000 .............................. $ (204,170,352) $ (1,272,014) $ (95,600) $ (91,904)
Exercise of stock options and warrants ...................
Issuance of common stock for employee benefit plans .
Issuance of common stock in follow-on offering ...........
Costs related to follow-on offering ......................
Conversion of long term convertible notes ................
Shares issued for stock split ............................
Conversion of Signal preferred stock .....................
Deferred compensation .................................... (6,706,274)
Amortization of deferred compensation .................... 3,087,681
Expense related to non-employee stock options ............
Collection of notes receivable from stockholders ......... 33,600
Issuance of Signal preferred stock warrants for
promissory note .........................................
Comprehensive loss:
Net loss ................................................ (16,284,370)
Net change in unrealized gain (loss) on -- available
for sale securities ..................................... 1,001,783
Total comprehensive loss ................................
Balances at December 31, 2000 ........................... $ (220,454,722) $ (4,890,607) $ (62,000) $ 909,879
============== ============= ========== ==========
TOTAL
-----------------
Balances at January 1, 2000 .............................. $ (9,726,824)
Exercise of stock options and warrants ................... 10,457,762
Issuance of common stock for employee benefit plans . 1,047,755
Issuance of common stock in follow-on offering ........... 278,553,960
Costs related to follow-on offering ...................... (885,160)
Conversion of long term convertible notes ................ 26,824,566
Shares issued for stock split ............................ --
Conversion of Signal preferred stock ..................... 1,810
Deferred compensation .................................... --
Amortization of deferred compensation .................... 3,087,681
Expense related to non-employee stock options ............ 970,309
Collection of notes receivable from stockholders ......... 33,600
Issuance of Signal preferred stock warrants for
promissory note ......................................... 450,000
Comprehensive loss: --
Net loss ................................................ (16,284,370)
Net change in unrealized gain (loss) on -- available
for sale securities ..................................... 1,001,783
-------------
Total comprehensive loss ................................ (15,282,587)
-------------
Balances at December 31, 2000 ........................... $ 295,532,872
=============
*Restated-see note 1
See accompanying notes to consolidated financial statements.
F-8
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999* 1998*
----------------- ----------------- -----------------
Cash flows from operating activities:
Loss from continuing operations ............................... $ (17,003,473) $ (29,636,948) $ (36,379,275)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization of long-term assets ............ 3,722,467 3,038,222 2,394,197
Provision for accounts receivable allowances ................. 130,000 58,051 43,386
Non-cash stock-based compensation ............................ 4,057,990 700,040 614,788
Amortization of debt issuance and warrant costs .............. 700,000 250,000 --
Amortization of discount on note obligations ................. 274,848 192,978 47,142
Shares issued for employee benefit plans ..................... 1,047,755 799,823 463,688
Change in current assets and liabilities:
Increase in accounts receivable .............................. (4,938,569) (2,285,845) (1,332,190)
Increase in inventory ........................................ (1,810,198) (884,651) (1,571,408)
Increase in other operating assets ........................... (10,649,979) (393,863) (291,164)
Increase in accounts payable and accrued expenses ............ 9,793,831 2,469,216 4,614,073
Increase(decrease) in deferred revenue ....................... 13,239,782 2,068,693 (2,334,111)
-------------- ------------- -------------
Net cash used in continuing operations ........................ (1,435,546) (23,624,284) (33,730,874)
Net cash used in discontinued operations ...................... -- -- (59,837)
-------------- ------------- -------------
Net cash used in operating activities ......................... (1,435,546) (23,624,284) (33,790,711)
-------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures .......................................... (9,637,333) (1,875,072) (2,188,910)
Proceeds from sales and maturities of marketable
securities available for sale ................................ 139,575,925 17,781,948 29,776,137
Purchases of marketable securities available for sale ......... (276,264,605) (16,444,276) (26,201,862)
Proceeds from sale of chiral intermediate assets .............. 719,103 -- 7,500,000
Purchase of license rights .................................... -- (450,000) (280,000)
-------------- ------------- -------------
Net cash provided by (used in) investing activities ........... (145,606,910) (987,400) 8,605,365
-------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from follow-on public offering ................... 277,668,800 -- (73,136)
Proceeds from sale of stock ................................... -- -- 2,500,000
Proceeds from notes receivable from stockholders .............. 33,600 -- --
Proceeds from exercise of common stock options and
warrants ..................................................... 10,457,762 8,425,801 3,045,064
Net proceeds from issuance of preferred stock ................. -- 992,882 --
Repayment of capital lease and note obligations ............... (1,593,127) (1,751,059) (1,652,334)
Capital lease funding ......................................... -- -- 260,195
Debt issuance costs ........................................... -- (750,000) --
Net proceeds from issuance of convertible notes ............... -- 30,000,000 8,348,959
-------------- ------------- -------------
Net cash provided by financing activities ..................... 286,567,035 36,917,624 12,428,748
-------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents .......... 139,524,579 12,305,940 (12,756,598)
Cash and cash equivalents at beginning of year ................ 21,869,256 9,563,316 22,319,914
-------------- ------------- -------------
Cash and cash equivalents at end of year ...................... $ 161,393,835 $ 21,869,256 $ 9,563,316
============== ============= =============
* Restated-see note 1
See accompanying notes to consolidated financial statements.
F-9
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED )
YEARS ENDED DECEMBER 31,
------------------------------------------------
2000 1999* 1998*
-------------- -------------- --------------
Supplemental schedule of non-cash investing and
financing activity:
Change in net unrealized gain (loss) on marketable
securities available for sale ............................... $ 1,001,783 $ (98,130) $ (42,115)
=========== =========== ==========
Issuance of options related to license agreement ............. $ -- $ 696,895 $ 720,000
=========== =========== ==========
Capital lease obligations entered into for equipment ......... $ -- $ 526,128 $2,343,033
=========== =========== ==========
Issuance of common stock for promissory notes from
stockholders ................................................ $ -- $ -- $ 95,600
=========== =========== ==========
Issuance of common stock upon the conversion of
convertible notes and accrued interest thereon, net ......... $26,737,824 $ -- $ --
=========== =========== ==========
Accretion of premium payable on preferred stock and
warrants .................................................... $ -- $ -- $ 24,648
=========== =========== ==========
Deemed dividend for preferred stock conversion discount $ -- $ 818,487 $ --
=========== =========== ==========
Issuance of common stock upon the conversion of
convertible preferred stock and Signal preferred stock . $41,330,800 $ -- $4,054,103
=========== =========== ==========
Deferred compensation relating to stock options .............. $ 6,706,274 $ 1,024,244 $1,019,170
=========== =========== ==========
Supplemental disclosure of cash flow information:
Interest paid ................................................ $ 3,114,144 $ 1,957,325 $ 415,228
=========== =========== ==========
Cash received related to tax benefit ......................... $ 1,089,677 $ 3,017,910 $ --
=========== =========== ==========
* Restated-see note 1
See accompanying notes to consolidated financial statements.
F-10
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
(1) NATURE OF BUSINESS AND BASIS OF PRESENTATION
Celgene Corporation and its subsidiaries (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-(alpha), and
are anti-angiogenic. TNF-(alpha) 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. The Company's 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. The
Company's 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.
On August 31, 2000, the Company completed its merger with Signal
Pharmaceuticals, Inc. ("Signal"), a privately held San Diego-based
biopharmaceutical company focused on the discovery and development of drugs
that regulate genes associated with disease. The Company issued 3,710,144
shares of its common stock for all the outstanding common shares of Signal at
an exchange ratio of .1257 of a share of Celgene common stock for each share of
Signal common stock. Immediately prior to the consummation of the merger, all
Signal preferred shares were converted into Signal common shares on a
one-for-one basis. In addition, Celgene issued 380,607 options for all the
Signal options outstanding at the closing date.
The merger was accounted for as a pooling-of-interests. All prior period
consolidated financial statements of Celgene have been restated to include the
results of operations, financial position and cash flows of Signal.
The consolidated financial statements include the accounts of Celgene
Corporation and its subsidiaries. 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. THALOMID is the Company's only FDA approved product for sale.
Currently, the Company obtains all of its bulk drug substance for THALOMID from
a single supplier and relies on a single manufacturer to formulate and
encapsulate THALOMID.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH EQUIVALENTS
At December 31, 2000 and 1999, cash equivalents consisted principally of
highly liquid funds invested in commercial paper, money market funds, and
United States government securities such as treasury bills and notes. These
instruments are stated at cost, which approximates market because of the short
maturity of these investments.
(B) MARKETABLE SECURITIES
F-11
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
All of the Company's marketable securities are classified as securities
available for sale in current assets and are carried at fair value. Such
securities are held for an indefinite period of time and are intended to be
used to meet the ongoing liquidity needs of the Company. Unrealized gains and
losses (which are deemed to be temporary), if any, are reported in a separate
component of stockholders' equity. The cost of the debt securities is adjusted
for amortization of premiums and accretion of discounts to maturity. The
amortization, along with realized gains and losses, is included in interest
income. The cost of securities is based on the specific identification method.
(C) CONCENTRATION OF CREDIT RISK
Cash, cash equivalents, and marketable securities are financial
instruments that potentially subject the Company to concentration of credit
risk. The Company invests its excess cash primarily in U.S. government
securities and marketable debt securities of financial institutions and
corporations with strong credit ratings. The Company also has established
guidelines relative to diversification and maturities to maintain safety and
liquidity. These guidelines are reviewed periodically and may be modified to
take advantage of trends in yields and interest rates. Pursuant to Company
practice, the Company has historically held the investments to maturity.
However, the Company has the ability to sell these investments before maturity
and has therefore classified the investments as available for sale. The Company
has not experienced any significant losses on its investments.
(D) INVENTORY
Inventories are carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
(E) 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 years
Furniture and fixtures ..................... 5 years
Computer equipment ......................... 3 years
Amortization of leasehold improvements is calculated using the
straight-line method over the remaining 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.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, the Company reviews long-lived assets for impairment
whenever events or changes in business circumstances occur that indicate 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.
(F) OTHER ASSETS
Other assets include capitalized costs associated with a new customer
service system, certain patent rights and licensed technology. Costs associated
with the customer service system, which was primarily developed and implemented
during 2000, were capitalized in accordance with Statement of Position No.
98-1, Accounting for the Costs of Computer Software Developed and Obtained for
Internal Use, and is amortized over its estimated useful life of three years
from the date the system was ready for its intended use. At December 31, 2000,
computer software costs totaled approximately $4.4 million which is net of $0.5
million in accumulated amortization. The cost of patent rights is amortized
using the straight-line method over the life of the patents. The weighted
average remaining patent life at December 31, 2000 is
F-12
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
11 years. Licensed technology is stated at cost and depreciated over the
estimated useful life of three years using the straight-line method. At
December 31, 2000 and 1999, patent rights and licensed technology totaled $1.3
million and $1.7 million, respectively, which is net of $1.2 million and $0.4
million in accumulated amortization, respectively.
(G) RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred.
(H) 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.
(I) 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. In accordance with SEC Staff Accounting
Bulletin No. 101, up-front nonrefundable fees associated with license and
development agreements where the Company has continuing involvement in the
agreement, are recorded as deferred revenue and recognized over the estimated
service period. If the estimated service period is subsequently modified, the
period over which the up-front fee is recognized is modified accordingly on a
prospective basis. Revenues from the achievement of research and development
milestones are recognized when and if the milestones are achieved. Continuation
of certain contracts and grants are dependent upon the Company achieving
specific contractual milestones; however, none of the payments received to date
are refundable regardless of the outcome of the project. Grant revenue is
recognized in accordance with the terms of the grant and as services are
performed, and generally equals the related research and development expense.
Axys Pharmaceutical ("Axys") is a related party, as the previous Chief
Executive Officer of Axys served on the Signal Board of Directors at the time
Signal and Axys entered into a collaboration agreement prior to the merger with
Celgene. Accordingly, related party revenues of $2.5 million and $625,000 were
recorded in 2000 and 1999, respectively.
Serono S.A. ("Serono") is a related party, based on its ownership interest
in Signal at the time Signal and Serono entered into a collaboration agreement.
Therefore, revenues from Serono of $3.8 million, $3.9 million and $3.0 million
were recognized in 2000, 1999, and 1998, respectively, as related party
revenue.
As a result of the merger, revenues from these companies will cease being
classified as related party upon the expiration of the initial term of the
respective agreements.
(J) STOCK OPTION PLANS
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. SFAS No. 123, Accounting for Stock-Based
Compensation, established accounting and
F-13
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
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.
When the exercise price of employee or director stock options is less than
the fair value of the underlying stock on the grant date, the Company records
deferred compensation for the difference and amortizes this amount to expense
over the vesting period of the options. Options or stock awards issued to
non-employees and consultants are recorded at their fair value as determined in
accordance with SFAS No. 123 and EITF No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services and recognized over the related
vesting period.
(K) EARNINGS PER SHARE
"Basic" earnings (loss) per common share equals net income (loss)
applicable to common stockholders divided by weighted average common shares
outstanding during the period. "Diluted" earnings per common share would equal
net income applicable to common stockholders divided by the sum of weighted
average common shares outstanding during the period plus common stock
equivalents if dilutive. The Company's basic and diluted per share amounts are
the same since the assumed exercise of stock options, 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
11,034,130 in 2000, 19,373,823 in 1999 and 15,074,727 in 1998.
(L) COMPREHENSIVE INCOME
Comprehensive income (loss) consists of net losses and the change in net
unrealized gains (losses) on securities classified as available for sale and is
presented in the consolidated statements of stockholders' equity (deficit).
(M) PRESENTATION
In connection with the disposition of the Company's chiral intermediate
operation in January 1998 (see Note 15), the financial results applicable to
continuing operations exclude amounts from this discontinued operation.
(N) FINANCIAL INSTRUMENTS AND DERIVATIVES
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 8), 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 recorded at fair value. The Company currently is not party
to any derivative instruments. Any future transactions involving derivative
instruments will be evaluated based on SFAS No. 133.
(O) WAREHOUSING AND DISTRIBUTION EXPENSES
Warehousing and distribution expenses are included in selling, general and
administrative expenses. Warehousing and distribution expenses totaled
approximately $4.5 million, $3.9 million and $0.4 million in 2000, 1999 and
1998, respectively.
F-14
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
(3) MERGER OF CELGENE AND SIGNAL
As discussed in Note 1, on August 31, 2000, Celgene completed the merger
with Signal in a transaction accounted for as a pooling-of-interests.
Accordingly, the consolidated financial statements reflect the combined results
of Celgene and Signal as if the merger had been in effect for all periods
presented. The results of operations for the separate companies and the
combined amounts presented in the consolidated financial statements for the
periods prior to the merger follow:
SIX MONTHS YEAR YEAR
ENDED ENDED ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
2000 1999 1998
---------------- ----------------- -----------------
(UNAUDITED)
Revenue:
Celgene .......... $ 28,884,836 $ 26,209,624 $ 3,800,490
Signal ........... 5,337,008 11,748,325 15,414,242
------------- ------------- -------------
Combined ......... $ 34,221,844 $ 37,957,949 $ 19,214,732
============= ============= =============
Net loss:
Celgene .......... $ (3,971,178) $ (21,781,200) $ (25,067,880)
Signal ........... (8,085,818) (7,855,748) (4,356,402)
------------- ------------- -------------
Combined ......... $ (12,056,996) $ (29,636,948) $ (29,424,282)
============= ============= =============
Celgene and Signal incurred direct transaction expenses of approximately
$6.7 million which were recognized upon consummation of the merger. The
merger-related costs consisted of transaction fees for financial advisors,
attorneys, accountants, financial printing and other related charges.
(4) MARKETABLE SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value of available for sale securities by major
security type at December 31, 2000 and 1999, were as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
DECEMBER 31, 2000 ---------------- ------------ ------------ ----------------
Government agencies ............... $ 113,811,071 $ 411,117 $ (776) $ 114,221,412
Government bonds & notes .......... 301,758 -- (822) 300,936
Corporate debt securities ......... 29,745,069 500,360 -- 30,245,429
------------- --------- --------- -------------
$ 143,857,898 $ 911,477 $ (1,598) $ 144,767,777
============= ========= ========= =============
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
DECEMBER 31, 1999 -------------- ------------ -------------- --------------
Government agencies ............... $ 2,050,000 $ -- $ (66,325) $ 1,983,675
Government bonds & notes .......... 2,313,125 -- (25,579) 2,287,546
Corporate debt securities ......... 2,806,093 -- -- 2,806,093
----------- ---- ---------- -----------
$ 7,169,218 $ -- $ (91,904) $ 7,077,314
=========== ==== ========== ===========
F-15
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
Maturities of debt securities classified as available for sale were as
follows at December 31, 2000:
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------------- ---------------
Due within one year ............................ $ 88,275,189 $ 88,395,791
Due after one year through five years .......... 48,946,682 49,735,959
Due after five years through six years ......... 6,636,027 6,636,027
------------- -------------
$ 143,857,898 $ 144,767,777
============= =============
(5) INVENTORY
Inventory consists of the following:
DECEMBER 31,
-------------------------------
2000 1999
-------------- --------------
Raw materials ........... $ 985,556 $ 1,411,663
Work in process ......... 1,869,104 647,841
Finished goods .......... 1,411,597 396,555
----------- -----------
$ 4,266,257 $ 2,456,059
=========== ===========
(6) PLANT AND EQUIPMENT
Plant and equipment consists of the following:
DECEMBER 31,
-------------------------------
2000 1999
-------------- --------------
Laboratory equipment and machinery ......... $ 7,896,666 $ 6,206,768
Leasehold improvements ..................... 7,434,963 6,122,955
Computer equipment ......................... 2,747,181 2,173,784
Furniture and fixtures ..................... 1,224,976 1,074,137
Leased equipment ........................... 3,547,378 4,133,963
Construction in progress ................... 2,527,955 219,441
----------- -----------
25,379,119 19,931,048
Less: accumulated depreciation ............. 16,983,217 14,189,659
----------- -----------
$ 8,395,902 $ 5,741,389
=========== ===========
(7) ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-------------------------------
2000 1999
-------------- --------------
Professional and consulting fees .......... $ 1,685,679 $ 940,953
Accrued compensation ...................... 4,651,488 3,485,397
Accrued interest, royalties and license
fees ..................................... 1,530,703 2,214,394
Accrued sales returns and rebates ......... 668,680 128,468
Other ..................................... 974,957 515,131
----------- -----------
$ 9,511,507 $ 7,284,343
=========== ===========
(8) CONVERTIBLE DEBT
On September 16, 1998, the Company issued convertible notes to an
institutional investor in the amount of $8,750,000. The notes had a five-year
term and a coupon rate of 9.25% with interest payable
F-16
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
on a semi-annual basis. The notes contained a conversion feature that allowed
the note holders to convert the notes into common shares at $3.67 per share.
These notes were issued at a discount of $437,500 which was being amortized
over three years. On October 16, 2000, all of the notes were converted into
2,386,387 common shares.
On January 20, 1999, the Company issued to an institutional investor
convertible notes in the amount of $15,000,000. The notes have a five year term
and a coupon rate of 9% with interest payable on a semi-annual basis. The notes
contain a conversion feature that allows the note holders to convert the notes
into common shares after one year at $6.00 per share. The Company can redeem
the notes after three years at 103% of the principal amount (two years under
certain conditions). Issuance costs of $750,000 incurred in connection with
these notes are being amortized over three years. Just prior to the Company's
follow-on offering on February 16, 2000, a portion of the notes totaling
$9,288,000 were converted into 1,548,000 common shares and included in the
public offering. On May 17, 2000, an additional $3,998,400 of the notes were
converted into 666,399 common shares and issued to the noteholder. At December
31, 2000, the remaining notes have a carrying value of $1,713,600 and are
convertible into 285,801 common shares.
On July 6, 1999, the Company issued to a third institutional investor
convertible notes in the amount of $15,000,000. The notes have a five year term
and a coupon rate of 9% with interest payable on a semi-annual basis. The notes
contain a conversion feature that allows the note holders to convert the notes
into common shares after one year at $6.33 per share. The Company can redeem
the notes after three years at 103% of the principal amount (two years under
certain conditions). There was no fee or discount associated with these notes.
On July 6, 2000, $5,000,000 of the notes were converted into 789,474 common
shares. At December 31, 2000, the remaining notes have a carrying value of
$10,000,000 and are convertible into 1,578,876 common shares.
On September 26, 2000, the Company entered into an agreement with the note
holders of the January 1999 and the July 1999 notes that allows the note
holders to take a "short position" in the common stock (as defined in the
respective Note Purchase Agreements) of the Company with certain limitations on
transactions resulting in a "short position" based upon the level of the stock
price. In exchange for the Company consenting to waive the provisions that
prohibit short sales, the note holders waive the right to the receipt of any
interest after the effective date of August 24, 2000.
At December 31, 2000 and 1999, the fair value of the Company's convertible
notes exceeded their carrying value reflecting the increase to $32.50 and
$23.33 per share, respectively, in the market value of the Company's common
stock.
(9) SECURED PROMISSORY NOTES
In June 2000, the Company issued a secured promissory note for up to $5
million that could be borrowed against through December 21, 2000, as needed.
The proceeds of the note were to be used for general corporate purposes and
working capital. The interest rate floats with the Treasury rate until the
proceeds are drawn down and then are fixed for the term, maintaining the
spread. The promissory note expired on December 21, 2000 and the Company did
not draw down any proceeds from the note. In conjunction with the issuance of
the promissory note, the Company issued the creditor a warrant to purchase
150,000 shares of Signal C-2 Preferred Stock.
In November 1996, the Company issued a secured promissory note for
$3,000,000. The proceeds of the note payable were used for general corporate
purposes and working capital. The note payable accrued interest at a rate of
14% and was secured by certain assets of the Company. The outstanding
obligation at December 31, 1999 of approximately $396,000 was repaid upon its
due date during May 2000. In conjunction with the issuance of the promissory
note, the Company issued the creditor a warrant to purchase 250,000 shares of
Signal Series C-1 Preferred Stock.
F-17
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
(10) 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
In a private stock placement during 1996, 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 10,026,606 shares of common stock at December 31,
1998.
During 1996, the Company issued warrants valued at $138,156, that entitle
certain holders of the Series A Convertible Preferred Stock to purchase 460,521
shares of common stock at an exercise price of $3.83 per share. The warrants
were issued in exchange for the deferral of conversion for 90 days. All these
warrants either expired or were exercised for 10,254 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 200,559 shares of common stock
at an exercise price of $6.84 per share, 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, 2000, 105,117
warrants were exercised to purchase 69,966 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 $2.17 per share. All
shares of the Series B Preferred had been converted into 2,365,407 shares of
common stock at December 31, 1998.
Under the terms of the private placement, the Company was obligated to
issue 1,557,690 warrants to the investor, with a term of four years from the
issuance date of the warrants, to acquire a number of shares of common stock.
As of December 31, 2000, there were a total of 1,207,693 warrants outstanding.
All such warrants have an exercise price of $2.50 per share and expire on June
1, 2002.
SIGNAL CONVERTIBLE PREFERRED STOCK
Immediately prior to the consummation of the merger, all Signal preferred
shares were converted into Signal common shares on a one-for-one basis and
exchanged into Celgene common shares on a .1257-for-1 basis upon consummation of
the merger.
A summary of the Signal convertible preferred stock at December 31, 1999
is as follows:
SHARES ISSUED PREFERENCE IN
AND OUTSTANDING LIQUIDATION
----------------- --------------
Series A ................ 2,626,892 $ 2,626,892
Series B ................ 2,875,000 3,450,000
Series C ................ 8,791,432 12,308,005
Series D ................ 732,601 2,000,000
Series E ................ 6,455,493 12,329,929
Series F ................ 2,722,513 8,194,761
Series F-1 .............. 288,708 1,000,000
--------- ------------
24,492,639 $ 41,909,587
========== ============
F-18
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
Each of the shares of Series A, B, C, D, E, F and F-1 preferred stock were
convertible on a one-for-one basis, at the option of the holder, into shares of
Signal's common stock.
Annual dividends of $.08, $.10, $.11, $.32, $.15, $.24 and $.28 per share
of Series A, B, C, D, E, F and F-1 preferred stock, respectively, were payable
whenever funds were legally available and when declared by the Board of
Directors. No dividends were paid.
COMMON STOCK
On February 16, 2000, the Company completed an offering to sell 10,350,000
shares of its common stock at a price of $33.67 per share. Of the total shares
offered, 8,802,000 shares were for the account of the Company and 1,548,000
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 of the Company, net of expenses, were approximately
$278,000,000.
On April 14, 2000, the Company effected a three-for-one stock split for
stockholders of record as of April 11, 2000. On April 10, 2000, the Company's
stockholders approved an increase in the number of authorized shares of common
stock from 30,000,000 to 120,000,000. All share and per share amounts in the
consolidated statements of operations and share and per share amounts disclosed
in the accompanying notes to the consolidated financial statements have been
retroactively restated to reflect the three-for-one stock split. Share and per
share amounts in the consolidated balance sheets and statements of
stockholders' equity (deficit) have not been retroactively restated to reflect
the stock split. During the second quarter 2000, the Company recorded a
reclassification of approximately $433,000 to decrease additional
paid-in-capital and to increase common stock in order to reflect the
three-for-one stock split.
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 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. On February 17, 2000, the Company's Board of Directors
approved an amendment to the Rights Plan changing the initial exercise price
thereunder from $100.00 per Right (as defined in the original Rights Plan
agreement) to $700.00 per Right and extending the final expiration date of the
Rights Plan to February 17, 2010.
F-19
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
(11) STOCK BASED COMPENSATION
(A) STOCK OPTIONS
The Company has two equity incentive plans ("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
4,200,000 shares of common stock under the 1992 plan and 6,500,000 shares of
common stock under the 1998 plan, as amended, subject to adjustment under
certain circumstances. As a result of the merger with Signal, the Company also
assumed the former Signal stock option plans. The options issued pursuant to
the former Signal plans converted into Celgene options upon consummation of the
merger at a .1257-for-1 exchange ratio. No additional options will be granted
from the former Signal plans. 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 1,050,000
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 authorized to
1,800,000 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.
The weighted-average fair value per share for stock options granted was
$16.44, $3.06 and $1.31 for stock options granted in 2000, 1999 and 1998,
respectively. The Company estimated the fair values using the Black-Scholes
option pricing model and used the following assumptions:
2000 1999 1998
---------- ---------- ----------
Risk-free interest rate ....................... 4.84% 6.37% 5.68%
Expected stock price volatility ............... 57% 46% 63%
Expected term until exercise (years) .......... 2.81 4.94 2.89
Expected dividend yield ....................... 0% 0% 0%
F-20
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
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) 2000 1999 1998
- ---------------------------------------------------- -------------- -------------- --------------
Net loss applicable to common stockholders:
As reported ....................................... $ (16,284) $ (30,455) $ (29,449)
Pro forma ......................................... (38,011) (34,248) (31,181)
Net loss per share applicable to common stockholders
basic and diluted:
As reported ....................................... $ (0.24) $ (0.59) $ (0.60)
Pro forma ......................................... ( 0.57) ( 0.67) ( 0.64)
The pro forma effects on net loss applicable to common stockholders and
net loss per share applicable to common stockholders (basic and diluted) for
2000, 1999 and 1998 may not be representative of the pro forma effects in
future years since compensation cost is allocated on a straight-line basis over
the vesting periods of the grants, which extends beyond the reported years.
The following table summarizes the stock option activity for the
aforementioned Plans:
OPTIONS OUTSTANDING
-----------------------------------
SHARES
AVAILABLE WEIGHTED AVERAGE
FOR GRANT SHARES PRICE PER SHARE
--------------- --------------- -----------------
Balance January 1, 1998 ........... 1,591,896 7,322,463 $ 3.14
Authorized ....................... 5,111,400 -- --
Expired .......................... (255,288) -- --
Granted .......................... (1,929,741) 1,929,741 3.01
Exercised ........................ -- (939,017) 2.31
Cancelled ........................ 618,608 (618,608) 3.54
Repurchases ...................... 13,394 -- --
---------- --------- --------
Balance December 31, 1998 ......... 5,150,269 7,694,579 3.18
Authorized ....................... 870,000 -- --
Expired .......................... (210,141) -- --
Granted .......................... (2,715,591) 2,715,591 6.38
Exercised ........................ -- (2,870,021) 2.81
Cancelled ........................ 184,618 (184,618) 3.38
Repurchases ...................... 219 -- --
---------- ---------- --------
Balance December 31, 1999 ......... 3,279,374 7,355,531 4.50
Authorized ....................... 2,417,100 -- --
Expired .......................... -- -- --
Granted .......................... (3,266,281) 3,266,281 42.19
Exercised ........................ -- (2,569,569) 3.66
Cancelled ........................ 99,555 (99,555) 19.62
Repurchases ...................... 2,197 -- --
---------- ---------- --------
Balance December 31, 2000 ......... 2,531,945 7,952,688 $ 20.06
========== ========== ========
F-21
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
The following table summarizes information concerning options outstanding
under the Incentive Plans at December 31, 2000:
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING EXERCISE REMAINING EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/00 PRICE TERM (YRS.) AT 12/31/00 PRICE
- ------------------------ ------------- ---------- ------------- ------------- -----------
1.11 -- 5.00 ........... 2,218,575 $ 3.27 6.4 1,416,186 $ 3.36
5.01 -- 15.00 .......... 2,508,423 5.96 8.1 990,444 6.28
15.01 -- 25.00 ......... 250,125 17.92 8.9 13,875 17.95
25.01 -- 35.00 ......... 1,405,650 25.97 9.1 185,000 25.79
35.01 -- 45.00 ......... 134,000 38.34 9.3 -- --
45.01+ ................. 1,435,915 63.52 9.6 129,474 62.58
--------- -------- --- --------- --------
7,952,688 $ 20.06 8.1 2,734,979 $ 8.81
========= ======== === ========= ========
The Company recorded $6,706,274, $1,024,244 and $1,019,170 of deferred
compensation for options granted under the former Signal plans during the 2000,
1999 and 1998, respectively, representing the difference between the option
exercise price and the estimated fair value of the underlying stock for
financial statement presentation purposes. The Company is amortizing the
deferred compensation over the vesting period of the options and recorded
$3,087,681, $675,122 and $607,788 of compensation expense during the years
ended December 31, 2000, 1999 and 1998, respectively.
Former non-employee directors of Signal, who entered into consulting
agreements with Celgene effective August 31, 2000, held unvested stock options
to purchase 36,457 shares of the Company's common stock. As a result, the
Company is required to record compensation expense relative to the fair value
of such options which is being recognized over the remaining vesting period for
such options. During 2000, 1999 and 1998, the Company recorded $970,309,
$20,646 and $0, respectively in compensation expense relating to stock options
or warrants issued to consultants, advisors or financial institutions.
(B) 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, 200,559
shares of common stock at a price of $6.84. There were 9,000 warrants
outstanding as of December 31, 2000.
In connection with the placement of the Series B Convertible Preferred
Stock in June 1997, the Company issued warrants to purchase 1,557,690 shares of
common stock until June 1, 2002, at a price of $2.50 per share. There were
1,207,693 warrants outstanding as of December 31, 2000.
In conjunction with the issuance of the promissory note in June 2000, the
Company issued the creditor a warrant to purchase 150,000 shares of Signal C-2
Preferred Stock at a price of $4.00 per share. The warrant was fair valued at
$450,000 which was recorded as interest expense during 2000. None of these
warrants outstanding as of December 31, 2000.
In conjunction with the issuance of a promissory note in November 1996, the
Company issued the creditor a warrant to purchase 250,000 shares of Signal
Series C-1 Preferred Stock at a price of $2.10 per share. The warrant was valued
at $165,000, which was recorded as a discount on the related debt. The value of
the warrant was amortized as interest expense over the term of the debt which
ended during May 2000. The warrant was not outstanding as of December 31, 2000.
F-22
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
(12) EMPLOYEE BENEFIT PLANS
The Company has an investment savings plan and a deferred compensation
plan for certain employees, of which the investment savings plan qualifies
under Section 401(k) of the Internal Revenue Code. The Company's contributions
to the savings plan are discretionary and have historically been made in the
form of the Company's common stock. Such contributions are based on specified
percentages of employee contributions and aggregated a total expense charged to
operations of $1.2 million in 2000 and $1 million in both 1999 and 1998.
During 2000, the Company's Board of Directors approved a deferred
compensation plan effective September 1, 2000. Eligible participants, which
include certain top-level executives of the Company as specified by the plan,
can elect to defer up to 25% of the participant's base salary, 100% of cash
bonuses and restricted stock and stock options gains (both subject to a minimum
deferral of 50% of each award of restricted stock or stock option gain approved
by the Committee for deferral). Company contributions to the deferred
compensation plan represent a 100% match of the participant's deferral up to a
specified percentage (ranging from 10% to 25%, depending on the employee's
position as specified in the plan) of the participant's base salary. All
amounts are 100% vested at all times, except with respect to restricted stock,
which will not be vested until the date the applicable restrictions lapse. At
December 31, 2000, the Company had a deferred compensation liability included
in other non-current liabilities in the consolidated balance sheet of
approximately $122,000, which included the participant's elected deferral of
salaries only, the Company's matching contribution and earnings on deferred
amounts as of that date.
(13) SPONSORED RESEARCH AND LICENSE AGREEMENT
NOVARTIS PHARMA AG
On April 19, 2000, the Company entered into an agreement with Novartis
Pharma AG ("Novartis") wherein the Company granted to Novartis an exclusive
worldwide license for the development and marketing of d-methylphenidate
("d-MPH"), its chirally pure version of Ritalin. The Company also granted
rights to all of its related intellectual property and patents, including new
formulations of the currently marketed Ritalin. Celgene received a $10,000,000,
nonrefundable, upfront license fee payment in July 2000 and is entitled to
receive substantial milestone payments in addition to royalties on the entire
family of Ritalin drugs. The upfront license fee of $10,000,000 is being
recognized as revenue over a 14 month period commencing June 2000 which is
management's estimate of the period of time required to fulfill its obligations
related to obtaining FDA approval of the immediate release form of d-MPH. This
estimate is subject to change due to uncertainties inherent in the regulatory
approval process, which change could have a material impact on the timing of
the recognition of revenue. Accordingly, the Company recognized approximately
$4,600,000 of research contract revenue for the year ended December 31, 2000.
The Company also achieved a milestone of $5,000,000 in December 2000 upon
acceptance of the New Drug Application ("NDA") by the FDA for d-MPH. The
milestone payment was recognized as research contract revenue in December 2000.
In December 2000, the Company signed a collaborative research agreement
with Novartis for joint research of selective estrogen receptor modulator
compounds ("SERMs") for the treatment and prevention of osteoporosis. The
Company received a nonrefundable, upfront payment of $10,000,000 and is
entitled to receive milestone payments for specific preclinical, clinical and
regulatory endpoints, as well as royalties upon commercialization of products
receiving FDA marketing approval. The upfront payment is being amortized over
the estimated two year research period.
AXYS
On October 15, 1999, the Company entered into a two-year collaborative
research and license agreement with Axys to develop and commercialize certain
compounds for use in the prevention and/or treatment of certain human diseases.
The Company received an initial non-refundable license fee of
F-23
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
$2,000,000 and will receive additional payments based on the achievement of
certain program milestones, as well as royalties upon commercial sales of
certain products, if any. The Company may exercise a profit share option in the
United States and possibly other territories at a predetermined point during
development in lieu of royalties on product sales. In addition, Axys has agreed
to pay the Company certain amounts for the full time equivalent personnel
working on the research.
NIPPON KAYAKU
In February 1998, the Company entered into a two-year collaborative
research and license agreement with Nippon Kayaku to develop and commercialize
products based on or derived from a compound supplied by Nippon Kayaku for the
treatment and prevention of diseases and disorders of the CNS and PNS. Nippon
Kayaku has agreed to pay the Company certain amounts for the full-time
equivalent personnel working on the research. Each party is obligated to pay
the other royalties on future product sales arising from the collaboration.
In February 2000, following the initial research phase of the
collaboration, the Company executed an interim agreement with Nippon Kayaku
under which the Company agreed to enter into a joint agreement to develop and
commercialize neuroprotectant drugs for PNS and CNS disorders.
In July 2000, the Company and Nippon Kayaku mutually agreed to conclude
their collaboration. Nippon Kayaku was granted a worldwide, royalty-free
license to certain compounds involved in the collaboration.
DUPONT
On December 1997, the Company entered into a three-year collaborative
research and license agreement with DuPont Pharmaceuticals ("DuPont") to
develop and commercialize novel products for the treatment and prevention of
human immunodeficiency virus and hepatitis C virus infection. The Company
received an initial non-refundable license fee of $1,000,000 and will receive
additional payments based on the achievement of certain program milestones, as
well as royalties upon commercial sales of certain products, if any. In
addition, DuPont has agreed to pay the Company certain amounts for the full
time equivalent personnel working on the research. Due to the Company's
achievement of a certain milestone in 1999, DuPont purchased 288,708 shares of
Signal Series F-1 Preferred Stock for total cash proceeds of $1,000,000. In
accordance with EITF Issue No. 98-5 the Company recognized an imputed dividend
of $818,487 to reflect a beneficial conversion feature on these preferred
shares.
SERONO
On November 1997, the Company entered into a three-year collaborative
research, development and license agreement with Serono to perform research
within the field of the modulation of NF-kB. The agreement was extended for one
year at the end of the initial three-year term. The Company will receive
payments based on the achievement of certain program milestones, as well as
royalties upon commercial sales of certain products, if any. In addition, Serono
makes quarterly payments to the Company to fund research efforts. Serono
purchased shares of Signal Series F Preferred Stock in conjunction with the
license agreement.
TANABE
From March 1996 to March 1998 the Company and Tanabe were engaged in a
collaborative program under which Tanabe funded certain research by the Company
in target and drug discovery in the fields of inflammatory disease and
osteoporosis. In March 1998, the Company and Tanabe mutually agreed to conclude
their collaboration and Tanabe licensed from the Company a lead compound that
was discovered during the collaboration. Signal retained all other intellectual
property rights. Tanabe paid a nonrefundable fee of $1,800,000 to the Company
for the exclusive worldwide license to the lead
F-24
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
compound and is obligated to make payments to the Company based on the
achievement of certain research and development milestones and royalties on any
future product sales. The Company has no future performance obligations under
this collaboration.
(14) INCOME TAXES
At December 31, 2000 and 1999, the tax effects of temporary differences
that give rise to deferred tax assets are as follows:
2000 1999
----------------- ----------------
Deferred assets:
Federal and state net operating loss carryforwards ..... $ 125,087,000 $ 84,536,000
Capitalized research expenses .......................... 6,788,000 921,000
Research and experimentation tax credit
carryforwards ........................................ 6,111,000 5,861,000
Plant and equipment, principally due to differences
in depreciation ...................................... 2,168,000 2,027,000
Patents, principally due to differences in
amortization ......................................... 111,000 58,000
Accrued and other expenses ............................. 4,470,000 711,000
-------------- -------------
Total deferred tax assets ............................ 144,735,000 94,114,000
Valuation allowance ..................................... (144,735,000) (94,114,000)
-------------- -------------
Net deferred tax assets ................................ $ -- $ --
============== =============
During 2000 and 1999, the Company recognized a tax benefit of $1,809,677
and $3,017,910, respectively, from the sale of certain State net operating loss
carryforwards.
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, 2000, the Company had Federal net operating loss carryforwards of
approximately $312,307,000 and combined State net operating loss carryforwards
of approximately $228,225,000 that will expire in the years 2001 through 2010.
State net operating loss carryforwards differ from Federal net operating loss
carryforwards primarily due to the fact that the Company sold approximately
$60,082,000 of its State net operating loss carryforwards during 2000 and 1999
and approximately $24,000,000 has expired. The Company also has research and
experimentation credit carryforwards of approximately $6,111,000 that expire in
the years 2001 through 2015. Ultimate utilization/availability of such net
operating losses and credits may be curtailed if a significant change in
ownership occurs. Signal experienced an ownership change, as that term is
defined in section 382 of the Internal Revenue Code, when it was merged with
Celgene. As such, there is an annual limitation on the use of this Net
Operating Loss in the amount of approximately $11,580,000. Of the deferred tax
asset related to the Federal and State net operating loss carryforwards,
approximately $56,000,000 relates to a tax deduction for non qualified stock
options. The Company will increase additional paid in capital when those
benefits are realized for tax purposes.
(15) 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 $15,000,000. The Company received $7,500,000 upon
the closing of the transaction, and will receive future royalties with a
present value not exceeding $7,500,000, with certain minimum royalty payments
in the third through
F-25
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
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. During the fourth quarter 2000, the Company
received $719,103 pursuant to the minimum royalty provision of the agreement.
(16) COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company leases its offices and research facilities under several
operating lease agreements. The minimum annual rents may be subject to
specified annual rental increases. The non-cancelable lease terms for the
operating leases expire at various dates between 2002 and 2011 and each
agreement includes renewal options ranging from one or two additional three or
five-year terms. In general, the Company is also required to reimburse the
lessors for real estate taxes, insurance, utilities, maintenance and other
operating costs associated with the leases. The Company received approximately
$450,000 per year from 1998 through 2000 from Cambrex Corporation under a
facilities sub-lease agreement. The fees were for rent, utilities and other
services.
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, 2000, the Company has leased $675,000 of
laboratory equipment under this agreement. In addition, the Company leases
certain laboratory equipment and machinery and office furniture under other
capital lease arrangements with three year terms and options to extend the
lease term to five years. Assets held under capital leases are included in
plant and equipment and the amortization of these assets is included with
depreciation expense.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 2000 are:
OPERATING CAPITAL
YEAR ENDING DECEMBER 31 LEASES LEASES
- -------------------------------------------------------------------------- -------------- ------------
2001 ..................................................................... $ 1,990,452 $ 996,444
2002 ..................................................................... 2,062,221 602,705
2003 ..................................................................... 2,098,221 46,801
2004 ..................................................................... 1,131,000 --
2005 ..................................................................... 1,131,000 --
Later years, through 2010 ................................................ 3,772,000 --
------------ ----------
Total minimum lease payments ............................................ $ 12,184,894 1,645,950
------------
Less amount representing interest ....................................... 83,746
----------
Present value of net minimum capital lease payments ..................... 1,562,204
Less current installments of obligations under capital leases ........... 929,258
----------
Obligations under capital leases, excluding current installments ........ $ 632,946
==========
Total rental expense under operating leases amounted to $2,142,937,
$1,815,792 and $1,930,670 in 2000, 1999 and 1998, respectively.
(B) EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain officers and employees.
The related outstanding annual commitment through 2002 is approximately $2.3
million (excluding any change in control provisions). Employment contracts
provide for an increase in compensation reflecting annual reviews and related
salary adjustments.
F-26
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (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 2001, for facility payments totaling
approximately $540,000.
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 is renewable for one year terms upon agreement of both parties and has
been renewed for 2001. Under the terms of the agreement, the Company is
required to make quarterly payments of approximately $404,000.
In September 1999, the Company entered into a Master Clinical Service
agreement with Premier Research Worldwide, Ltd. ("PRWW") under which work
orders may be executed from time to time for PRWW to provide services in
support of clinical development projects. In 2001, the Company anticipates
payments to PRWW of approximately $2,200,000 under three such work orders.
In December 1998, the Company entered into an exclusive license agreement
with EntreMed, Inc. ("EntreMed") whereby EntreMed granted to the Company an
exclusive license to its patent and technology rights for thalidomide. In
return, EntreMed will receive royalties on all sales of THALOMID.
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
2001.
In 1998, the Company paid $280,000 in cash and issued 30,168 shares of
common stock related to a license agreement with the University of
Massachusetts and capitalized the total value of $1,000,000 as purchased
technology. The Company has future commitments to pay up to an additional
$4,100,000 to licensees based on the achievement of certain milestones, as well
as royalties upon commercial sales, if any, of certain products. Such fees or
milestone payments may also involve the issuance of up to 7,542 shares of
common stock, which would be recorded at the fair value at the date of
issuance.
(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 it is in substantial compliance with all applicable environmental laws
and regulations.
(17) SEGMENTS
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires the use of the management approach in identifying and
disclosing financial information about segments of an enterprise. The Company
is engaged in the discovery, development and commercialization of orally
F-27
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 - (CONTINUED)
administered, small molecule drugs for the treatment of cancer and
immunological diseases. Additionally, the Company's chiral chemistry program
develops chirally pure versions of existing compounds for both pharmaceutical
and agrochemical markets. The Company markets and sells its product in the
United States and the Company is managed and operates as one business segment.
All of the Company's customers are located in the United States. In 2000,
five customers accounted for 54.5% of total product sales revenue. At December
31, 2000, these customers had an aggregate outstanding accounts receivable
balance that represented 78.1% of the total balance. The Company estimates an
allowance for doubtful accounts based on the creditworthiness of its customers
as well as general economic conditions. Consequently, an adverse change in
those factors could affect the Company's estimate of its bad debts.
F-28
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998 -- (CONTINUED)
(18) QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED,
---------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30,
2000 2000 2000
-------------- --------------- --------------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE
AMOUNTS)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA (1):
Total revenue .......................... $ 27,323 $ 22,705 $ 19,685
Gross profit(2) ........................ 13,892 15,144 13,652
Merger-related costs ................... (500) 7,168 --
Tax benefit ............................ 1,810 -- --
Net income(loss) ....................... $ 3,693 $ (7,471) $ (5,882)
Net income (loss) per share
applicable to stockholders:(3)
Basic .................................. $ 0.05 $ (0.11) $ (0.09)
Diluted ................................ $ 0.05 $ (0.11) $ (0.09)
Weighted average number of shares of
common stock outstanding--basic (3) ... 73,314,000 68,301,000 65,349,000
Weighted average number of shares of
common stock outstanding--diluted (3) . 81,662,000 68,301,000 65,349,000
THREE MONTHS ENDED,
---------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2000 1999 1999 1999 1999
-------------- -------------- --------------- -------------- --------------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA (1):
Total revenue .......................... $ 14,537 $ 12,347 $ 9,286 $ 9,097 $ 7,228
Gross profit(2) ........................ 10,002 8,082 5,614 4,537 2,836
Merger-related costs ................... -- -- -- -- --
Tax benefit ............................ -- 3,018 -- -- --
Net income(loss) ....................... $ (6,625) $ (4,808) $ (8,234) $ (7,789) $ (8,805)
Net income (loss) per share
applicable to stockholders:(3)
Basic .................................. $ (0.11) $ (0.11) $ (0.16) $ (0.15) $ (0.17)
Diluted ................................ $ (0.11) $ (0.11) $ (0.16) $ (0.15) $ (0.17)
Weighted average number of shares of
common stock outstanding--basic (3) ... 59,151,000 52,404,000 51,478,000 51,147,000 50,656,000
Weighted average number of shares of
common stock outstanding--diluted (3) . 59,151,000 52,404,000 51,478,000 51,147,000 50,656,000
(1) Amounts are restated to reflect the merger with Signal Pharmaceuticals,
Inc. on August 31, 2000 which was accounted for as a pooling-of-interests.
(2) Gross profit is calculated as product sales less cost of goods sold.
(3) These amounts are adjusted for the three-for-one stock split effected April
2000.
F-29
CELGENE CORPORATION
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
YEAR EXPENSE OR SALES DEDUCTIONS YEAR
-------------- -------------------- ------------ -----------
Year ended December 31, 2000
Allowance for doubtful accounts .......... $ 101,437 $ 130,000 $ -- $231,437
Allowance for sales returns .............. 75,327 2,522,000 (1) 2,216,239 381,088
Allowance for customer discounts ......... 20,000 1,304,000 (1) 1,172,860 151,140
--------- ------------ ---------- --------
$ 196,764 $ 3,956,000 $3,389,099 $763,665
========= ============ ========== ========
Year ended December 31, 1999
Allowance for doubtful accounts .......... $ 43,386 $ 58,051 $ -- $101,437
Allowance for sales returns .............. -- 1,131,572 (1) 1,056,245 75,327
Allowance for customer discounts ......... -- 453,208 (1) 433,208 20,000
--------- ------------ ---------- --------
$ 43,386 $ 1,642,831 $1,489,453 $196,764
========= ============ ========== ========
Year ended December 31, 1998
Allowance for doubtful accounts .......... -- $ 43,386 -- $ 43,386
========= ============ ========== ========
(1) Amounts are a reduction from gross sales
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