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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, 2002
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 07059
Warren, New Jersey ----------
------------------------------------- (Zip Code)
(Address of principal executive offices)
(732) 271-1001
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in 12b-2 of the Act).
Yes X No
---
The aggregate market value of voting stock held by non-affiliates of the
registrant on June 28, 2002, the last business day of the registrant's most
recently completed second quarter, was $1,135,431,360, based on the last
reported sale price of the registrant's Common Stock on the NASDAQ National
Market on that date. There were 80,448,475 shares of Common Stock outstanding
as of March 1, 2003.
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. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2002. The proxy statement is incorporated herein by reference into the
following parts of the Form 10K:
Part III, Item 10, Directors and Executive Officers of the Registrant;
Part III, Item 11, Executive Compensation;
Part III, Item 12, Security Ownership of Certain Beneficial Owners and
Management (except for that portion of Item 12 relating to Equity
Compensation Plan Information);
Part III, Item 13, Certain Relationships and Related Transactions;
Part III, Item 15, Principal Accountant Fees and Services
In addition, the portion of Item 5 in Part II relating to Equity
Compensation Plan Information is cross-referenced to Part III, Item 12, of this
Annual Report on Form 10-K.
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CELGENE CORPORATION ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM NO. PAGE
- ----------- -----
Part I
1. Business ......................................................... 1
2. Properties ....................................................... 32
3. Legal Proceedings ................................................ 33
4. Submission of Matters to a Vote of Security Holders .............. 33
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters .............................................. 34
6. Selected Consolidated Financial Data ............................. 35
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 36
7a. Quantitative and Qualitative Disclosures About Market
Risk ............................................................. 43
8. Financial Statements and Supplementary Data ...................... 44
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .............................. 44
Part III
10. Directors and Executive Officers of the Registrant ............... 45
11. Executive Compensation ........................................... 45
12. Security Ownership of Certain Beneficial Owners and
Management ....................................................... 45
13. Certain Relationships and Related Transactions ................... 46
14. Controls and Procedures .......................................... 46
15. Principal Accountant Fees and Services ........................... 46
Part IV
16. Exhibits, Financial Statements, and Reports on Form 8-K .......... 47
Signatures ....................................................... 50
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ITEM 1. BUSINESS
We are a fully-integrated biopharmaceutical company, incorporated in 1986
as a Delaware corporation. We are primarily engaged in the discovery,
development and commercialization of novel therapies designed to treat cancer
and immunological diseases through regulation of cellular, genomic and
proteomic targets. We had total revenues of $135.7 million in 2002 and a net
loss of $100.0 million, which included a charge to operations of $32.2 million
attributable to a litigation settlement and related agreements and $55.7 million
related to an acquired in-process research and development charge in connection
with the acquisition of Anthrogenesis Corp. We had an accumulated deficit of
$322.4 million at December 31, 2002 and have since our inception in 1986
financed our working capital requirements primarily through product sales,
public and private sales of our equity securities and debt, income earned on the
investment of the proceeds from the sale of such securities and revenues from
research contracts and license payments.
We have built a highly integrated discovery, development and
commercialization platform for drug and cell-based therapies that enables the
company to both create and retain significant value within its therapeutic
franchise areas of cancer and immunological diseases. This
target-to-therapeutic platform integrates both small molecule and cell-based
therapies and spans the key functions required to generate a large and diverse
pipeline of new drug and cell therapy candidates, including: (i) cell biology,
genomics, proteomics and informatics technologies for identifying and
validating clinically important therapeutic targets; (ii) high throughput
screening systems combined with diverse and focused compound libraries for
discovering new drug leads; (iii) computational and medicinal chemistry for
optimizing drug candidates; (iv) in vitro and in vivo models of disease for
preclinical evaluation of drug efficacy and safety; (v) a clinical and
regulatory organization highly experienced in the development of pharmaceutical
agents; and (vi) an approximately 160-person sales and marketing organization.
The parallel development of chemotherapeutic and biotherapeutic agents may
allow us to provide physicians/clinicians with a more comprehensive and
integrated set of therapeutic solutions for managing complex human diseases
such as cancer and immuno-related diseases.
We have three major commercial-stage programs:
o THALOMID(Reg. TM) (THALIDOMIDE), is approved in the United States for the
treatment of acute cutaneous manifestations of moderate to severe
erythema nodosum leprosum, or ENL, and as maintenance therapy to prevent
and suppress cutaneous manifestation recurrences. ENL, a complication of
leprosy, is a chronic bacterial disease. We distribute THALOMID(Reg. TM)
in the United States through our commercial organization. Working with
the FDA, we developed a novel comprehensive education and distribution
program, the "System for Thalidomide Education and Prescribing Safety,"
or S.T.E.P.S.(Reg. TM), that is designed to support the safe and
appropriate use of THALOMID(Reg. TM). We also intend to seek marketing
approval for THALOMID(Reg. TM) for the treatment of early-stage multiple
myeloma and metastatic renal cell carcinoma.
o We have a major collaboration with Novartis Pharma AG concerning the
entire Ritalin(Reg. TM) family of drugs. We developed Focalin(TM)
(d-MPH), the chirally pure version of Ritalin(Reg. TM), that is approved
for the treatment of attention deficit disorder and attention deficit
hyperactivity disorder, or ADD/ADHD, in school-age children. The use of
chirally pure compounds, such as Focalin(TM), can result in significant
clinical benefits. Many non-chirally pure pharmaceuticals contain two
configurations, known as isomers, which are mirror images of each other.
Generally these isomers interact differently with their biological
targets causing one isomer to have a beneficial effect and the other
isomer to have either no effect or potentially undesirable side effects.
In April 2000, we granted Novartis an exclusive license (except Canada)
for the development and marketing of Focalin(TM) in return for
substantial milestone payments and royalties on Focalin(TM) and the
entire Ritalin(Reg. TM) family of drugs. In 2002, Novartis launched
Focalin(TM) and Ritalin(Reg. TM) LA, the long-acting version of
Ritalin(Reg. TM), in the United States. We have retained the exclusive
commercial rights to Focalin(TM) for oncology-related disorders such as
cognitive dysfunction associated with chemotherapy.
o CELLULAR THERAPEUTICS. In 2002 we acquired Anthrogenesis Corp., a
privately held biotherapeutics company pioneering the recovery of stem
cells from human placental tissue that now operates as
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Celgene Cellular Therapeutics, our wholly owned subsidiary. Celgene
Cellular Therapeutics' proprietary technology allows for the procurement
of large quantities of high-potential stem cells from human placental
tissue. Celgene Cellular Therapeutics has developed proprietary methods
for collecting, processing and storing placental stem cells and is
developing three main business units: stem cell banking for
transplantation, private stem cell banking and the development of
biomaterials for organ and tissue repair.
Our preclinical and clinical-stage pipeline of new drug candidates and
cell therapies is highlighted by seven classes of small molecule, orally
administered therapeutic agents designed to selectively regulate
disease-associated genes and proteins:
o IMMUNOMODULATORY DRUGS (IMIDS(TM)). IMiDs(TM) are novel small molecule,
orally available compounds that modulate the immune system. We have
advanced two IMiDs(TM), REVIMID(TM) (CC-5013) and ACTIMID(TM) (CC-4047),
into clinical trials in cancer and inflammatory diseases. We recently
initiated two pivotal programs for REVIMID(TM) in multiple myeloma and
metastatic melanoma that consist of multi-center, controlled,
double-blind trials conducted in the United States and internationally.
In addition, REVIMID(TM) is also being evaluated in myelodysplastic
syndromes, glioblastoma and serious inflammatory diseases. ACTIMID(TM), a
second class of IMiDs(TM), is being tested in a Phase I/II clinical trial
in refractory multiple myeloma. Interim data from this trial demonstrated
that ACTIMID(TM) has anti-tumor activity in multiple myeloma and has a
manageable toxicity profile. ACTIMID(TM) and REVIMID(TM) have different
activity profiles that may be better suited for different disease types.
A third IMiD(TM) is currently undergoing preclinical efficacy and safety
evaluation. The IMiD(TM) class of drug candidates is covered by a
comprehensive intellectual property estate of U.S. and foreign issued
patents and pending patent applications including composition-of-matter
and use patents.
o SELECTIVE CYTOKINE INHIBITORY DRUGS (SELCIDS(TM)). SelCIDs(TM) are novel
small molecule, orally available modulators of the phosphodiesterase type
form 4 (PDE 4) target that inhibit tumor necrosis factor-alpha, or TNF-,
and interleukin-1 , or IL-1, cytokines that have been linked to the onset
and progression of inflammatory diseases and potentially cancer. Our lead
SelCID(TM), CC-1088, completed a Phase I/II trial in patients with
Crohn's disease and demonstrated anti-inflammatory activity. CC-1088 is
also being studied as a potential treatment for myelodysplastic syndromes
in a Phase II clinical trial. A second SelCID(TM), CC-7085, was well-
tolerated in a Phase I trial and a third, more potent SelCID(TM),
CC-1004, is expected to begin clinical trials in 2003.
o BENZOPYRANS. Our first compound from our San Diego Research Division to
enter the clinic, CC-8490, completed a Phase I safety trial and was
well-tolerated in healthy human volunteers. CC-8490 demonstrated
anti-proliferative effects and the ability to induce apoptosis in
preclinical models of cancer. We plan to initiate a Phase I/II study of
CC-8490 in glioblastoma later in 2003. We have a Collaborative Research
and Development Agreement with the National Cancer Institute for this
group of compounds.
o SELECTIVE ESTROGEN RECEPTOR MODULATORS (SERMS). SERMs are compounds that
mimic the positive effects of estrogen while blocking the hormone's
negative effects. Estrogen is a hormone that has a broad spectrum of
effects on tissues in both women and men. Although the hormone's
biological effects are often beneficial, estrogen is also a potent growth
factor in breast and other reproductive tissues that can cause or
contribute to cancer. For cancer indications, our SERMs are designed to
block certain harmful stimulatory effects of estrogen and other factors
targeted by these agents. In treating osteoporosis, our SERMs are
designed to mimic the positive effects of estrogen by inhibiting bone
loss and providing potential cardiovascular protection in pre- and
post-menopausal women, while avoiding some of estrogen's adverse effects
such as increased risk of breast and uterine cancer. We have a
Collaborative Research and License Agreement with Novartis to discover
and develop SERMs for the treatment and prevention of osteoporosis.
o KINASE INHIBITORS. Our kinase inhibitors include c-Jun N-terminal kinase,
or JNK, and nuclear factor kappa beta, or NF (Kappa Beta), inhibitors.
Kinases are regulatory proteins that control cell growth, diffentiation
and survival/death by transmitting biological signals from a cell's
exterior
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environment to its nucleus, where genes that maintain health and genes
that cause disease are turned on and off in response to these signals.
Kinase inhibitors bind to and block the activity of gene-regulating
kinases, such as JNK and NF-(Kappa Beta), thereby inhibiting the ability
of kinase proteins to turn on specific genes that cause or contribute to
disease. We have a major JNK drug discovery and development program, as
well as a comprehensive patent estate covering JNK and other important
kinases.
o TUBULIN INHIBITORS. The newest class of compounds that we have developed
is the tubulin inhibitors. This novel class of anti-proliferative
compounds contains multiple drug candidates that have numerous
anti-cancer mechanisms. In preclinical models, our proprietary tubulin
inhibitors have demonstrated activity against drug resistant cancer
cells, inhibition of inflammatory cytokines and anti-angiogenic activity.
o LIGASE MODULATORS. Ubiquitin ligases are important molecules that control
key cellular functions by maintaining appropriate levels and types of
proteins within cells. Ubiquitin-mediated protein modulation regulates a
broad range of cellular processes including cell proliferation,
differentiation and survival/death. When disease-preventing proteins,
such as tumor suppressor proteins, are inappropriately removed or
disease-causing proteins such as tumorgenic proteins are not properly
eliminated from cells, abnormalities in cellular functions may occur and
cause diseases such as cancer and inflammation. Our novel ubiquitin
ligases modulate key cell signaling proteins and are accessible targets
for developing selective small molecule drugs to treat cancer and
inflammatory diseases. Based on this data, we are developing a growing
portfolio of small molecule modulators of potential proprietary E3
ligases. We are establishing a leading intellectual property estate in
the emerging field of ubiquitin ligase-biogenetic activities and mediated
protein turnover that includes thirty-eight potentially proprietary
ligase targets.
3
CELGENE PRODUCT OVERVIEW
The target disease indications and the development and commercial status
of THALOMID(Reg. TM), Focalin(TM) and our drug candidates currently under
development are outlined in the following table:
PRODUCT DISEASE INDICATION COLLABORATOR STATUS
- --------------------- ----------------------- -------------------- --------------------------------
THALOMID(Reg. TM) ENL Marketed.
Multiple Myeloma Phase III trials ongoing.
Additional trials ongoing and
planned.
Renal Cancer Phase II/III trials ongoing and
planned.
MDS Phase III trial ongoing.
Colorectal Cancer Pharmacia Phase II trials ongoing.
Inflammatory Diseases Phase II trials ongoing and
planned.
IMiDs(TM)
REVIMID(TM) Multiple Myeloma Phase II/III trials ongoing.
Additional trials planned.
Malignant Metastatic Phase II/III trials ongoing.
Melanoma
Additional trials planned.
MDS Phase II trials ongoing.
Additional registration studies
planned.
Solid Tumor Cancers Phase I/II trials ongoing and
expanded. Additional trials
planned.
Inflammatory Diseases Phase I/II trials ongoing and
planned.
ACTIMID(TM) Multiple Myeloma Phase I/II trial ongoing.
Prostate Cancer Phase I/II trials planned.
SelCIDs(TM)
CC-1088 Crohn's Disease Phase II trial completed.
MDS Phase II trial ongoing.
CC-7085 Inflammatory Diseases Phase I trial completed.
CC-1004 Inflammatory Diseases Phase I/II trials planned.
BENZOPYRANS
CC-8490 Cancer Phase I trial completed.
Additional trials planned.
SERMs
SERM(alpha) Osteoporosis Novartis Pharma AG Preclinical studies ongoing.
KINASE INHIBITORS
JNK
CC-401 Cancer/Inflammatory
Diseases Phase I trials completed.
Additional trials planned.
IKK-2 Cancer/Inflammatory Serono SA
Diseases Preclinical studies ongoing.
P38/MEK Cancer/Inflammatory
Diseases Drug discovery ongoing.
TUBULIN INHIBITORS
CC-5079 Cancer Preclinical studies ongoing.
CC-4089 Cancer Preclinical studies ongoing.
LIGASES Cancer/Inflammatory
Diseases Drug discovery ongoing.
FOCALIN(TM) ADD/ADHD Novartis Pharma AG Marketed.
Chemotherapy-induced
fatigue and Cognitive
Phase II trial ongoing.
Dysfunction
RITALIN(Reg. TM) LA ADD/ADHD Novartis Pharma AG Marketed.
FOCALIN(TM) LA ADD/ADHD Novartis Pharma AG Trials planned.
4
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap.
o PHASE I CLINICAL TRIALS
If the FDA allows a request to initiate clinical investigations to become
effective, Phase I human clinical trials can begin. These tests usually involve
a small number of healthy volunteers or patients. The tests study a drug's
safety profile, and may include the safe dosage range. The Phase I clinical
studies also determine how a drug is absorbed, distributed, metabolized and
excreted by the body, and the duration of its action.
o PHASE II CLINICAL TRIALS
In Phase II clinical trials, controlled studies are conducted on a limited
number of patients with the targeted disease. An initial evaluation of the
drug's effectiveness on patients is performed and additional information on the
drug's safety is obtained.
o PHASE III CLINICAL TRIALS
This phase typically includes multi-center trials and involves a larger
patient population. During the Phase III clinical trials, physicians monitor
patients to determine efficacy and to gather further information on safety.
OVERVIEW OF GENES AND DISEASE
Genes control all cellular functions responsible for maintaining human
health. Gene regulation is a highly controlled process in which specific sets
of genes are activated and inactivated to maintain the body's essential
functions, as well as to fight disease. Genes are controlled by networks of
proteins inside cells that relay biologic information through pathways from a
cell's surface to its nucleus where genes are activated or inactivated in
response to these signaling events. These cell signaling pathways consist of
several large and distinct classes of gene regulating proteins that 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 selectively regulate gene expression. Ligases
control the levels and types of gene regulating proteins in cells. Each of
these three classes of gene regulatory proteins controls multiple genes that
contribute to disease.
Recent advances in cellular and molecular biology have demonstrated that
malfunctions in gene regulation trigger cells to produce inappropriate amounts
or types of proteins that give rise to many complex human diseases. For
example, over-activation of certain genes and overproduction of their protein
products can cause uncontrolled proliferation of cells characteristic of cancer
and inflammatory diseases. Alternatively, under-activation of critical genes
and their protein products, such as tumor suppressors, also may give rise to
diseases including cancer.
Genomics is the large-scale identification and characterization of the
genes that comprise the human genome, which is advancing drug discovery and
development. The entire human genome has been sequenced, and this information
is being compiled in databases. These genomic databases only provide a starting
point for understanding the role of genes in disease because gene sequence
data, by itself, provides limited information about a gene's relationship to a
specific disease. To fully capitalize on the therapeutic potential of genomics,
it is necessary to map critical gene regulating pathways and identify key
proteins in these pathways that can serve as drug targets for disease therapy.
Many conventional drug discovery efforts have focused on identifying
compounds that have been directed toward extracellular targets -- either cell
surface receptors or proteins produced and secreted by cells -- that indirectly
regulate gene expression. Many of these drugs provide only symptomatic relief
of disease and do not treat the molecular causes of disease. For example,
standard rheumatoid arthritis therapies such as non-steroidal anti-inflammatory
drugs (e.g., Ibuprofen) only relieve the symptoms of pain and inflammation.
These drugs do not address the destruction of arthritic joints caused by
rheumatoid arthritis. Drugs directed toward targets outside the cell also have
a number of potential
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limitations because they often control only a few of the specific sets of genes
and proteins that are responsible for the onset and progression of disease and
may even cause detrimental side effects due to their non-specific action. An
additional limitation is that many current drugs must be injected and are not
orally available.
OVERVIEW OF OUR GENE AND PROTEIN-REGULATING TECHNOLOGY
We have developed and integrated a large set of proprietary drug targets
and drug discovery technologies to accelerate the application of genomics and
proteomics to the discovery of important new classes of gene and
protein-regulating drugs. To identify specific drug targets, we map
gene-regulating pathways to identify proteins that control disease-associated
genes. This information is then used to discover novel gene and
protein-regulating drugs by applying our drug discovery engine. We believe our
discovery and development capabilities provide us with a highly advanced and
competitive technology platform for target and drug discovery. This engine
consists of:
o 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 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.
o TARGET FOCUSED HIGH THROUGHPUT SCREENING SYSTEMS AND COMPOUND LIBRARIES.
We have assembled a library of distinct small molecule compounds and
natural products that we screen using our proprietary biochemical and
cell-based assay technologies. Our drug discovery systems are capable of
determining the activity and specificity of a compound across multiple genes
and proteins.
o A PROPRIETARY, KINASE-FOCUSED COMPOUND LIBRARY.
We have 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 undiscovered gene-regulating kinase targets.
In addition, we design these compounds with attractive pharmaceutical
properties, such as solubility, chemical stability, non-reactivity and the
ability to be taken orally, which may accelerate the development of viable drug
candidates.
o STRUCTURE-BASED DRUG DESIGN.
We use our proprietary three-dimensional models of drug targets, combined
with advanced chemistry technologies, to generate drug leads and advance drug
candidates into preclinical and clinical development.
Our drug discovery and development programs are focused principally on
cancer and inflammatory diseases in which gene dysregulation plays a major role
in the onset and progression of these complex multi-genic diseases.
THALOMID(Reg. TM)
In July 1998, we received approval from the U.S. Food and Drug
Administration to market THALOMID(Reg. TM) for the treatment of acute cutaneous
manifestations of moderate to severe ENL and as maintenance therapy for
prevention and suppression of cutaneous manifestation recurrences. ENL is an
inflammatory complication of leprosy associated with excess TNF- production.
Although leprosy is relatively rare in the United States, the disease afflicts
millions worldwide. ENL occurs in about 30% of leprosy patients and is
characterized by skin lesions, acute inflammation, fever and anorexia.
Thalidomide was developed initially as a sedative, and was widely prescribed by
doctors in Europe in the late 1950s
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and early 1960s to pregnant women for relief of morning sickness. After severe
birth defects were associated with its use, thalidomide was virtually removed
from the world market. Thalidomide was later discovered to have therapeutic
effects in the treatment of ENL. Although the FDA had never approved the
marketing of thalidomide until 1998, the U.S. Public Health Service has
dispensed the drug for the treatment of ENL for the previous 25 years. We note
that thalidomide's history may limit market acceptance of THALOMID(Reg. TM).
THALOMID(Reg. TM) is the first drug approved under a special "Restricted
Distribution for Safety" regulation, and we launched THALOMID(Reg. TM) in late
September 1998 with our patented S.T.E.P.S.(Reg. TM) program. S.T.E.P.S.(Reg.
TM) is designed to support the safe and appropriate use of THALOMID(Reg. TM)
and is part of the approved labeling for THALOMID(Reg. TM). In 2002,
THALOMID(Reg. TM) revenue totaled $119 million.
We are currently developing THALOMID(Reg. TM) for the treatment of a
variety of serious diseases for which we believe there are no adequate approved
therapies. THALOMID(Reg. TM) has been, or is being evaluated in more than 200
clinical trials, some sponsored by the National Cancer Institute, or NCI, as a
potential therapy for cancer and inflammatory diseases. Key indications include
multiple myeloma, myelodysplastic syndromes, renal cell carcinoma and
colorectal cancer. Our current intent is to seek FDA approval for THALOMID(Reg.
TM) in early-stage multiple myeloma patients and renal cell carcinoma patients.
Our work with thalidomide was originally based on a scientific
collaboration with The Rockefeller University's Laboratory of Cellular
Physiology and Immunology. In the early 1990s, researchers at The Rockefeller
University discovered that thalidomide is a selective modulator of TNF- and,
therefore, could be of potential benefit in many serious immunological
diseases, including cachexia and other AIDS-related conditions. We believe that
in serious and debilitating disease states, the risk of birth defects and other
potential side effects related to thalidomide is outweighed by the drug's
potential clinical benefits. The Rockefeller University has granted us certain
exclusive rights and licenses to manufacture, use and sell thalidomide for
treating the toxicity associated with high concentrations of TNF- in septic
shock, cachexia and HIV-related disease states. Subsequently, researchers at
the Children's Medical Center Corporation, or CMCC, which is affiliated with
Harvard University, discovered that thalidomide is anti-angiogenic and filed
patents on this utility. In December 1998, we were granted an exclusive license
to these patents by CMCC, some of which have not yet issued in the United
States.
As a result of our own applications and designations acquired from the
CMCC, we now have Orphan Drug designations from the FDA for THALOMID(Reg. TM)
covering primary brain malignancies, HIV-associated wasting syndrome, severe
Recurrent Aphthous Stomatitis, or RAS, 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(Reg. TM), we will be
granted a seven-year period of exclusivity during which time the FDA is
prohibited, except under certain conditions, from approving another version of
thalidomide for the approved indication. In November 2001, we were also granted
European Orphan Drug status for THALOMID(Reg. TM) in multiple myeloma and ENL.
In addition, patents related to S.T.E.P.S.(Reg. TM) provide additional
protection as the S.T.E.P.S.(Reg. TM) program is included in the THALOMID(Reg.
TM) label.
THALOMID(Reg. TM) AND ONCOLOGY
Cancer tissue stimulates the growth of blood vessels essential for tumor
growth, tissue invasion and metastasis. Specifically, primary tumors are
believed to remain clinically insignificant unless they can obtain nourishment
from their host. Biochemically, an invasive tumor induces the production of
several growth factors that cause the formation of new blood vessels, termed
angiogenesis. Almost three decades ago, it was proposed that this process of
tumor angiogenesis could be a promising new target of cancer therapy.
Anti-angiogenic compounds were believed 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 CMCC in Boston. We are currently working with the NCI
and a number of clinical investigators to assess the potential of THALOMID(Reg.
TM) in the treatment of various cancers. Currently, we estimate that
approximately 92% of THALOMID(Reg. TM) prescriptions are in oncological
indications.
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MULTIPLE MYELOMA. Multiple myeloma is the second most common hematologic
malignancy diagnosed in the United States. It is a malignant disorder of plasma
cells residing in the bone marrow and is characterized by the prominent
appearance of a certain monoclonal antibody, or M-protein, in the blood or
urine of patients. There is a high morbidity and mortality associated with
multiple myeloma that includes bone fractures, bone marrow failure and kidney
failure.
According to the Multiple Myeloma Research Foundation and the American
Cancer Society, there are approximately 45,000 people in the United States
living with multiple myeloma with over 14,000 new cases and 11,000 deaths
expected this year. While current treatment regimens provide some therapeutic
benefits, multiple myeloma patients continue to relapse and suffer high
mortality rates. Additionally, current treatments for multiple myeloma have
detrimental side effects, and there is a great need for safer and more
effective alternatives.
THALOMID(Reg. TM) is currently being evaluated as a potential therapy for
every disease stage of multiple myeloma, including monoclonal gammopathy of
uncertain significance, or MGUS, smoldering, newly diagnosed, relapsed and
refractory. Several investigators at leading cancer research centers have
reported data on the response rate, the median effective dose and the average
duration of response for multiple myeloma patients treated with THALOMID(Reg.
TM) in clinical trials.
o Newly Diagnosed Multiple Myeloma. Peer-reviewed studies from MD Anderson
Cancer Center and the Mayo Clinic evaluating the use of the orally
administered combination of THALOMID(Reg. TM) and dexamethasone for newly
diagnosed multiple myeloma were published in the Journal of Clinical
Oncology. Dr. S. Vincent Rajkumar of the Mayo Clinic reported that 32 of
50 patients (64 percent) achieved a greater than 50 percent reduction in
M-protein, and an additional 14 patients (28 percent) achieved a reduction
in M-protein of between 25 and 50 percent. The regimen was generally
well-tolerated, and the most commonly reported grade one or two adverse
events were constipation, sedation, neuropathy, edema, infection and bone
pain. Based on this data, we have initiated a pivotal trial for
THALOMID(Reg. TM) plus dexamethasone in early-stage multiple myeloma, and
we intend to seek FDA approval for THALOMID(Reg. TM) in this indication.
o Relapsed and Refractory Multiple Myeloma. THALOMID(Reg. TM)'s effect on
long-term survival in multiple myeloma was published in Blood in an
article entitled "Extended Survival in Advanced and Refractory Multiple
Myeloma After Single-agent Thalidomide: Identification of Prognostic
Factors in a Phase II Study of 169 Patients." The study is a follow-up of
a phase II trial of 169 advanced and refractory multiple myeloma patients
with progressive disease treated with THALOMID(Reg. TM), and it extends
results of 84 patients previously reported in The New England Journal of
Medicine. The phase II study was initiated to evaluate the use of
THALOMID(Reg. TM) in multiple myeloma patients who relapsed after high
dose chemotherapy. Of the study's 169 patients, 37 percent demonstrated a
25 percent or greater reduction in myeloma protein, 30 percent
demonstrated a 50 percent or greater reduction and 14 percent of patients
achieved a complete or near complete response.
The trial's principal investigator, Bart Barlogie, M.D., Ph.D., and
researchers at the Arkansas Cancer Research Center reported that high-risk
patients who received greater than or equal to 42 grams of THALOMID(Reg.
TM) in a three-month period experienced higher response rates (63 percent
vs. 45 percent) and longer survival time (54 percent vs. 21 percent). In
addition, for the entire patient cohort, event-free survival after two
years of follow-up was 20 percent, and overall survival is 48 percent.
The study's most commonly reported side effects included one or more
grade three toxicities. 25 percent of patients experienced events
affecting the central nervous system, such as sedation and somnolence,
confusion, depression and tremor. Sixteen percent of patients experienced
gastrointestinal toxicities, mainly constipation. Neuropathy was seen in
nine percent of patients, and less than two percent of patients developed
deep vein thrombosis. These toxicities were found to be dose related.
MYELODYSPLASTIC SYNDROMES. Myelodysplastic Syndromes, or 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
8
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 United States, with survival rates ranging from six months to five years
for the different types of MDS.
The first peer-reviewed study evaluating the potential use of
THALOMID(Reg. TM) to treat MDS was published in the August 15, 2001 issue of
Blood. The study, entitled "Thalidomide Produces Transfusion Independence in
Long-standing Refractory Anemias of Patients with Myelodysplastic Syndromes,"
reported on 83 MDS patients treated with THALOMID(Reg. TM). This pilot study
was initiated to evaluate the activity of THALOMID(Reg. TM) in either low- or
high-risk patients with MDS. Patients received an initial THALOMID(Reg. TM)
dose of 100 mg/day and were escalated as tolerated. Sixteen patients showed
hematologic improvement with 10 patients becoming transfusion independent.
Hematologic improvement was measured by increased platelets, decreased
dependence on transfusions and improved erythroid series. Less than five
percent of patients had grade 4 toxicity with the most commonly reported side
effects being fatigue, constipation, shortness of breath, fluid retention,
dizziness, rash, tingling in fingers and/or toes, fever and headache, and
nausea.
We have initiated a Phase III, multi-center, controlled study to further
evaluate THALOMID(Reg. TM) as a potential therapy of MDS.
RENAL CELL CARCINOMA. Renal cell carcinoma, the most common form of kidney
cancer, is caused when cells in the lining of the renal tubule, one of the
canals that make up the kidneys, undergoes cancerous changes. The American
Cancer Society estimates that about 30,800 new cases of kidney cancer are
diagnosed in the United States annually. About 12,100 people die from this
disease annually. Unlike most other cancers, kidney cancer does not respond to
chemotherapy since one of the major functions of the kidneys is to clear the
body of toxins. The only approved drug treatment for metastatic kidney cancer
in the United States is Interleukin-2, or IL-2.
We, in partnership with Baylor Cancer Center, initiated a Phase I/II study
of THALOMID(Reg. TM) in combination with IL-2 in metastatic renal cell
carcinoma patients. Fifteen patients received a daily THALOMID(Reg. TM) dose of
200 mg (3 patients), 400 mg (6 patients) or 600 mg (6 patients). IL-2 was given
by subcutaneous injections (7mlU/m2; days 1-4, weeks 1-4). Of the 10 evaluable
patients, five experienced partial response and two experienced stable disease.
Adverse effects observed with THALOMID(Reg. TM) and IL-2 were sedation,
constipation, skin rash, flu-like symptoms, fluid retention, hypotension and
deep vein thrombosis.
Based on these and similar data, we are planning pivotal trials and intend
to seek FDA marketing approval for THALOMID(Reg. TM) in metastatic renal cell
carcinoma.
OTHER SOLID TUMORS. In addition to renal cell carcinoma, THALOMID(Reg. TM)
is also used in colorectal cancer, prostate cancer, glioblastoma and metastatic
melanoma.
THALOMID(Reg. TM) AND INFLAMMATORY DISEASES
THALOMID(Reg. TM) has been shown to modulate the immune system response
both in vitro and in vivo. Examples of such biological activities include the
inhibition of TNF-, stimulation of the anti-inflammatory cytokine IL-10 and
activation of T-cell functions. 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 sarcoidosis, an inflammation of body tissue, which often
attacks the lungs and lymph nodes, and scleroderma, a chronic inflammatory
tissue disorder.
S.T.E.P.S.(Reg. TM)
Working with the FDA and other governmental agencies, as well as certain
advocacy groups, we designed and implemented S.T.E.P.S.(Reg. TM), for the safe
and appropriate use of THALOMID(Reg. TM). This proprietary program includes
comprehensive physician, pharmacist and patient education. All patients are
required to use contraception, and female patients of child-bearing potential
are given pregnancy tests regularly. All patients are subject to other
requirements, including informed consent. Physicians are
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also required to comply with the educational, contraception counseling,
informed consent and pregnancy testing and other elements of the program.
Automatic refills are not permitted under the program, and each prescription
may not exceed four weeks dosing. A new prescription is required each month.
S.T.E.P.S.(Reg. TM) is protected by a business patent covering 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.
S.T.E.P.S.(Reg. TM) is designed as a blueprint for pharmaceutical products that
offer life-saving or other important therapeutic benefits but have potentially
problematic side effects.
IMIDS(TM)
IMiDS(TM) are novel, small molecule, orally available compounds that
modulate the immune system. Data published in The Journal of Immunology
demonstrated that IMiDs(TM) potently inhibit the inflammatory cytokines and
growth factors such as TNF-, basic fibroblastic growth factor, or bFGF, and
vascular endothelial growth factor, or VEGF, that are involved in tumor
development. IMiDs(TM) were also reported in Blood to enhance T-cell
proliferation, IL-2 production and apoptosis, or cell death. We have advanced
two IMiDs(TM), REVIMID(TM) and ACTIMID(TM), into clinical trials in cancer and
inflammatory diseases.
REVIMID(TM)
REVIMID(TM), our lead IMiD(TM), is an orally available compound that
affects multiple cellular pathways and biological targets. We are currently
evaluating REVIMID(TM) in a wide range of hematological and solid tumor
cancers, as well as inflammatory diseases. We are pursuing multiple
regulatory pathways for REVIMID(TM).
MULTIPLE MYELOMA. Preliminary data from a Phase II trial of REVIMID(TM)
in relapsed or refractory multiple myeloma demonstrate that 39 of 46
evaluable patients (85 percent) with progressive disease experienced a
reduction or stabilization in their paraprotein levels (a measure of tumor
burden). Importantly, five of seven patients who experienced progressive
disease on REVIMID(TM) monotherapy subsequently experienced a reduction or
stabilization of paraprotein levels after REVIMID(TM) plus dexamethasone
combination therapy. Therefore, 44 of 46 evaluable patients (96 percent)
experienced a reduction or stabilization of paraprotein levels after either
REVIMID(TM) monotherapy or REVIMID(TM) plus dexamethasone combination
therapy.
The preliminary data from the Phase II trial is very similar to final
results from a Phase I/II trial of REVIMID(TM) monotherapy in relapsed or
refractory multiple myeloma that we conducted in partnership with the
Dana-Farber Cancer Institute. The trial demonstrated that 17 of 24 patients
(71 percent) experienced at least a 25 percent reduction in paraprotein.
MYELODYSPLASTIC SYNDROMES. Myelodysplastic syndromes, or MDS, are a
group of hematologic conditions that affect approximately 50,000 people in
the United States. 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. MDS occurs when blood cells remain in an immature,
or "blast", stage within the bone marrow and never develop into mature
cells capable of performing their necessary functions. Eventually, the bone
marrow becomes filled with blast cells until there is no room for normal
cells to develop. According to the American Cancer Society, 14,000 new
cases of MDS are diagnosed each year in the United States, with
average/expected survival rates ranging from six months to five years for
the different types of MDS.
Preliminary data from a Phase I/II trial of REVIMID(TM) monotherapy in
MDS indicates that 12 of 18 evaluable patients (66 percent) with MDS
responded to REVIMID(TM) therapy, including five patients with deletion of
chromosome 5q31-33 who all achieved a complete cytogenetic response.
REVIMID(TM) demonstrated significant erythropoietic and cytogenetic
remitting activity in patients with MDS during the trial. Importantly,
nearly all patients who responded to REVIMID(TM) achieved
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transfusion independence, and many patients achieved a disappearance of
cytogenetic abnormalities. Based on these findings, we plan to develop a
clinical program designed to achieve regulatory approval in the timeliest
manner.
PIVOTAL PROGRAMS. The pivotal program for REVIMID(TM) in relapsed and
refractory multiple myeloma has been reviewed by the FDA through the
Special Protocol Assessment Program and will be conducted in accordance
with comments received from the FDA. The pivotal program for REVIMID(TM) in
relapsed and refractory multiple myeloma consists of two identical
multi-center, controlled, double-blind trials that will each compare 25
mg/day of REVIMID(TM) plus dexamethasone versus dexamethasone alone in over
300 patients with previously treated multiple myeloma. One trial will be
conducted in the United States and the second will be conducted
internationally. The endpoints are time to disease progression and overall
survival.
We have also initiated a pivotal program for REVIMID(TM) in refractory
metastatic melanoma that is comprised of two studies that will each
evaluate REVIMID(TM) in 274 patients whose disease has progressed on
treatment with DTIC, IL-2, IFN- or IFN-. The primary endpoint of this
program will be overall survival. The median survival for this patient
population is four to six months. The first trial will be conducted in the
United States and will compare two different doses of REVIMID(TM). The
second trial will be conducted internationally and will compare 25 mg/day
of REVIMID(TM) versus placebo.
ACTIMID(TM)
ACTIMID(TM), our second IMiD(TM) to enter clinical trials, is being
evaluated in a Phase I/II clinical trial in refractory multiple myeloma.
MULTIPLE MYELOMA. Interim data from an ongoing Phase I/II trial of
ACTIMID(TM) in 18 relapsed and refractory multiple myeloma patients
indicates that ACTIMID(TM) has anti-tumor activity in multiple myeloma and
has an acceptable toxicity profile. All patients at all dose levels
reportedly experienced an improvement in their clinical health while on
ACTIMID(TM) therapy. Based on these data, we will initiate Phase II trials
of ACTIMID(TM).
PROSTATE CANCER. We have identified prostate cancer as the first solid
tumor target indication for ACTIMID(TM), and we expect to initiate a Phase
II clinical trial of ACTIMID(TM) in metastatic hormone-refractory prostate
cancer in 2003. The study will evaluate the safety and preliminary efficacy
of ACTIMID(TM) in patients with metastatic hormone-refractory prostate
cancer.
SELCIDS(TM)
SelCIDs(TM) are novel, small molecule drugs that modulate TNF-|jj and
other disease-causing cytokines by selectively and potently inhibiting PDE 4,
an enzyme whose selective inhibition has been shown to be effective in animal
models of asthma and inflammation. We believe that control of TNF- at its
source, versus simple removal of circulating levels of the cytokine, may
facilitate more effective therapy without immune suppression. PDE 4 inhibitors,
although shown to have potential therapeutic benefit in the treatment of
inflammatory diseases, have also been found to have undesirable biological
activities including nausea and vomiting. Phase I trials demonstrated that our
first two SelCIDs(TM) are well-tolerated, with minimal side effects.
Importantly, there were no signs of nausea or vomiting. Our SelCIDs(TM) were
evaluated in ferret models of asthma and vomiting in which they were found to
be potent anti-inflammatory agents with minimal side effects at therapeutic
dosing levels.
CC-1088
CC-1088, our lead SelCID(TM), is being studied as a potential treatment
for MDS and Crohn's disease in Phase II clinical trials. CC-1088 completed
a Phase I/II trial in patients with Crohn's disease. We conducted the
double-blind, placebo controlled, Phase I/II trial to evaluate the safety
and efficacy of CC-1088 in patients with moderate to severe Crohn's
disease. We reported that 6 of 11 evaluable patients (54 percent)
experienced a response to either 800 mg or 1200 mg of CC-1088 that was
defined by a decrease of 70 or more points in the Crohn's Disease Activity
Index, or CDAI,
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at week 12 as compared to 3 of 7 evaluable patients (43 percent) who received
placebo. This trend for activity was notable since the patients in the
placebo arm had significantly less disease activity at entry. The most common
adverse events patients experienced were a metallic taste (71 percent) and
headache (29 percent).
OTHER SELCIDS(TM)
Based on the Phase I/II data from CC-1088 in Crohn's disease, we will
advance the SelCID(TM) program and initiate clinical trials of the more
potent, chirally pure compounds, including CC-1004, in a variety of chronic
inflammatory diseases.
BENZOPYRANS
CC-8490
Our first compound from our San Diego research division to enter the
clinic, CC-8490, completed a Phase I safety trial and was well-tolerated in
healthy human volunteers. CC-8490 demonstrated anti-proliferative effects and
the ability to induce apoptosis in preclinical models of cancer.
In partnership with the National Cancer Institute, we will initiate a
Phase I/II clinical trial of CC-8490 in glioblastoma. In preclinical
glioblastoma models, CC-8490 demonstrated significant anti-tumor activity.
Specifically, CC-8490 has caused marked inhibition of glioma growth in in
vivo animal studies and has promoted cellular apoptosis in preclinical
glioblastoma models. The Phase I/II clinical study, conducted jointly with
the NCI, will identify the maximum tolerated dose of CC-8490 and evaluate the
preliminary efficacy of CC-8490 in patients with recurrent high-grade
gliomas.
SERMS
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 significantly increases the risk of
cancer in women. In addition, estrogen contributes to prostate cancer in men.
Given the tissue-selective expression of estrogen receptors, 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.
APPLICATIONS OF SERMS IN OSTEOPOROSIS. Hormone replacement therapy, or
HRT, has been the standard anti-resorptive therapy to prevent bone loss in
post-menopausal women. However, HRT poses a number of health risks that
make it a poor choice for many women, including an increased risk for
breast and uterine cancer. SERMs have been developed to overcome many of
the risks associated with HRT. However, first and second generation SERMs
lack the efficacy of estrogen in preventing bone loss, and are also
associated with several important risks and side effects that include
increased risk of endometrial cancer, hot flashes, deep vein thrombosis,
vaginal bleeding and liver toxicity. We have developed non-steroidal small
molecules with a novel core chemical structure compared to FDA-approved
SERMs and other known SERMs in clinical development.
We have an agreement with Novartis for joint development of SERMs to
treat and prevent osteoporosis, which is believed to affect over 75 million
people worldwide. Under the terms of this agreement, we will receive
milestone payments for specific preclinical, clinical and regulatory
endpoints, as well as royalties. Novartis is currently evaluating our SERMs
in preclinical models for efficacy on bone tissue and safety on
reproductive tissues. In 2002, Novartis selected the first preclinical
candidate after testing our SERMs for the most appropriate pharmacological
properties. This selection triggered a milestone payment to us.
12
KINASE INHIBITORS
JNK INHIBITORS
The JNK cell-signaling pathway plays a pivotal role in the onset and
progression of several important human diseases. Over-activation of the JNK
pathway increases expression of a broad set of disease-causing genes,
including VEGF, TNF-, IL-2, gamma interferon and matrix metalloproteinases.
Drugs designed to inhibit JNK have a number of potential advantages in
treating complex diseases such as inflammation and cancer because of their
ability to suppress a broad set of disease-causing cytokines, growth
factors and tissue-destructive enzymes. Importantly, JNK is an
intracellular enzyme that can be targeted with small molecule, orally
administered drugs.
We have an extensive intellectual property estate covering JNK genes,
JNK polypeptides and proteins, expression systems for protein production,
JNK screening technology, JNK targets and therapeutic uses of molecules
modulating JNK activity. This patent estate includes issued U.S. patents
and foreign patents through licenses with the University of California, the
University of Massachusetts and our own patents. Our comprehensive patent
portfolio is expected to expand further as we have various pending U.S. and
foreign patent applications. We have not licensed any rights to our JNK
program to date and retain exclusive worldwide rights for all disease
indications.
We have a major drug discovery program focused on developing small
molecules to control the JNK signaling pathway, and have identified
multiple series of novel JNK inhibitors. We have completed high throughput
screening for JNK1, JNK2 and JNK3 inhibitors using proprietary biochemical
and cell-based screens. We also have developed additional high throughput
drug screens for several other drug targets in the JNK pathway, including
JNKKl (MKK4) and JNKK2 (MKK7). Using our kinase-focused inhibitor library,
we have identified several potent compounds that inhibit JNK1, JNK2 and
JNK3 activity. In addition to significantly reducing inflammation in acute
disease models, these drug leads prevent the destruction of joints in an
animal model of arthritis and also demonstrate potent disease-modifying
activity in an animal model of asthma. Our scientists have presented data
demonstrating significant therapeutic potential of our novel JNK inhibitors
in a wide range of in vivo models, including stroke, asthma,
ischemia/reperfusion injury, seizure, diabetes and cancer. We are currently
optimizing drug leads to improve their potency, selectivity and other
pharmaceutical properties. Our first JNK inhibitor drug is expected to
enter the clinic later this year, and is currently completing preclinical
development studies. This drug is being developed initially for intravenous
administration for the treatment of acute organ failure caused by cell
death and acute inflammatory responses.
We are also developing orally administered JNK inhibitors that may be
beneficial for long-term treatment of chronic rheumatologic,
cardiovascular, respiratory and neurodegenerative diseases, in addition to
a variety of cancers. At a recent scientific meeting, we described the
promising anti-cancer activity of a JNK inhibitor when administered as a
combination treatment with standard chemotherapeutic drugs in an animal
model of cancer. The JNK pathway controls the expression of specific sets
of genes involved in cancer, including cytokines and growth factors, cell
cycle regulatory proteins and apoptosis-inducing genes, genes involved in
oncogenic transformation, cell-to-cell adhesion molecules, tissue
destructive enzymes involved in metastasis, multi-drug resistance proteins
and angiogenic factors.
In summary, pharmacologic intervention of JNK represents a novel
approach to treating a variety of human diseases including those caused by
excessive cell proliferation and death and inflammation. We have identified
different chemical classes that act as potent JNK inhibitors and are
actively optimizing these compounds for clinical development.
CC-401
Our first JNK inhibitor, CC-401, successfully completed a Phase I,
double-blind, placebo controlled, ascending single intravenous dose
study in healthy human volunteers. Based on these results, we will
advance the development of our JNK program and plan to initiate Phase II
trials.
13
IKK-2
The NF-(Kappa Beta) cell-signaling pathway plays a pivotal role in
inflammatory disease processes by regulating cytokine genes, such as
TNF-, IL-l and IL-2, along with pro-inflammatory genes that code for
cyclooxygenase-2, or COX-2, and cell adhesion molecules such as ICAM-1. The
NF-(Kappa Beta) cell-signaling pathway also controls the expression of
specific sets of genes involved in different stages of cancer development and
progression, such as cell adhesion molecules and proteinases that facilitate
tumor metastasis. In addition, NF-(Kappa Beta) regulates specific cell
survival genes that make cancer cells resistant to radiation and
chemotherapy. Our researchers and collaborators have identified six drug
targets that regulate NF-(Kappa Beta) activation, and we have been issued
four U.S. patents and, along with our collaborators, have filed related
patent applications for drug targets in this pathway.
Using our kinase-focused screening library, we have identified several
small molecule drug leads that selectively inhibit the IKK-2 kinase target
in the NF-(Kappa Beta) gene regulation pathway and have optimized certain
pharmaceutical properties of these drug leads. Our scientists presented
preclinical data on CC-839, our small molecule NF-(Kappa Beta) inhibitor. The
data demonstrated that CC-839 potently regulates the expression of multiple
pro-inflammatory and cell survival genes, and therefore may have broad
disease-modifying effects in treating a variety of serious inflammatory
diseases and cancer. Based on these results, our partner, Serono, is
investigating specific therapeutic applications for CC-839 in preclinical
disease models.
TUBULIN INHIBITORS
The newest class of compounds that we have developed is the tubulin
inhibitors. This novel class of anti-proliferative compounds contains multiple
drug candidates that have numerous anti-cancer mechanisms. In preclinical
models, our proprietary tubulin inhibitors have demonstrated activity against
drug resistant cancer cells, inhibition of inflammatory cytokines and
anti-angiogenic activity.
The compounds have demonstrated the ability to stop cancer cells from
proliferating by impeding cell division. Preclinical models also demonstrated
that the lead compound, CC-5079, and its analogs inhibit proliferation of
various cancer cell lines. Multiple drug resistant, or MDR, cancer cells showed
sensitivity to CC-5079 and its analogs with inhibition of TNF- production in
vivo by both CC-4089 and CC-5079. In addition, CC-5079 was shown to inhibit
angiogenesis in an in vitro assay and also to inhibit TNF- over-production in
vitro and in vivo. We plan to aggressively develop these compounds and to fully
understand their clinical potential.
LIGASE MODULATORS
Ubiquitin ligases are important molecules that maintain normal cellular
functions by selectively marking unwanted or damaged proteins for degradation
within cells. Ubiquitin-mediated protein modulation regulates a broad range of
cellular processes including cell cycle progression, immune responses and cell
differentiation. When unwanted proteins are not properly removed within cells,
abnormalities in cellular functions may occur and cause diseases such as cancer
and inflammation. There are three classes of ubiquitin ligases (E1, E2 and E3),
of which the E3 ubiquitin ligases have the most substrate specificity. Our
scientists have demonstrated that E3 ubiquitin ligases are attractive drug
targets because they are amenable to high throughput screening and structural
determination.
We are establishing a significant intellectual property estate in the
emerging field of ubiquitin ligase-dependent protein degradation that includes
38 proprietary E3 ligases. Our scientists have demonstrated that the Company's
novel ubiquitin ligases modulate key cell signaling proteins and are accessible
targets for developing selective small molecule drugs to treat cancer and
inflammatory diseases. Based on this data, we are developing a growing
portfolio of small molecule modulators of proprietary E3 ligases.
Our scientists presented preclinical data on a small molecule inhibitor of
the p27 E3 ubiquitin ligase, which regulates key signaling pathways involved in
the onset and progression of cancer. The data demonstrate that treatment of
cancer cells with inhibitors of the p27 E3 ubiquitin ligase dramatically
14
elevate the level of the p27 tumor suppressor protein, leading to cell cycle
arrest and subsequent tumor cell death. The data further indicate that the p27
E3 ubiquitin ligase promotes apoptosis in tamoxifen-resistant breast cancer
cells and multiple myeloma cells.
CELGRO
Celgro, our wholly owned subsidiary, is engaged in developing and applying
proprietary biocatalytic synthesis technologies to the production of chirally
pure agrochemicals and pharmaceuticals, and intermediates for their production,
including for our own products.
Many human pharmaceuticals and agrochemicals exist in two or more
different three-dimensional configurations that are identical in chemical
structure and are mirror images of each other. These conformations, known as
enantiomers, or isomers, generally interact differently with biological
targets. In clinical applications, one isomer may result in the desired
therapeutic effect by stimulating or inhibiting a targeted biological function,
while another isomer may be inactive or cause undesirable side effects. In
contrast to racemic compositions, which contain two or more isomers, the use of
chirally pure pharmaceuticals, containing only one isomer, can result in
significant clinical benefits such as reduced toxicity and increased efficacy.
In agrochemical applications, the use of chirally pure chemicals can result in
a substantially reduced volume of product required to achieve the desired
benefit, thereby potentially lowering manufacturing costs and reducing the
environmental burden as compared with racemic chemicals. The production of
chirally pure products is essential to current pharmaceutical and agrochemical
development practices.
Conventional chemical synthesis generally produces racemic mixtures of
chemicals containing multiple isomeric forms, including the desired or active
form, as well as undesired, inactive, competitive or toxic forms. The use of
enzymes as specific, three-dimensional catalysts, referred to as
"biocatalysis", can result in the exclusive production of the desired, active
form. To commercialize this potential, we have developed unique and powerful
capabilities for optimizing enzymatic reactions to be more specific,
productive, cheaper and robust enough for use in conventional fine chemical
operations.
Since 1998, through our Celgro subsidiary, we have focused our
biocatalysis technology development and application efforts on the agrochemical
industry. We have demonstrated 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. Agrochemicals are highly price sensitive and, therefore, a
process that produces chirally pure products at significant cost savings could
be in substantial demand. 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 recent years, we have entered into technology development and
application agreements with large agrochemical companies. Our approach has been
to collaborate with these companies to adapt our biocatalytic technology to the
manufacture of chirally pure versions of their existing crop protection
products, whether sold originally as racemic mixtures or in chirally pure form,
and then to license and transfer the technology to these companies in exchange
for royalties. During the development phases of these collaborations, we
typically receive combinations of development and milestone payments,
exclusivity fees and minimum royalty payments.
Celgro has also developed patents and methods for chirally pure versions
of existing agrochemicals on its own, and is seeking to enter into license
agreements with third parties to manufacture and sell the agrochemicals.
On January 9, 1998, we had concluded the sale of our chiral intermediates
production business to Cambrex Corporation. Under the terms of this sale, we
had agreed not to compete in the pharmaceuticals fine chemicals business for a
period of five years, which ended on January 9, 2003. During the past five
years, while developing agrochemical applications, Celgro has also developed
and patented new
15
biocatalytic technologies that are outside the technology license to Cambrex,
and are of use for pharmaceutical as well as agrochemical applications.
Accordingly, in 2003, Celgro is also engaging in discussions with
pharmaceutical customers to find technology applications and license
opportunities under these new patents.
In addition, Celgro is looking at Celgene pharmaceutical candidates that
have chiral intermediates to provide cost-effective production methods, and to
strengthen the competitive and proprietary positions of these products.
ADD/ADHD PROGRAM
We have a major collaboration with Novartis concerning the entire
Ritalin(Reg. TM) family of drugs. We developed Focalin(TM) (d-MPH), the
chirally pure version of Ritalin(Reg. TM), that is approved for the treatment
of attention deficit disorder and attention deficit hyperactivity disorder, or
ADD/ADHD, in school-age children. The use of chirally pure compounds, such as
Focalin(TM), can result in significant clinical benefits. Many non-chirally
pure pharmaceuticals contain two configurations, known as isomers, which are
mirror images of each other. Generally these isomers interact differently with
their biological targets causing one isomer to have a beneficial effect and the
other isomer to have either no effect or potentially undesirable side effects.
In April 2000, we granted Novartis an exclusive license (except Canada) for the
development and marketing of Focalin(TM) in return for substantial milestone
payments and royalties on Focalin(TM) and the entire Ritalin(Reg. TM) family of
drugs. In 2002, Novartis launched Focalin(TM) and Ritalin(Reg. TM) LA, the
long-acting version of Ritalin(Reg. TM), in the United States. We have retained
the exclusive commercial rights to Focalin(TM) for oncology-related disorders,
such as cognitive dysfunction associated with chemotherapy.
In Canada, we have licensed d-MPH to Biovail Corporation, which purchased
$2.5 million dollars worth of our stock and will pay us licensing fees,
milestone payments and royalties. In July 2001, Biovail Corporation filed a new
drug submission with Canada's Therapeutic Products Program, or TPP, for d-MPH.
(TPP is the governmental agency in Canada responsible for reviewing and
approving or denying a New Drug Submission, which is an application filed with
TPP for the purpose of review and possible subsequent marketing approval.) We
have been issued patents for the use of d-MPH for the treatment of ADD/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-MPH and
the racemic form. In addition, we have been issued process patents covering the
manufacturing process for the active substance.
ANTHROGENESIS
In December 2002, we acquired Anthrogenesis Corp., a privately held
biotherapeutics company pioneering the recovery of stem cells from human
placental tissue that now operates as Celgene Cellular Therapeutics, a wholly
owned subsidiary of Celgene. Celgene Cellular Therapeutics' proprietary
technology allows for the procurement of large quantities of high-potential stem
cells from human placental tissue. Celgene Cellular Therapeutics has developed
proprietary methods for collecting, processing and storing placental stem cells
and has organized three main business units: stem cell banking for
transplantation, private stem cell banking and the development of biomaterials
for organ and tissue repair.
PLACENTAL STEM CELL TECHNOLOGY
Celgene Cellular Therapeutics delivers stem cell therapies that are
produced from renewable human placental sources and are initially directed
toward major, unmet medical needs in the cancer field. Primarily, we will focus
on blood cancers such as leukemias, lymphomas and myelomas. We have developed
proprietary methods for collecting, processing and storing stem cells and other
valuable biomaterials from human placental tissue, currently an unused
byproduct of over four million annual U.S. births. Hematopoietic stem cells
derived from this source can be immediately applied in bone marrow transplants
for numerous cancer indications, in conjunction with chemotherapy and
radiation. We are also developing and producing stem cell products to treat
immunological diseases and inherited metabolic disorders, and for regenerative
medicine applications such as cardiovascular, neurological and musculo-skeletal
indications.
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We believe placental stem cells may have clinically beneficial features
and advantages, compared with stem cells derived from alternative sources, such
as human embryo and fetal tissue, adult bone marrow and other tissues, and
umbilical cord blood. In addition, placental stem cells are an economical and
socially acceptable alternative to using stem cells derived from human embryos
and fetal tissue in human therapy. These beneficial features may broaden the
use of cell therapies as a standard of care for debilitating and
life-threatening diseases and injuries. They potentially include the ability
to:
(i) produce multiple transplant units from a single placental source
that meet and exceed current adult dosing standards, without using in
vitro cell expansion techniques;
(ii) source multiple stem cell phenotypes from a single placental
source, including pluripotent, multipotent and hematopoietic stem cells,
which are capable of developing into many differentiated cell types;
(iii) achieve durable, long-term cell engraftment due to increased
immune compatibility and the younger age of placental stem cells,
compared with stem cells derived from adult sources, or non-adult cells
that have been subjected to an interactive expansion regimen; and
(iv) procure, process and bank a large inventory of transplant units
meeting adult dose standards specific to the intended application and
immediately available worldwide to physicians and patients. This would
avoid additional time, cost and invasive medical procedures currently
required to match donor transplant units for patients at critical,
immediately life-threatening stages of disease.
We believe these combined features can potentially overcome many current
obstacles limiting commercialization of new stem cell therapies and can improve
patient therapy. We have filed extensive patent applications covering the
production and therapeutic use of placenta-derived stem cells and biomaterials.
Materials and techniques developed by Celgene Cellular Therapeutics are
already in use in its autologous (those stem cells that come directly from the
individual using them) and allogeneic (those stem cells matched from distinct
donors) stem cell banking programs. With our scientific collaborators, we have
demonstrated the human placenta to be an abundant source for biotherapies,
including stem cell transplant products, regenerative medicines and
biomaterials for organ and tissue repair.
We are leveraging the placenta as a large and renewable source of human
stem cells and biomaterials, and currently focus on:
(i) producing a large, rapidly accessible bank of matched adult-dose
stem cells for patients with acute-stage, life-threatening diseases who
require immediate treatment and cannot risk additional time identifying
matched donors;
(ii) delivering stem cell therapies for cancer indications where bone
marrow transplant is an accepted but underutilized treatment due to
inadequate or unavailable supply of suitably matched, transplantable stem
cells, specifically blood cancers such as leukemias, lymphomas and
myelomas;
(iii) extending stem cell therapy to other diseases that have
demonstrated clinical benefits, notably solid tumor cancers and certain
immunological diseases and inherited metabolic disorders; and
(iv) generating near-term revenue by co-developing and licensing
regenerative therapies and biomaterials to commercial partners for organ
and tissue repair.
Celgene Cellular Therapeutics operates a state-licensed blood bank, is an
FDA-registered cell therapy company and is recognized as one of the leading
providers of stem cell banking services to private clients. In addition, we are
planning human clinical studies of optimized, high-dose placental stem cell
units in bone marrow transplants for oncology and hematology indications, to
compare the distinct clinical benefits of placental stem cells with umbilical
cord blood and adult stem cells currently used for these disease indications.
We have also initiated preclinical studies in cardiac, neurologic and
orthopedic regeneration to demonstrate the pluripotency, potential clinical
efficacy and versatility of these cells in preparation for future clinical
investigative programs.
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PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to our business. Thus,
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.
We own or control more than 125 U.S. patents, and have over 110 additional
U.S. patent applications pending. Our U.S. patents include patents for a method
of delivering a teratogenic drug to a patient who is not pregnant and an
improvement thereof. We also have patent applications pending which are
directed to this improvement, and are seeking worldwide protection for this
improvement. While we have a policy to seek worldwide patent protection for our
inventions, we have foreign patent rights corresponding to most but not all of
our United States patents. Although THALOMID(Reg. TM) is approved for use
associated with ENL, we do not currently have, nor do we intend to seek, patent
protection relating to the use of THALOMID(Reg. TM) to treat ENL.
Our San Diego-based research division seeks patent protection for
molecular targets and drug discovery technologies, as well as therapeutic and
diagnostic products and processes. Specifically, our San Diego research
division has developed proprietary technology for use in molecular target
discovery, regulatory pathway identification, assay design and pharmaceutical
product candidates. As of 2003, and included in those described above, our San
Diego research division owned, in whole or in part, 25 issued U.S. patents and
had approximately 27 U.S. patent applications pending. An increasing percentage
of our San Diego research division's recent patent applications have been
related to potential product candidates or compounds. The division also holds
licenses to dozens of U.S. patents and pending U.S. patent applications, some
of which are licensed exclusively to third parties in connection with sponsored
or collaborative research relationships.
Celgene Cellular Therapeutics, which is our recently acquired cellular
therapeutics division, seeks patent protection for the collection, processing,
storage and uses of the mammalian placenta and the placental stem cells, and
other biomaterials uncovered from these placenta. Our cellular therapeutics
division also has sought additional patent protection for the use of placenta,
their stem cells and biomaterials. As of 2003, the division owned, in whole or
in part, 10 pending U.S. patent applications, and holds licenses to certain
U.S. patents and pending applications, including those related to cord blood
collection and storage.
Under an agreement with The Rockefeller University, pursuant to which we
have made a lump sum payment and issued stock options to The Rockefeller
University and the inventors, we have obtained certain exclusive rights and
licenses to manufacture, have manufactured, use, offer for sale and sell
products that are based on compounds, which were identified in research carried
out by The Rockefeller University and us, that have activity associated with
TNF-. In particular, The Rockefeller University identified a method of using
thalidomide and certain thalidomide-like compounds to treat certain symptoms
associated with abnormal concentrations of TNF-, 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
agreement with The Rockefeller University. However, The Rockefeller University
did not seek corresponding patents in any other country.
In August 2001, we entered into a new agreement, or the New Thalidomide
Agreement, with EntreMed, Inc., Children's Medical Center Corporation and
Bioventure Investments, KFT relating to patents and applications owned by CMCC,
which agreement superceded several agreements already in place between CMCC,
EntreMed and us. Pursuant to the New Thalidomide Agreement, CMCC directly
granted to us an exclusive, worldwide, royalty-bearing license under the
relevant patents and patent applications relating to thalidomide. Several U.S.
patents have already issued to CMCC in this patent family; certain of these
patents expire in 2014. Corresponding foreign patent applications and
additional U.S. patent applications are still pending.
In addition to the agreement with The Rockefeller University and the New
Thalidomide Agreement, both of which relate to thalidomide, we entered into an
agreement with CMCC and EntreMed in December 2002, pursuant to which we have
been granted a worldwide, exclusive, royalty-bearing license
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to certain CMCC patents and patent applications relating to thalidomide
analogs, or the New Analog Agreement. The New Analog Agreement was executed in
connection with the settlement of certain pending litigation between and among
us, EntreMed, and the U.S. Patent and Trademark Office relating to the
allowance of certain CMCC patent applications covering thalidomide analogs.
These patent applications had been licensed exclusively to EntreMed in the
field of thalidomide analogs. In conjunction with the settlement of these
suits, we acquired equity securities in EntreMed, and EntreMed terminated its
license agreements with CMCC relating to thalidomide analogs. In turn, under
the New Analog Agreement, CMCC exclusively licensed to Celgene these patents
and patent applications, which relate to analogs, metabolites, precursors and
hydrolysis products of thalidomide, and all stereoisomers thereof.
The New Analog Agreement grants us control over the prosecution and
maintenance of the licensed thalidomide analog patent rights. The New Analog
Agreement also grants us an option to inventions in the field of thalidomide
analogs that may be developed at CMCC in the laboratory of Dr. Robert D'Amato,
pursuant to the terms and conditions of a separate Sponsored Research Agreement
negotiated between us and CMCC.
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. 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.
There can be no assurance that additional patents will issue to us from
any of our pending applications or that, if patents issue, such patents will
provide us with significant proprietary protection or commercial advantage.
Moreover, there can be no assurance that any of our existing patents will
provide us with proprietary protection or commercial advantage. Nor can we
guarantee that these patents will not be either infringed, invalidated or
circumvented by others. Finally, we cannot guarantee that our patents or
pending applications will not be involved in any interference proceedings
before the U.S. Patent and Trademark Office.
With respect to patents and patent applications we have licensed-in, there
can be no assurance that additional patents will issue to any of the third
parties from whom we have licensed patent rights, either with respect to
thalidomide or thalidomide analogs, or that, if any new patents issue, 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, invalidated or circumvented by others, or that the relevant
agreements will not be terminated. Any termination of the licenses granted to
Celgene by CMCC could have a material adverse effect on our business, financial
condition and results of operations.
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 issued patents or 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 our inventions, we, or our licensors, may have to participate
in interference proceedings before 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 US. patent protection for the
invention. Even if the eventual outcome is favorable to us, such interference
proceedings could result in substantial cost to us.
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We are aware of U.S. patents that have issued to third parties claiming
subject matter relating to the NF-(Kappa Beta) pathway which could overlap with
technology claimed in some of our pending NF-(Kappa Beta) patent applications.
We believe 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-(Kappa Beta) 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 three additional issued U.S. patents relating to the
NF-(Kappa Beta) 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. 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. Many of
our therapeutic products will require regulatory approval by governmental
agencies prior to commercialization. In particular, human therapeutic products
are subject to rigorous preclinical testing and clinical trials and other
pre-marketing approval requirements by the FDA and regulatory authorities in
other countries. In the United States, various federal and in some cases state
statutes and regulations also govern or impact upon the manufacturing, safety,
labeling, storage, record-keeping and marketing of such products. The lengthy
process of seeking required approvals, and the continuing need for compliance
with applicable statutes and regulations, require the expenditure of
substantial resources. Regulatory approval, when and if obtained, may be
limited in scope which may significantly limit the indicated uses for which a
product may be marketed. Further, approved drugs, as well as their
manufacturers, are subject to ongoing review and discovery of previously
unknown problems with such products may result in restrictions on their
manufacture, sale or use or in their
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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 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 New Drug Application, or 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 safe
and effective 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 U.S. 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
CMCC. However, there can be no assurance that another company also holding
orphan drug designation will not receive approval prior to us for the use of
thalidomide for the treatment of one or more of these indications, other than
ENL. If that were to happen, our applications for that indication could not be
approved until the competing company's seven-year period of exclusivity
expired.
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Among the conditions for NDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures
continually conform with the FDA's current Good Manufacturing Practice, or
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 biotechnology industries in which we compete are
each highly competitive. Our competitors include major pharmaceutical and
biotechnology companies, many 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 pharmaceutical and biotechnology companies have extensive anit-cancer
discovery and development activities. Bristol-Myers Squibb, Genentech,
AstraZeneca, Millenium Pharmaceuticals, Genta, Cell therapeutics, Vertex
Pharmaceuticals, IDEC Pharmaceuticals and Ilex Oncology are among the companies
testing new compounds in the oncology field.
The pharmaceutical and biotechnology 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.
SIGNIFICANT ALLIANCES
From time to time we enter into collaborative research and/or license
agreements with other pharmaceutical companies in which in exchange for the
rights to certain compounds, the partnering company will provide funding in the
form of upfront payments, milestone payments or direct research funding. The
following are our most significant collaborations.
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NOVARTIS PHARMA AG
We entered into an agreement with Novartis in April 2000 in which we
granted to Novartis an exclusive license (excluding Canada) for the development
and marketing of Focalin(TM) (d-MPH). We received a $10 million upfront payment
in July 2000, a $5 million milestone payment for the acceptance of the NDA
filing by the FDA in December 2000 and a $12.5 million milestone payment upon
approval by the FDA to market Focalin(TM) in November 2001. We are currently
selling Focalin(TM) to Novartis as well as receiving royalties on all of
Novartis' Ritalin(Reg. TM) family of ADD- and ADHD-related products.
NOVARTIS PHARMA AG
We entered into a second collaborative agreement with Novartis in December
2000 for joint research of SERMs for the treatment and prevention of
osteoporosis. We received a nonrefundable, upfront payment of $10 million, a $1
million milestone payment for the selection of the first compound to be
advanced into preclinical studies and are entitled to receive additional
milestone payments for specific preclinical, clinical and regulatory endpoints,
as well as royalties upon commercialization of products receiving FDA and other
regulatory marketing approval. The agreement was extended in December 2002 for
an additional six months.
MANUFACTURING
THALOMID(Reg. TM) is formulated and encapsulated for us by Penn
Pharmaceuticals Services Limited of Great Britain in an FDA-approved facility .
Both the bulk manufacturing facility that produces the drug substance for
THALOMID(Reg. TM) and the Penn facility meet FDA requirements. In certain
instances, we may be required to make substantial capital expenditures to
access additional manufacturing capacity. In addition, we entered into a
contract with another cGMP certified bulk drug substance supplier for
THALOMID(Reg. TM) in 2001. We received regulatory approval for that site in
late 2001. We are actively seeking a backup manufacturer to provide additional
capacity for the formulation and encapsulation of THALOMID(Reg. TM).
Reformulated THALOMID(Reg. TM) capsules, introducing 100mg and 200mg strengths,
were successfully launched on March 17, 2003.
The bulk API (active pharmaceutical ingredient) for Focalin(TM) is
manufactured and supplied by Johnson Matthey Inc. A Supply Agreement was
executed in March 2003 with a second supplier, Seigfried USA Inc. The product
is manufactured into tablets of different strengths and packaged by Mikart,
Inc. for distribution. We are currently seeking a secondary manufacturer for
tableting and packaging.
INTERNATIONAL EXPANSION
In November 2001, we signed agreements with Pharmion Corporation and Penn
Pharmaceuticals Services Limited to expand the THALOMID(Reg. TM) franchise
internationally. The strategic partnership combines Penn's FDA-compliant
manufacturing capability, Pharmion's global development and marketing expertise
and our extensive intellectual property. The new alliance is designed to
accelerate the establishment of THALOMID(Reg. TM) as an important therapy in
the international markets. Additionally, we acquired an exclusive option to
purchase the branch of Penn Pharmaceutical that manufactures THALOMID(Reg. TM).
The option, if exercised, would enable us to receive an imputed royalty of 36%
less cost of goods on all international sales of THALOMID(Reg. TM) and to
manage the manufacturing of THALOMID(Reg. TM).
SALES AND COMMERCIALIZATION
We have established an organization of approximately 160 persons to
commercialize our products. These individuals have considerable experience in
the pharmaceutical industry ,and many have experience with oncological and
immunological products. We expect to expand our sales and commercialization
group to support products we develop to treat oncological and immunological
diseases. We intend to market and sell the products we develop for indications
with accessible patient populations. For drugs with indications with larger
patient populations, we may partner 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.
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EMPLOYEES
As of March 1, 2003, we had 560 full-time employees, 289 of whom were
engaged primarily in research and development activities, 161 of whom were
engaged in sales and commercialization activities and the remainder of whom
were engaged in executive and administrative activities. Of these employees,
201 have advanced degrees, including 105 who have doctorate degrees. We also
maintain consulting arrangements with a number of scientists at various
universities and other research institutions in Europe and the United States.
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this annual
report are forward-looking statements concerning our business, financial
condition, results of operations, economic performance and financial condition.
Forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and within the meaning of Section 21E of the Securities Exchange
Act of 1934 are included, for example, in the discussions about:
- -- our strategy;
- -- new product development or product introduction;
- -- product sales, royalties and contract revenues;
- -- expenses and net income;
- -- our credit risk management;
- -- our liquidity;
- -- our asset/liability risk management; and
- -- our operational and legal risks.
These statements involve risks and uncertainties. Actual results may
differ materially from those expressed or implied in those statements. Factors
that could cause such differences include, but are not limited to, those
discussed under "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISK FACTORS
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT.
We have sustained losses in each year since our incorporation in 1986. We
sustained net losses of $100.0 million, which included $32.2 million
attributable to litigation settlement and related agreements and $55.7 million
related to an acquired in-process research and development charge in connection
with the Anthrogenesis acquisition, and $1.9 million for the years ended
December 31, 2002 and 2001. We had an accumulated deficit of $322.4 million at
December 31, 2002. We expect to make substantial expenditures to further
develop and commercialize our products. We also 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.
IF WE ARE UNSUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR PRODUCTS, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED WHICH COULD IMPACT NEGATIVELY ON THE VALUE OF OUR COMMON
STOCK.
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. With the
exception of Focalin(TM) and THALOMID(Reg. TM), all of our other products will
require further development, clinical testing and regulatory approvals. If it
becomes too expensive to sustain our present commitment of resources on a
long-term basis, we will be unable to continue our necessary development.
Furthermore, we cannot be certain that our clinical testing will render
satisfactory results, or that we will receive
24
required regulatory approval for our products. 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 which could impact negatively on the value of our common stock.
DURING THE NEXT SEVERAL YEARS, WE WILL BE VERY DEPENDENT ON THE COMMERCIAL
SUCCESS OF THALOMID(Reg. TM), FOCALIN(TM) AND THE ENTIRE RITALIN(Reg. TM)
PRODUCT LINE.
At our present level of operations, we may not be able to attain
profitability if physicians prescribe THALOMID(Reg. TM) only for patients who
are diagnosed with ENL. Under current FDA regulations, we are precluded from
promoting THALOMID(Reg. TM) outside this approved use. The market for the use
of THALOMID(Reg. TM) in patients suffering from ENL is relatively small. We
have conducted clinical studies that appear to show that THALOMID(Reg. TM) is
active when used to treat disorders other than ENL, such as multiple myeloma,
but we do not know whether we will succeed in receiving regulatory approval to
market THALOMID(Reg. TM) for additional indications. FDA regulations place
restrictions on 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. In addition, if adverse
experiences are reported in connection with the use of THALOMID(Reg. TM) 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(Reg. TM) in the ENL market. We are dependent upon
royalties from Novartis Pharma AG's entire Ritalin(Reg. TM) product line as
well as Focalin(TM), although we cannot directly impact their ability to
successfully commercialize these products.
WE FACE A RISK OF PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
SUFFICIENT INSURANCE ON COMMERCIALLY REASONABLE TERMS OR WITH ADEQUATE
COVERAGE.
We may be subject to product liability or other claims based on
allegations that the use of our technology or products has resulted in adverse
effects, whether by participants in our clinical trials or by patients using
our products. Thalidomide, when used by pregnant women, has resulted in serious
birth defects. Therefore, necessary and strict precautions must be taken by
physicians prescribing the drug to women with childbearing potential. These
precautions may not be observed in all cases or, if observed, may not 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, we may be unable to
obtain additional coverage on commercially reasonable terms if required, or our
coverage may be inadequate 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 be expensive and divert the efforts of our management and
technical personnel.
IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, DEMAND FOR OUR PRODUCTS
WILL DETERIORATE OR NOT MATERIALIZE AT ALL.
It is necessary that our products, including THALOMID(Reg. TM) and
Focalin(TM), achieve market acceptance once they receive regulatory approval, if
regulatory approval is required. 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. In particular,
thalidomide, when used by pregnant women, has resulted in serious birth
defects, and the negative history associated with thalidomide and birth defects
may decrease the market acceptance of THALOMID(Reg. TM). In addition, the
products that we are attempting to develop through our cellular therapeutics
division may represent substantial departures from established treatment
methods and will compete with a number of traditional drugs and therapies
manufactured and marketed by major pharmaceutical companies. Furthermore,
public attitudes may be influenced by claims that stem cell therapy is unsafe,
and stem cell therapy may not gain the acceptance of the public or the medical
community. If our products are not accepted by the market, demand for our
products will deteriorate or not materialize at all.
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
25
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:
o demand for our products;
o regulatory approvals for our products;
o the timing of the introduction and market acceptance of new products
by us or competing companies;
o the timing and recognition of certain research and development
milestones and license fees; and
o our ability to control our costs.
WE HAVE NO COMMERCIAL MANUFACTURING FACILITIES AND WE ARE DEPENDENT ON TWO
SUPPLIERS FOR THE RAW MATERIAL AND ONE MANUFACTURER FOR THE FORMULATION AND
ENCAPSULATION OF THALOMID(Reg. TM), AND ARE DEPENDENT ON TWO SUPPLIERS FOR THE
RAW MATERIAL AND ONE MANUFACTURER FOR THE TABLETING AND PACKAGING OF
Focalin(TM).
We currently have no facilities for manufacturing any products on a
commercial scale. Currently, we can obtain all of our bulk drug material for
THALOMID(Reg. TM) from two suppliers, ChemSyn Laboratories, a Division of
Eagle-Picher Technologies, L.L.C., and Sifavitor s.p.a., and we rely on a
single manufacturer, Penn Pharmaceutical Services Limited, to formulate and
encapsulate THALOMID(Reg. TM). In addition, we currently can obtain all of our
bulk active pharmaceutical ingredient for Focalin(TM) from two suppliers,
Johnson Matthey Inc. and Seigfried USA, Inc., and we rely on a single
manufacturer, Mikart, Inc., for the packaging and tableting of Focalin(TM).
Presently, we are actively seeking backups to each of Penn and Mikart. The FDA
requires that all suppliers of pharmaceutical bulk material and all
manufacturers of pharmaceuticals for sale in or from the United States achieve
and maintain compliance with the FDA's current Good Manufacturing Practice, or
cGMP, regulations and guidelines. (cGMP are regulations established by the FDA
that govern the manufacture, processing, packing, storage and testing of drugs
intended for human use.) If the operations of either Penn or Mikart were to
become unavailable for any reason, any required FDA review and approval of the
operations of an alternative could cause a delay in the manufacture of
THALOMID(Reg. TM) or Focalin(TM). Although we have an option to purchase the
THALOMID(Reg. TM) manufacturing operations of Penn, 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, demand for our products or our ability to
continue manufacturing such products could substantially decline, to the extent
we depend on these outside manufacturers.
WE HAVE LIMITED MARKETING AND DISTRIBUTION CAPABILITIES.
Although we have an approximately 160-person commercialization group to support
our products, 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 substantially delay or curtail the marketing of these
products. We have contracted with Ivers Lee Corporation, d/b/a Sharp, a
specialty distributor, to distribute THALOMID(Reg. TM). If Sharp does not
perform its obligations, our ability to distribute THALOMID(Reg. TM) may be
severely restricted.
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. Our present joint ventures and licenses include an
agreement with Novartis Pharma AG with respect to the joint research of SERMs,
and a separate agreement wherein we have granted to Novartis an exclusive
license (excluding Canada) for the development and commercialization of
Focalin(TM), or d-MPH; an agreement with Biovail Corporation International,
wherein we granted to
26
Biovail exclusive Canadian marketing rights for d-MPH; and agreements with
Pharmion Corporation and Penn Pharmaceuticals Services Limited to expand the
THALOMID(Reg. TM) franchise internationally. Our present and future
arrangements may be jeopardized if any or all of the following occur:
o we are not able to enter into additional joint ventures or other
arrangements on acceptable terms, if at all;
o our joint ventures or other arrangements do not result in a compatible
work environment;
o our joint ventures or other arrangements do not lead to the successful
development and commercialization of any products;
o we are unable to obtain or maintain proprietary rights or licenses to
technology or products developed in connection with our joint ventures
or other arrangements; or
o we are unable 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 THAT 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 be certain that accidental injury or contamination will
not occur. Any such accident or contamination could result in substantial
liabilities, that could exceed our insurance coverage and financial resources.
Additionally, the cost of compliance with environmental and safety laws and
regulations may increase in the future, requiring us to expend more financial
resources either in compliance or in purchasing supplemental insurance
coverage.
THE PHARMACEUTICAL INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION
WHICH PRESENTS NUMEROUS RISKS TO US.
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.
If we are delayed in receiving, or are unable to obtain at all, necessary
governmental approvals, we will be unable to effectively market our products.
The testing, marketing and manufacturing of our products require
regulatory approval, including approval from the FDA and, in some cases, from
the U.S. Environmental Protection Agency or governmental authorities outside of
the United States that perform roles similar to those of the FDA and EPA.
Certain of our pharmaceutical products, such as Focalin(TM), fall under the
Controlled Substances Act of 1970 that requires authorization by the U.S. Drug
Enforcement Agency of the U.S. Department of Justice in order to handle and
distribute these products. The regulatory approval process presents several
risks to us:
o 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.
o Delays or rejections may be encountered during any stage of the
regulatory 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.
o Requirements for approval may become more stringent due to changes in
regulatory agency policy, or the adoption of new regulations or
legislation.
o The scope of any regulatory approval, when obtained, may significantly
limit the indicated uses for which a product may be marketed and may
impose significant limitations in the nature of warnings, precautions and
contraindications that could materially affect the profitability of the
drug.
27
o Approved drugs, as well as their manufacturers, are subject to continuing
and on-going review, and discovery of previously unknown problems with
these products or the failure to adhere to manufacturing or quality
control requirements may result in restrictions on their manufacture, sale
or use or in their withdrawal from the market.
o Regulatory authorities and agencies may promulgate additional regulations
restricting the sale of our existing and proposed products.
o Once a product receives marketing approval, the FDA may not permit us to
market that product for broader or different applications, or may not,
grant us clearance with respect to separate product applications that
represent extensions of our basic technology. In addition, the FDA may
withdraw or modify existing clearances in a significant manner or
promulgate additional regulations restricting the sale of our present or
proposed products.
o Our labeling and promotional activities relating to our products are
regulated by the FDA and state regulatory agencies and, in some
circumstances, by the Federal Trade Commission and DEA, and are subject to
associated risks. If we fail to comply with FDA regulations prohibiting
promotion of off-label uses and the promotion of products for which
marketing clearance has not been obtained, the FDA could bring an
enforcement action against us that could inhibit our marketing
capabilities as well as result in penalties.
In addition, stem cells intended for human use are subject to FDA
regulations requiring, among other things, certain infectious disease testing.
New FDA regulations anticipated in 2003 may relate to screening of potential
donors and donations for certain infectious diseases and the establishment of
quality controls, recordkeeping and other practices related to the manufacture
of human tissue. Currently, we are required to be, and are, licensed to operate
in New York and New Jersey, two of the states in which we currently collect
placentas and umbilical cord blood for our allogeneic and private stem cell
banking businesses. If other states adopt similar licensing requirements, we
would need to obtain such licenses to continue operating. If we are delayed in
receiving, or are unable to obtain at all, necessary licenses, we will be
unable to provide services in those states which would impact negatively on our
revenues.
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, if our pending applications, or a pending application that we
have licensed-in from third parties, do not result in the issuance of patents
or, if any patents that are issued do not provide significant proprietary
protection or commercial advantage, our ability to sustain the necessary level
of intellectual property upon which our success depends may be restricted.
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. Therefore, if the
issuance to us or our licensor, in a given country, of a patent covering an
invention is not followed by the issuance, in other countries, of patents
covering the same invention, or if any judicial interpretation of the validity,
enforceability or scope of the claims in a patent issued in one country is not
similar to the interpretation given to the corresponding patent issued in
another country, our ability to protect our intellectual property in other
countries may be limited.
Under the current patent laws, patent applications in the United States
are maintained in secrecy from six to 18 months, and publications of
discoveries in the scientific and patent literature often lag behind actual
discoveries. Thus, we may discover, sometime in the future, that we, or the
third parties from whom we have licensed patents or patent applications, were
not 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 not the first to be filed on such inventions. In the event
that a third party has also filed
28
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 U.S. Patent and Trademark Office to
determine priority of invention. Such an interference could result in the loss
of an issued U.S. patent or loss of any opportunity to secure U.S. patent
protection for that invention. Even if the eventual outcome is favorable to us,
such interference proceedings could result in substantial cost to us.
Furthermore, even if our patents, or those we have licensed-in, are
issued, our competitors may still challenge the scope, validity or
enforceability of our patents in court, requiring us to engage in complex,
lengthy and costly litigation. Alternatively, our competitors may 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 may not
be successful in enforcing our intellectual property rights or defending the
validity or enforceability of our issued patents.
It is also possible that third-party patent applications and patents could
issue with claims that cover certain aspects of the subject matter claimed in
the patents owned or optioned by us or licensed to us, which may limit our
ability to practice under our patents, and may impede our efforts to obtain
meaningful patent protection of our own. If patents are issued to third parties
that contain competitive or conflicting claims, we may be legally prohibited
from pursuing research, development or commercialization of potential products
or be required to obtain licenses to these patents or to develop or obtain
alternative technology. We may be legally prohibited from using patented
technology, may not be able to obtain any license to the patents and
technologies of third parties on acceptable terms, if at all, or may not be
able to obtain or develop alternative technologies. Consequently, if we cannot
successfully defend against any patent infringement suit that may be brought
against us by a third party, we may lose the ability to practice certain
subject matter delineated by patent claims that we have exclusive rights to,
whether by ownership or by license, and that may have a material adverse effect
on our business.
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. If these agreements
are breached, we may not have adequate remedies for any such breach. Despite
precautions taken by us, others may obtain access to or independently develop
our proprietary technology or such technology may be found to be
non-proprietary or not a trade secret.
In addition, our right to practice the inventions claimed in some patents
that relate to THALOMID(Reg. TM) arises under licenses granted to us by others,
including The Rockefeller University and Children's Medical Center Corporation
or CMCC. In addition to these patents, which relate to thalidomide, we have
also licensed from CMCC certain patents relating to thalidomide analogs. In
December 2002, we entered into an exclusive license agreement with CMCC and
EntreMed. Inc. in connection with the settlement of certain pending litigation
between and among us, EntreMed, and the U.S. Patent and Trademark Office
relating to the issuance of certain CMCC patent applications covering
thalidomide analogs. These patent applications had been licensed exclusively to
EntreMed in the field of thalidomide analogs. In conjunction with the
settlement of these suits, we acquired preferred shares and warrants which, if
converted into EntreMed common shares, would constitute 49% of the outstanding
shares of EntreMed, and EntreMed terminated its license agreements with CMCC
relating to thalidomide analogs. In turn, CMCC exclusively licensed to us these
patents and patent applications, which relate to analogs, metabolites,
precursors and hydrolysis products of thalidomide, and all stereoisomers
thereof. The December 2002 exclusive license to us is worldwide and
royalty-bearing, and grants us complete control over the prosecution of the
licensed thalidomide analog patent rights. The December 2002 agreement also
grants us an option to inventions in the field of thalidomide analogs that may
be developed at CMCC in the laboratory of Dr. Robert D'Amato, pursuant to the
terms and conditions of a separate Sponsored Research Agreement negotiated
between us and CMCC.
While we believe these confidentiality and license agreements to be valid
and enforceable, our rights under these agreements may not continue or disputes
concerning these agreements may arise. If any of the foregoing should occur, we
may be unable to rely upon our unpatented proprietary and trade secret
29
technology, or we may be unable to use the third party proprietary technology
we have licensed-in, either of which may prevent or hamper us from successfully
pursuing our business.
THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND
SIGNIFICANT TECHNOLOGICAL CHANGE.
The pharmaceutical industry in which we operate is highly competitive and
subject to rapid and significant technological change. Our present and
potential competitors include major pharmaceutical and biotechnology companies,
as well as specialty pharmaceutical firms, such as:
o Bristol-Myers Squibb, Co., which potentially competes in clinical
trials with our IMiDs(TM) and SelCIDs(TM);
o Genentech Inc., which potentially competes in clinical trials with our
IMiDs(TM) and SelCIDs(TM);
o AstraZeneca, which potentially competes in clinical trials with our
IMiDs(TM) and SelCIDs(TM);
o Millennium Pharmaceuticals, which potentially competes in clinical
trials with our IMiDs(TM) and SelCIDs(TM) as well as with
THALOMID(Reg. TM);
o Genta Inc., which potentially competes with our IMiDs(TM) and
SelCIDs(TM) as well as with THALOMID(Reg. TM);
o Cell Therapeutics, which potentially competes in clinical trials with
our IMiDs(TM) and SelCIDs(TM) as well as with THALOMID(Reg. TM);
o Vertex Pharmaceuticals Inc., which potentially competes in clinical
trials with our kinase inhibitors; and
o IDEC Pharmaceuticals Corporation and Ilex Oncology, Inc., both of
which are generally developing drugs that address the oncology and
immunology markets, although we are not aware of specific competing
products.
Many 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 industry has
undergone, and is expected to continue to undergo, rapid and significant
technological change, and we expect competition to intensify as technical
advances in the field are made and become more widely known. The development of
products or processes by our competitors with significant advantages over those
that we are seeking to develop could cause the marketability of our products to
stagnate or decline.
SALES OF OUR PRODUCTS ARE DEPENDENT ON THIRD-PARTY REIMBURSEMENT.
Sales of our products will depend, in part, on the extent to which the
costs of our products will be paid by health maintenance, managed care,
pharmacy benefit and similar health care management organizations, or
reimbursed by government health administration authorities, private health
coverage insurers and other third-party payors. These health care management
organizations and third-party payors are increasingly challenging the prices
charged for medical products and services. Additionally, the containment of
health care costs has become a priority of federal and state governments, and
the prices of drugs have been targeted in this effort. If these organizations
and third-party payors do not consider our products to be cost-effective, they
may not reimburse providers of our products or, if they do, the level of
reimbursement may not 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 biopharmaceutical companies, including ours. In 2001, the
price of our common stock fluctuated from a high of $38.88 to a low of $14.40.
In 2002, the price of our common stock fluctuated from a high of $32.20
30
to a low of $11.32. On March 12, 2003, our common stock closed at a price of
$24.00. 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:
o results of our clinical trials;
o announcements of technical or product developments by our competitors;
o market conditions for pharmaceutical and biotechnology stocks;
o market conditions generally;
o governmental regulation;
o health care legislation;
o public announcements regarding medical advances in the treatment of
the disease states that we are targeting;
o patent or proprietary rights developments;
o changes in third-party reimbursement policies for our products; or
o 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 March 12, 2003, there were
outstanding stock options and warrants for 10,766,099 shares of common stock,
of which 9,660,459 were currently exercisable at an average exercise price
range between $0.15 and $70.00, with an average exercise price of $19.20. These
amounts include outstanding options and warrants of Anthrogenesis that we
assumed as part of the merger (the "Merger") with Anthrogenesis on December 31,
2002 and that were converted into outstanding options and warrants of our
common stock pursuant to an exchange ratio.
WE MAY NOT REALIZE THE BENEFITS OF THE COMBINED BUSINESSES AS A RESULT OF
THE ANTHROGENESIS ACQUISITION, WHICH COULD DIMINISH THE EXPECTED BENEFITS OF
THE ACQUISITION.
Achieving the expected benefits of the Anthrogenesis acquisition will
depend in large part on the successful integration of certain aspects of the
combined businesses in a timely and efficient manner. We must integrate the
information systems, product development, administration and other operations
of the combined company. 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 experience the loss of key personnel
for that reason.
We expect to incur costs from integrating Anthrogenesis' operations and
personnel. These costs may be substantial and may include costs for:
o employee retention and development; and
o integration of operating policies, procedures and systems.
If we are not successful in these integration efforts, we may not realize
the full expected benefits of the Anthrogenesis acquisition.
OUR SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BY-LAW PROVISIONS MAY
DETER A THIRD PARTY FROM ACQUIRING US AND MAY IMPEDE THE STOCKHOLDERS' ABILITY
TO REMOVE AND REPLACE OUR MANAGEMENT OR BOARD OF DIRECTORS.
31
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. An
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. These provisions
could impede the stockholders' ability to remove and replace our management
and/or board of directors.
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 inquirer of our common stock.
AVAILABLE INFORMATION
Our current reports on Form 8-K, quarterly reports on Form 10-Q and annual
reports on Form 10-K are electronically filed with the Securities and Exchange
Commission (SEC), and all such reports and amendments to such reports filed
have been and will be made available, free of charge, through our website
(http:www.celgene.com) as soon as reasonably practicable after such filing.
Such reports will remain available on our website for at least twelve months.
The public may read and copy any materials filed by us with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C.
The public may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC.
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 2007 with two five-year renewal options, a 29,000-square foot facility
which has a term ending in July 2010 with two five-year renewal options, and an
11,400-square foot facility with a term ending in 2005. Monthly rental expenses
for these facilities are approximately $74,000. We also lease an 18,000-square
foot laboratory and office facility in North Brunswick, New Jersey, under a
lease with an unaffiliated party that has a term ending in December 2009 with
two five-year renewal options. Monthly rental expenses for this facility are
approximately $50,200. We believe that our laboratory facilities are adequate
for our research and development activities for at least the next 12 months.
In December 2001, we entered into a lease to consolidate our San Diego
operations into one building. The 78,200-square foot laboratory and office
facility in San Diego, California was leased from an unaffiliated party and has
a term ending in August 2012. Monthly rental expenses for this facility are
approximately $172,000.
The three leases for the 44,000-square feet of San Diego laboratory and
office space recently vacated by us are coterminous and end in December 2003.
Under the leases, we reimburse the landlord for taxes, insurance and operating
costs associated with the properties and have an outstanding letter of credit
for $150,000 in favor of the landlord that is fully collateralized by cash.
Upon transferring our operations to the new facility, the 2003 lease expense
and remaining unamortized leasehold improvements for the vacated properties
were taken as a charge to earnings in the fourth quarter of 2002.
Upon completion of the acquisition of Anthrogenesis on December 31, 2002,
we assumed two separate leases in the same facility for office and laboratory
space in Cedar Knolls, New Jersey. The leases are for a combined approximately
15,000 square feet with a monthly rental expense of approximately $10,000. Both
leases have five year terms with one expiring in 2004 and one expiring in
32
2007 with a five year renewal option. In November of 2002, Anthrogenesis
entered into a lease for an additional 11,000 square feet of laboratory space
in Baton Rouge, Louisiana. The lease has a five year term with a three year
renewel option. Monthly rental expense for this facility is approximately
$7,500.
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
33
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 bid prices per share of common stock on the Nasdaq
National Market:
HIGH LOW
----------- -----------
2002
Fourth Quarter ............... $ 25.50 $ 15.06
Third Quarter ................ 21.35 11.39
Second Quarter ............... 25.20 11.32
First Quarter ................ 32.20 21.52
2001
Fourth Quarter ............... $ 38.88 $ 23.45
Third Quarter ................ 29.50 20.50
Second Quarter ............... 36.48 14.40
First Quarter ................ 33.50 16.94
The last reported sales price per share of common stock on the Nasdaq
National Market on March 12, 2002 was $24.00. As of March 12, 2002, there were
approximately 662 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.
EQUITY COMPENSATION PLAN INFORMATION
Information on our common stock authorized for issuance under equity
compensation plans is cross-referenced to Part III, Item 12, of this Annual
Report on Form 10-K.
34
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, 2002, 2001 and 2000
and the Consolidated Balance Sheet data as of December 31, 2002 and 2001 are
derived from our Consolidated Financial Statements which have been audited by
KPMG LLP, independent certified public accountants, and which are included
elsewhere in this Annual Report and are qualified by reference to such
Consolidated Financial Statements and related Notes thereto.
Some information has been derived from other audited consolidated
financial statements. Our historical results are not necessarily indicative of
future results of operations.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
2002 2001 2000 1999 1998
IN THOUSANDS, EXCEPT PER SHARE DATA --------------- ------------ -------------- -------------- --------------
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total revenue .............................. $ 135,746 $ 114,243 $ 84,908 $ 38,192 $ 19,276
Costs and operating expenses ............... 259,875 139,186 119,217 68,857 56,705
Interest income/(expense), net ............. 23,030 20,807 15,496 (1,990) 1,050
Tax benefit ................................ 98 1,232 1,810 3,018 --
----------- --------- ---------- ---------- ----------
Loss from continuing operations ............ (101,001) (2,904) (17,003) (29,637) (36,379)
Preferred stock dividend (including
accretion and imputed dividends) ......... -- -- -- 818 25
----------- --------- ---------- ---------- ----------
Loss from continuing operations applicable
to common stockholders ................... $ (101,001) $ (2,904) $ (17,003) $ (30,455) $ (36,404)
=========== ========= ========== ========== ==========
Per share of common stock-basic and diluted:
Loss from continuing operations applicable
to common stockholders (1) ............... $ (1.31) $ (0.04) $ (0.25) $ (0.59) $ (0.75)
=========== ========= ========== ========== ==========
Weighted average number of shares of
common stock outstanding (1) ............. 77,337 75,108 66,598 51,449 48,811
=========== ========= ========== ========== ==========
DECEMBER 31,
------------------------------------------------------------------
2002 2001 2000 1999 1998
IN THOUSANDS ------------ ------------ ------------ ------------- -------------
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents, and marketable
securities ................................ $ 261,182 $ 310,041 $ 306,162 $ 28,947 $ 18,076
Total assets ................................ 327,287 353,982 346,726 46,873 31,486
Long-term obligations under capital leases
and equipment notes payable ............... 40 46 633 1,828 2,656
Convertible notes ........................... -- 11,714 11,714 38,495 8,349
Accumulated deficit ......................... (322,367) (222,367) (220,455) (204,170) (173,715)
Stockholders' equity (deficit) .............. 276,698 310,425 295,533 (9,727) 8,393
(1) Note: amounts are adjusted for the three-for-one stock split effected in
April 2000.
35
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 was 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(Reg. TM) 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(Reg.
TM) (thalidomide) for use in ENL, a side effect of leprosy, and, in late
September 1998, we commenced sales of THALOMID(Reg. TM) in the United States.
Sales have grown rapidly each year since the launch and, in 2002, we recorded
net sales of THALOMID(Reg. TM) of $119.1 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, as
adjusted for a three-for-one stock split effective April 2000. 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. Our proceeds, 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 license for d-MPH, our
chirally pure version of Ritalin(Reg. TM). The agreement provides for
significant upfront and milestone payments based on achieving various
regulatory approvals and royalties on the entire family of Ritalin(Reg. TM)
products upon approval of d-MPH by the FDA. We have retained the rights for the
use of d-MPH in oncology indications. We received approval from the FDA to
market d-MPH, or Focalin(TM), on November 14, 2001.
On August 31, 2000, we completed a merger, accounted for as a
pooling-of-interests, with Signal Pharmaceuticals, Inc., a privately held
biopharmaceutical company focused on the discovery and development of drugs
that regulate genes associated with disease.
On December 31, 2002, we completed a merger, accounted for under the
purchase method, with Anthrogenesis Corp., a privately held biotherapeutics
company pioneering the recovery of stem cells from human placental tissue
following the completion of a full-term, successful pregnancy.
We have sustained losses in each year since our inception as an
independent biopharmaceutical company in 1986. In 2002, we had a net loss of
$100.0 million, including one-time charges primarily as a result of acquired
in-process R&D related to the Anthrogenesis acquisition and a patent litigation
settlement. At December 31, 2002, we had an accumulated deficit of $322.4
million. We expect to make substantial expenditures to further develop and
commercialize THALOMID(Reg. TM), develop our other oncology and immunological
disease programs, further develop and commercialize our stem cell recovery
36
efforts and advance our gene regulation and target discovery program. These
expenditures are expected to be more than offset by increasing product sales,
royalties, revenues from various research collaborations and license agreements
with other pharmaceutical and biopharmaceutical companies, and investment
income.
Subject to the risks described elsewhere in this Annual Report on Form
10-K under "Risk Factors", 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 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(Reg. TM) and Focalin(TM), 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 our products, and as of March 1, 2003, we
employ approximately 160 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 may partner with other pharmaceutical companies. We currently
partner with other companies 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, 2002, 2001 and 2000
Total revenue. Our total revenue for the year ended December 31, 2002
increased 19% to $135.7 million compared with $114.2 million for the same
period in 2001. Total revenue in 2002 consisted of product sales of $122.9
million, of which $119.1 million were THALOMID(Reg. TM) sales and $3.8 million
were sales of Focalin(TM), which received FDA approval in November 2001, and
research contract revenue of $12.8 million compared with product sales of $84.2
million, of which $82.0 million were THALOMID(Reg. TM) sales and $2.2 million
were sales of Focalin(TM), research contract revenue of $28.1 million and
related party revenue of $1.9 million in 2001. THALOMID(Reg. TM) sales continue
to grow in oncology as more clinical data is presented either in publications
or at oncology meetings. Research contract revenue and royalty income in 2002,
which decreased from 2001, included approximately $4.9 million of amortization
of an upfront payment related to an agreement with Novartis and $4.7 million in
royalty income from Novartis on sales of their Ritalin(Reg. TM) family of
products. There was no related party revenue in 2002 as the initial terms of
both related party agreements expired in 2001 and such entities are no longer
considered related parties. Our total revenue for the year ended December 31,
2001 increased 35% to $114.2 million compared with $84.9 million for the same
period in 2000. Total revenue in 2001 consisted of product sales of $84.2
million, of which $82.0 million were THALOMID(Reg. TM) sales and $2.2 million
were sales of Focalin(TM), research contract revenue of $28.1 million and
related party revenue of $1.9 million compared with product sales in 2000 of
$62.7 million, all of which were THALOMID(Reg. TM) sales, research contract
revenue of $15.9 million and related party revenue of $6.3 million in 2000.
Research contract revenue in 2001, which increased from 2000, included
approximately $10.4 million of amortization of upfront payments related to two
separate agreements with Novartis and a milestone payment of $12.5 million from
Novartis for receiving FDA approval to market Focalin(TM). Research contract
revenue in 2000 consisted primarily of recognition of $4.6 million of the $10.0
million nonrefundable upfront license fee payment received in
37
connection with a collaborative agreement entered into with Novartis in April
2000, and a $5.0 million milestone payment related to the same agreement with
Novartis. Related party revenue decreased in 2001 from 2000 as the initial
terms of both related party agreements expired and such entities are no longer
considered related parties. One of those agreements was extended and
approximately $2.8 million was classified as research contract revenue in 2001.
Cost of goods sold. Cost of goods sold in 2002 increased approximately 27%
to $17.3 million, or 14% of product sales, from approximately $13.6 million, or
16% of product sales, in 2001. This increase was primarily related to the
significant increase in THALOMID(Reg. TM) sales. Additionally, expenses related
to product royalties on THALOMID(Reg. TM) sales increased due to larger royalty
percentages as higher sales thresholds were met. Cost of goods sold for 2002
relating to Focalin(TM) sales continued to be favorably impacted as
manufacturing costs incurred prior to Focalin's(TM) approval in November 2001
were expensed as research and development expenses. This favorability will
continue until the quantity previously expensed is completely sold. Cost of
goods sold in 2001 increased approximately 36% to $13.6 million, or 16% of
product sales, from approximately $10.0 million, or 16% of product sales, in
2000, in line with the increase in product sales and therefore primarily volume
related. Cost of goods sold for 2001 relating to Focalin(TM) sales was
favorably impacted as manufacturing costs incurred prior to Focalin's(TM)
approval in November 2001 were expensed as research and development expenses.
Research and development expenses. Research and development expenses
consist primarily of salaries and benefits, contractor fees, principally with
contract research organizations to assist in our clinical development programs,
clinical drug supplies for our clinical and preclinical programs as well as
other consumable research supplies, and allocated facilities charges such as
building rent and utilities. Research and development expenses in 2002
increased 25% to $84.9 million from $67.7 million in 2001. Approximately $49.1
million in 2002 was spent on THALOMID(Reg. TM) and its follow-on compounds, the
IMiDs(TM) and SelCIDs(TM), primarily for preclinical toxicology and phase I/II
clinical trials, the initiation of our phase III clinical trials in multiple
myeloma and metastatic melanoma and legal expenses related to patent filings.
We spent approximately $35.8 million in our gene regulation, target discovery
and agro-chemical programs, primarily for internal headcount related expenses,
laboratory supplies and product development costs. Research and development
expenses in 2001 increased 20% to $67.7 million from $56.2 million in 2000.
Approximately $33.1 million was spent on THALOMID(Reg. TM) and its follow-on
compounds, the IMiDs(TM) and SelCIDs(TM), primarily for preclinical toxicology
and phase I/II clinical trials, regulatory expenses for preparation of a
supplementary New Drug Application, or sNDA, for THALOMID(Reg. TM) in multiple
myeloma and legal expenses related to patent filings. Approximately $2.8
million was spent for Focalin(TM), primarily for drug supply that was expensed
prior to FDA approval. We spent approximately $31.8 million in our gene
regulation, target discovery and agro-chemical programs, primarily for internal
headcount related expenses, laboratory supplies and product development costs.
As a percent of total revenue, research and development expenses were
approximately 63%, 59% and 66% in 2002, 2001 and 2000, respectively.
Reference the table on page 4 of Part I -- Business section for the status
of specific compounds. In general, estimated time to completion within the
various stages of clinical development are as follows:
ESTIMATED COMPLETION
CLINICAL PHASE PERIOD
- ----------------------- ---------------------
Phase I 1-2 years
Phase II 2-3 years
Phase III 2-3 years
Due to the significant risks and uncertainties inherent in preclinical
tests and clinical trials associated with each of our research and development
projects, the cost to complete such projects is not reasonably estimable. The
data obtained from these tests and trials may be susceptible to varying
interpretation that could delay, limit or prevent a project's advancement
through the various stages of clinical development, which would significantly
impact the costs incurred in bringing a project to completion.
Selling, general and administrative expenses. Selling expenses consist of
salaries and benefits for sales and marketing and customer service personnel,
warehousing and distribution costs, and other commercial
38
expenses to support the sales force and the education and registration efforts
underlying the S.T.E.P.S.(Reg. TM) program. General and administrative expenses
consist primarily of salaries and benefits, outside services for legal, audit,
tax and investor activities and allocations of facilities costs, principally
for rent, utilities and property taxes. Selling, general and administrative
expenses increased 20% in 2002 to $69.7 million from $58.0 million in 2001. The
increased spending was primarily commercial expenses to support the
commercialization of THALOMID(Reg. TM), with approximately a $4.9 million
increase in sales and marketing expenses primarily related to the sales force
expansion. Selling, general and administrative expenses increased 25% in 2001
to $58.0 million from $46.4 million in 2000. Similar to 2002, the increased
spending in 2001 was primarily commercial expenses to support the
commercialization of THALOMID(Reg. TM), with approximately a $2.7 million
increase in sales and marketing expenses primarily related to the sales force
expansion and an increase of $2.5 million in customer service and warehousing
and distribution, primarily related to bringing the previously out-sourced
customer service function in-house and a rollout of an enhanced S.T.E.P.S.(Reg.
TM) program. As a percent of total revenue, selling, general and administrative
expenses were approximately 51%, 51% and 55% in 2002, 2001 and 2000,
respectively.
Litigation settlement and related agreements. On December 31, 2002, we
entered into a series of agreements with EntreMed, Inc. and Children's Medical
Center Corporation to effectively terminate ongoing litigation relating to
patents for thalidomide analogs and to grant an exclusive license to us for the
rights to those patents. Under the terms of an Asset Purchase Agreement, we
paid to EntreMed $10,000,000 for all thalidomide analog patents and associated
clinical data and records, and the termination of any litigation surrounding
those patents. Under the terms of a Securities Purchase Agreement, we acquired
from EntreMed 3,350,000 shares of Series A Convertible Preferred Stock, and
warrants for an additional 7,000,000 common shares for $16,750,000. The Series
A Convertible Preferred Stock is convertible, at our option, into an aggregate
of 16,750,000 shares of common stock at an initial conversion price of $1.00
per share provided, however, that the conversion price in effect from time to
time shall be subject to certain adjustments. Dividends will accrue at 6% per
annum on these preferred stock. We shall have the right to one vote for each
share of Common Stock into which such share of Series A Convertible Preferred
Stock could then be converted, and with respect to such vote, we shall have
full voting rights and powers equal to the voting rights and powers of the
holders of shares of Common Stock. The warrants have an exercise price of $1.50
per share, vest after six months from the date of grant and expire after seven
years from the date of grant. The Company completed an assessment of the
estimated realizable value of the investment. Considering the level of the
Company's ownership interest in EntreMed, its history of operating losses and
the fact that EntreMed is a clinical-stage biopharmaceutical company engaged
primarily in research and development activities with proposed products and
research programs in the early stage of clinical development, and, based on
such assessment, the entire amount of such Preferred Stock was written down.
We also signed an exclusive license agreement with CMCC that terminated
any existing thalidomide analog agreements between CMCC and EntreMed and
directly granted us an exclusive worldwide license for the analog patents. We
paid to CMCC $2,500,000 under this agreement with another $2,500,000 payable
between 2004 and 2006, the present value relating to which aggregating
$2,201,500 was charged to 2002 earnings. Additonally, we entered into a five
year sponsored research agreement with CMCC whereby we have committed $300,000
per year in funding. Additional payments are possible under the agreement
depending on the successful development and commercialization of thalidomide
analogs.
We recorded a charge to earnings for the cost of these agreements and
related expenses of $32,211,500 in 2002 including the write down of the
EntreMed Series A Convertible Preferred Stock and certain legal expenses
incurred in connection with the settlement.
Acquired in-process research and development On December 31, 2002, we
completed the acquisition of Anthrogenesis Corp. for an aggregate purchase
price of $60.0 million (See Note 3). Anthrogenesis is an early-stage
biotherapeutics company delivering stem cell therapies produced from renewable
human placental sources/materials. We acquired Anthrogenesis to realize the
substantial therapeutic and commercial potential of placental stem cells
through its commercial and developmental infrastructure.
39
The acquisition of Anthrogenesis was accounted for using the purchase
method of accounting for business combinations. Approximately $55.7 million of
the total purchase consideration of $60.0 million was allocated to IPR&D, which
was charged to expense at the acquisition date.
In 2003, we do not expect the acquisition of Anthrogenesis to
significantly impact the overall level of research and development expenses, or
materially change our current product sales mix.
Merger-related costs. We incurred one-time costs of $6.7 million related
to the merger with Signal Pharmaceuticals, Inc. in 2000. These costs were
primarily related to fees for financial advisors, accountants, lawyers and
financial printers.
Interest and other income and interest expense. Interest and other income
increased approximately 11% in 2002 to $23.1 million from $20.9 million in
2001. The increase was primarily related to higher realized gains of
approximately $5.0 million on sales of certain marketable securities offset by
lower interest income on lower average cash balances and lower yields on our
securities during 2002. Interest and other income increased approximately 19%
in 2001 to $20.9 million from $17.6 million in 2000. The increase was primarily
related to higher average cash balances and the recognition of a gain on the
sale of certain marketable securities during 2001.
Interest expense decreased 67% to approximately $27,000 in 2002 compared
with approximately $83,000 in 2001. The decrease was primarily related to
exercising the purchase options on the majority of our leased equipment during
2002. Interest expense decreased 96% to approximately $83,000 in 2001 compared
with $2.1 million in 2000. The decrease was primarily related to an agreement
with the convertible note-holders to eliminate the interest requirements in
exchange for the right to hedge the shares underlying the convertible notes.
Loss from continuing operations. The loss from continuing operations
increased significantly in 2002 to $101.0 million from $2.9 million in 2001.
The increased loss resulted from the acquisition of Anthrogenesis, whereby we
incurred a charge of $55.7 million for in-process research and development
costs, the litigation settlement and related agreements with EntreMed, Inc. and
CMCC which resulted in a charge of $32.2 million, an increase of $32.8 million
in other operating costs and expenses as explained above under "Cost of goods
sold", "Research and development expenses" and "Selling, general and
administrative expenses" and a decrease of $1.1 million in the net income tax
benefit, partially offset by an increase in total revenue of $21.5 million as
explained above under "Total revenues" and an increase in net interest and
other income and expense of $2.2 million as explained above under "Interest and
other income and expense". The loss from continuing operations decreased
significantly in 2001, to $2.9 million from $17.0 million in 2000. The
decreased loss resulted from an increase in total revenue of $29.3 million as
explained above under "Total revenues" and an increase in net interest and
other income and expense of $5.3 million as explained above under "Interest and
other income and expense", partially offset by an increase in costs and
expenses of $20.0 million as explained above under "Cost of goods sold",
"Research and development expenses" and "Selling, general and administrative
expenses."
Gain on sale of chiral assets. We received royalty payments from Cambrex
Corporation of approximately $1.0 million, $992,000 and $719,000 in 2002, 2001
and 2000, respectively, which represent additional portions of the purchase
price paid by Cambrex for our chiral assets.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our working capital requirements
primarily through product sales, private and public sales of our debt and
equity securities, income earned on the investment of proceeds from the sale of
such securities and revenue from research contracts and license and milestone
payments. Since our initial product launch in the third quarter of 1998, we
have recorded net product sales totaling approximately $296.6 million through
December 31, 2002.
Our working capital at December 31, 2002 decreased approximately 18% to
$251.8 million from $306.5 million in 2001. The decrease in working capital was
primarily due to a lower combination of cash, cash equivalents and marketable
securities and higher current liablilities.
40
Cash and cash equivalents increased to $85.5 million in 2002 from $47.1
million in 2001 while investments in marketable debt securities decreased to
$175.7 million in 2002 from $262.9 million in 2001. Total cash, cash
equivalents and marketable securities decreased by approximately $48.8 million
reflecting increased spending for both commercial and research and development
activities and the litigation settlement and related agreements with EntreMed
and CMCC, partially offset by the receipt of funds from revenue received from
research contracts and collection of receivables from sales of THALOMID(Reg.
TM).
We expect that our rate of spending will increase as the result of
research and product development spending, 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(Reg. TM) and increased capital
investments. On February 16, 2000, we completed a public offering of 10,350,000
shares of our common stock, as adjusted for a three-for-one stock split
effective April 2000. Proceeds from the transaction, net of expenses, were
approximately $278.0 million. These funds, combined with the increasing revenue
from product sales and various research agreements and collaborations, are
expected to provide sufficient capital for our operations for the foreseeable
future.
CONTRACTUAL OBLIGATIONS
Our major outstanding contractual obligations relate to our operating
(facilities) leases.
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 2007 with two five-year renewal options, a 29,000-square foot facility
which has a term ending in July 2010 with two five-year renewal options, and an
11,400-square foot facility with a term ending in 2005. Monthly rental expenses
for these facilities are approximately $74,000. We also lease an 18,000-square
foot laboratory and office facility in North Brunswick, New Jersey, under a
lease with an unaffiliated party that has a term ending in December 2009 with
two five-year renewal options. Monthly rental expenses for this facility are
approximately $50,200.
In December 2001, we entered into another lease to consolidate our San
Diego operations into one building. The 78,200-square foot laboratory and
office facility in San Diego, California was leased from an unaffiliated party
and has a term ending in August 2012. Monthly rental expenses for this facility
are approximately $172,000.
The three leases for the 44,000-square feet of San Diego laboratory and
office space recently vacated by us are coterminous and end in December 2003.
Under the leases, we reimburse the landlord for taxes, insurance and operating
costs associated with the properties and have an outstanding letter of credit
for $150,000 in favor of the landlord that is fully collateralized by cash.
Upon transferring our operations to the new facility, the 2003 lease
obligations and remaining unamortized leasehold improvements for the vacated
properties were taken as a charge to earnings in the fourth quarter of 2002.
Upon completion of the acquisition of Anthrogenesis on December 31, 2002,
we assumed 2 separate leases in the existing facility for office and laboratory
space in Cedar Knolls, New Jersey. The leases are for a combined space of
approximately 15,000 square feet with a monthly rental expense of approximately
$10,000. Both leases have original five year terms with one expiring in 2004
and one expiring in 2007 with a five year renewal option. In November of 2002,
Anthrogenesis entered into a lease for an additional 11,000 square feet of
laboratory space in Baton Rouge, Louisiana. The lease has a five year term with
a three year renewel option. Monthly rental expense for this facility is
approximately $7,500.
For a schedule of payments related to the operating leases, refer to the
table included in footnote 17(a) to the consolidated financial statements
included elsewhere in this Annual Report.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the
41
company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. While
our significant accounting policies are more fully described in Note 2 to our
consolidated financial statements included in this annual report, we believe
the following accounting policy to be critical:
Revenue Recognition. We have formed collaborative research and development
agreements and alliances with several pharmaceutical companies. These
agreements are in the form of research and development and license agreements.
The agreements are for both early and late stage compounds and are focused on
specific disease areas. For the early stage compounds, the agreements are
relatively short-term agreements that are renewable depending on the success of
the compounds as they move through preclinical development. The agreements call
for nonrefundable upfront payments, milestone payments on achieving significant
milestone events, and in some cases ongoing research funding. The agreements
also contemplate royalty payments on sales if and when the compound receives
FDA marketing approval.
In accordance with Staff Accounting Bulletin No. 101 ("SAB 101") Revenue
Recognition in Financial Statements, upfront payments 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 upfront fee
is recognized is modified accordingly on a prospective basis. Revenue from the
achievement of research and development milestones, which represent the
achievement of a significant step in the research and development process, are
recognized when and if the specific milestones are achieved. Continuation of
certain contracts is dependent upon our achieving specific contractual
milestones; however, none of the payments received to date are refundable
regardless of the outcome of the project. Research funding is recorded in the
period during which the expenses covered by the funding occurred.
Acquired in-process research and development ("IPR&D"). IPR&D represents
that portion of the purchase price of the Anthrogenesis acquisition that
relates to the research and development activities, which are yet to
demonstrate their technological feasibility and have no alternative future use.
The estimated fair value of these projects is determined by employment of a
discounted cash flow model. The discount rates used take into account the stage
of completion and the risks surrounding the successful development and
commercialization of each of the purchased in-process technology projects that
were valued. The analysis included forecasted future cash flows that are
expected to result from the progress made on the in-process project prior to
the purchase dates. Appropriate operating expenses are deducted from the total
forecasted net revenues to establish a forecast of net returns on the completed
portion of the in-process technology. Finally, these net returns are discounted
to a present value using discount rates that incorporate the weighted average
cost of capital relative to the biotech industry and the Company as well as
product specific risks associated with the purchased in-process research and
development products. The product specific risk factors include the product's
phase of development, likelihood of success, manufacturing process capability,
scientific rationale, pre-clinical safety and efficacy data, target product
profile, and development plan and takes into consideration an overall discount
rate, which represents a risk premium to the Company's weighted average cost of
capital for purchase valuation purposes. The forecast data in the analysis is
based on internal product level forecast information maintained by management
in the ordinary course of managing the business. The inputs used by management
in analyzing IPR&D is based on assumptions, which management believes to be
reasonable but which are inherently uncertain and unpredictable. These
assumptions may be incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur. The valuations used to
estimate IPR&D require us to use significant estimates and assumptions, that if
changed, may result in a different valuation for IPR&D. Valuations for the
Anthrogenesis acquisition was completed by an independent third-party
consulting firm in accordance with SEC guidelines.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability
Recognition for
42
Certain Employee Termination Benefits and Other Costs to Exit an Activity. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its Obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of
the Interpretation are applicable to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 15, 2002. None
of the provisions are expected to have a material effect on the Company's
financial statements.
CERTIFICATION OF FINANCIAL STATEMENTS
The certifications by our Chief Executive Officer and Chief Financial
Officer of this Annual Report on Form 10-K as required by Section 906 of the
Sarbane-Oxley Act of 2002 (18 U.S.C. Section 1350), have been submitted to the
Securities and Exchange Commission as additional correspondence accompanying
this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Our holdings of financial instruments are comprised of commercial paper,
U.S. government and corporate securities. These financial instruments may be
classified as securities available for sale and carried at fair value or held
to maturity and carried at amortized cost depending upon our intent. Securities
classified as available for sale are held for an indefinite period of time and
are intended to be used to meet our ongoing liquidity needs. Unrealized gains
and losses (which are deemed to be temporary) on available for sale securities,
if any, are reported in a separate component of stockholders' equity. The cost
of all 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 and other income. We do not use financial
derivatives for investment or trading purposes. As of December 31, 2002 and
2001, all securities have been classified as available for sale.
We have established guidelines relative to diversification and maturities
to maintain safety and liquidity. These guidelines are reviewed periodically
and may be modified depending on market conditions. Although our investments
are subject to credit risk, our investment policy specifies credit quality
standards for our investments and limits the amount of credit exposure from any
single issue, issuer or type of investment. Our investments are also subject to
interest rate risk and will decrease in value if market interest rates
increase. 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, 2002:
2008 AND
2003 2004 2005 2006 2007 BEYOND TOTAL FAIR VALUE
------------ ------ ------------ ------------ ------------ ------------ ------------- -----------
(in Thousands $)
Fixed Rate .................... $ 20,800 -- $ 20,510 $ 64,345 $ 22,500 $ 37,275 $ 165,430 $173,707
Average Interest Rate ......... 6.76% -- 8.02% 6.78% 6.26% 7.76% 7.08%
Variable Rate ................. -- -- -- -- -- $ 2,000 $ 2,000 $ 2,000
Average Interest Rate ......... -- -- -- -- -- 8.00% 8.00%
-------- -- -------- -------- -------- -------- --------- --------
Total ....................... $ 20,800 -- $ 20,510 $ 64,345 $ 22,500 $ 39,275 $ 167,430 $175,707
We do not use derivative financial instruments.
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 16 of the this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information required by Part III (Items 10, 11, 12 (except as otherwise
provided), 13 and 15) is being incorporated by reference herein from our
definitive proxy statement (or an amendment to Form 10-K) to be filed with the
Securities and Exchange Commission within 120 days of the end of the fiscal
year ended December 31, 2002 in connection with our 2003 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
See Item 10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information required by Item 12 (Security Ownership of Certain Beneficial
Owners and Management) is being incorporated by reference herein from our
definitive proxy statement (or an amendment to Form 10-K) to be filed with the
Securities and Exchange Commission within 120 days of the end of the fiscal
year ended December 31, 2002 in connection with our 2003 Annual Meeting of
Stockholders.
The following table summarizes the equity compensation plans under which
our common stock may be issued as of December 31, 2002.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
NUMBER OF SECURITIES UNDER EQUITY
TO BE ISSUED UPON WEIGHTED-AVERAGE COMPENSATION PLANS
EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN COLUMN
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS (A))
- --------------------------- ---------------------- ---------------------- ----------------------
(A) (B) (C)
Equity compensation plans
approved by security
holders .................. 9,799,068 $ 22.42 1,023,692
Equity compensation plans
not approved by
security holders ......... 1,030,364 $ 11.37 137,031
Total ..................... 10,829,432 $ 21.37 1,160,723
The Anthrogenesis Corporation Qualified Employee Incentive Stock Option
Plan has not been approved by our stockholders. As a result of the acquisition
of Anthrogenesis, the Company acquired Anthrogenesis' Qualified Employee
Incentive Stock Option Plan (the "Qualified Plan") and the Non-Qualified
Recruiting and Retention Stock Option Plan (the "Non-Qualified Plan"). No
future awards will be granted under the Non-Qualified Plan. The Qualified Plan
authorizes the award of incentive stock options, which are stock options that
qualify for special federal income tax treatment. The exercise price of any
stock option granted under the Qualified Plan 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 Qualified Plan vests evenly over a 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 is subject to certain
acceleration provisions if a change in control occurs. No award will be granted
under the Qualified Plan on or after December 31, 2008.
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 10.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our principal
executive officer and principal financial officer have concluded that
our disclosure controls and procedures (as defined in Rule 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, as amended), based
on their evaluation of these controls and procedures as of a date within
ninety (90) days prior to the filing date of this Annual Report on Form
10-K, are effective.
(b) Changes in Internal Controls. There have been no significant changes in
our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation thereof,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
See Item 10.
46
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENTS, 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 or incorporated by
reference:
EXHIBIT
NO. EXHIBIT DESCRIPTION
- -------- ---------------------------------------------------------------------------------------------
2.1 Purchase Option Agreement and Plan of Merger, dated April 26, 2002, among the
Company, Celgene Acquisition Corp. and Anthrogenesis Corp. (incorporated by reference
to Exhibit 2.1 of the Company's Registration Statement on Form S-4 dated November 13,
2002 (No. 333-101196).
2.2 Amendment to the Purchase Option Agreement and Plan of Merger, dated September 6,
2002, among the Company, Celgene Acquisition Corp. and Anthrogenesis Corp.
(incorporated by reference to Exhibit 2.2 of the Company's Registration Statement on
Form S-4 dated November 13, 2002 (No. 333-101196).
2.3 Asset Purchase Agreement by and between the Company and EntreMed, Inc., dated as of
December 31, 2002 (incorporated by reference to Exhibit 99.6 of the Company's Schedule
13D filed on January 3, 2003).
2.4 Securities Purchase Agreement by and between EntreMed, Inc. and the Company, dated
as of December 31, 2002 (incorporated by reference to Exhibit 99.2 of the Company's
Schedule 13D filed on January 3, 2003).
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 1986 Stock Option Plan (incorporated by reference to Exhibit A to the Company's Proxy
Statement dated April 13, 1990).
10.3 1992 Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company's
Proxy Statement, dated May 30, 1997).
10.4 1995 Non-Employee Directors' Incentive Plan (incorporated by reference to Exhibit A to
the Company's Proxy Statement, dated May 24, 1999).
10.5 Form of Warrant to be issued in connection with the issuance of Series B Convertible
Preferred Stock, pursuant to a Securities Purchase Agreement among the Company and
certain Investors as set forth therein (the "Chancellor Entities"), such Warrants thereafter
assigned by the Chancellor Entities to Deutsche Bank A.G. (incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K dated June 10, 1997).
10.6 Rights Agreement, dated as of September 16, 1996, between the Company and American
Stock Transfer & Trust Company (incorporated by reference to the Company's
Registration Statement on Form 8A, filed on September 16, 1996), as amended on
February 18, 2000 (incorporated by reference to the Company's Current Report on Form
8-K filed on February 22, 2000).
10.7 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).
47
EXHIBIT
NO. EXHIBIT DESCRIPTION
- -------- ------------------------------------------------------------------------------------------
10.8 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).
10.9 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).
10.10 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)).
10.11 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)).
10.12 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)).
10.13 Amended and Restated 1998 Long-Term Incentive Plan (incorporated by reference to
Exhibit A to the Company's Proxy Statement, filed May 1, 2001).
10.14 Stock Purchase Agreement dated June 23, 1998 between the Company and Biovail
Laboratories Incorporated (incorporated by reference to the Company's Current Report
on Form 8-K filed on July 17, 1998).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 Development and License Agreement between the Company and Novartis Pharma AG,
dated April 19, 2000 (incorporated by reference to Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000).
48
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ---------- ---------------------------------------------------------------------------------------------
10.23 Collaborative Research and License Agreement between the Company and Novartis
Pharma AG, dated December 20, 2000 (incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2000).
10.24 Custom Manufacturing Agreement between the Company and Johnson Matthey Inc., dated
March 5, 2001 (incorporated by reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001).
10.25 Manufacturing and Supply Agreement between the Company and Mikart, Inc., dated as of
April 11, 2001 (incorporated by reference to Exhibit 10.25 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001).
10.26 Distribution Services Agreement between the Company and Ivers Lee Corporation, d/b/a
Sharp, dated as of June 1, 2000 (incorporated by reference to Exhibit 10.26 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2001).
10.27 Amendment to 1998 Long-Term Incentive Plan, effective as of June 18, 2002 (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
10.28 Amendment No. 1 to 1992 Long-Term Incentive Plan, effective as of June 22, 1999
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2002).
10.29 Amendment No. 1 to 1995 Non-Employee Directors' Incentive Plan, effective as of
June 22, 1999 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002).
10.30 Amendment No. 2 to 1995 Non-Employee Directors' Incentive Plan, effective as of
April 18, 2000 (incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002).
10.31 Agreement dated August 2001 by and among the Company, Children's Medical Center
Corporation, Bioventure Investments KFT and EntreMed Inc. (certain portions of the
agreement have been omitted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment, which request has been
granted) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002).
10.32 Exclusive License Agreement among the Company, Children's Medical Center Corporation
and, solely for purposes of certain sections thereof, EntreMed, Inc., effective December 31,
2002.
10.33 Supply Agreement between the Company and Sifavitor s.p.a, dated as of September 28,
1999.
10.34 Supply Agreement between the Company and Seigfried (USA), Inc., dated as of
January 1, 2003.
10.35 Anthrogenesis Corporation Qualified Employee Incentive Stock Option Plan.
21.1 List of Subsidiaries.
23.1 Consent of KPMG LLP.
24.1 Power of Attorney (included in Signature Page).
49
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 28, 2003
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 31, 2003
--------------------------- Chief Executive Officer
John W. Jackson
/s/ Sol J. Barer Director, Chief Operating Officer March 31, 2003
---------------------------
Sol J. Barer
/s/ Robert J. Hugin Director, Chief Financial Officer March 31, 2003
---------------------------
Robert J. Hugin
/s/ Jack L. Bowman Director March 31, 2003
---------------------------
Jack L. Bowman
/s/ Frank T. Cary Director March 31, 2003
---------------------------
Frank T. Cary
/s/ Michael D. Casey Director March 31, 2003
---------------------------
Michael D. Casey
50
SIGNATURE TITLE DATE
- -------------------------------- --------------------------------------- ---------------
/s/ Arthur Hull Hayes, Jr. Director March 31, 2003
---------------------------
Arthur Hull Hayes, Jr.
/s/ Gilla Kaplan Director March 31, 2003
---------------------------
Gilla Kaplan
/s/ Richard C.E. Morgan Director March 31, 2003
---------------------------
Richard C.E. Morgan
/s/ Walter L. Robb Director March 31, 2003
---------------------------
Walter L. Robb
/s/ James R. Swenson Controller (Chief Accounting Officer) March 31, 2003
---------------------------
James R. Swenson
The foregoing constitutes a majority of the directors.
51
CERTIFICATIONS
I, John W. Jackson, certify that:
1. I have reviewed this annual report on Form 10-K of Celgene Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's Board of Directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 31, 2003
/s/ John W. Jackson
---------------------
John W. Jackson
Chairman of the Board
Chief Executive Officer
52
I, Robert J. Hugin, certify that:
1. I have reviewed this annual report on Form 10-K of Celgene Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's Board of Directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 31, 2003
/s/ Robert J. Hugin
---------------------
Robert J. Hugin
Chief Financial Officer
53
CELGENE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Consolidated Financial Statements
Independent Auditors' Report ........................................................... F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001 ........................... F-3
Consolidated Statements of Operations -- Years Ended December 31, 2001, 2000 and 1999 .. F-4
Consolidated Statements of Stockholders' Equity (Deficit) -- Years Ended
December 31, 2002, 2001 and 2000 ..................................................... F-5
Consolidated Statements of Cash Flows -- Years Ended December 31, 2002,
2001 and 2000 ........................................................................ F-8
Notes to Consolidated Financial Statements ............................................. F-10
Consolidated Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts ....................................... F-34
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 on the accompanying
index. These consolidated financial statements and consolidated financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with 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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Celgene
Corporation and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, 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.
As discussed in Note 2(4c) to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 141, "Business Combinations" effective July 1, 2001.
/s/ KPMG LLP
Short Hills, New Jersey
January 29, 2003
F-2
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------------
2002 2001
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 85,475,088 $ 47,141,291
Marketable securities available for sale ................................ 175,706,555 262,900,049
Accounts receivable, net of allowance of $1,019,760 and $998,395 at
December 31, 2002 and December 31, 2001, respectively .................. 17,659,065 13,415,101
Inventory ............................................................... 4,805,770 3,603,462
Other current assets .................................................... 12,449,429 9,362,423
-------------- --------------
Total current assets ................................................. 296,095,907 336,422,326
Plant and equipment, net ................................................ 19,600,063 10,645,647
Goodwill ................................................................ 2,972,784 --
Intangible assets ....................................................... 3,010,000 --
Other assets ............................................................ 5,607,974 6,914,445
-------------- --------------
Total assets ......................................................... $ 327,286,728 $ 353,982,418
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 16,515,634 $ 10,831,464
Accrued expenses ........................................................ 27,574,973 13,667,022
Current portion of capital leases and note obligation ................... 86,318 586,731
Current portion of deferred revenue ..................................... 109,327 4,882,668
-------------- --------------
Total current liabilities ............................................ 44,286,252 29,967,885
Long term convertible notes ............................................. -- 11,713,600
Capitalized leases and note obligation, net of current portion .......... 39,852 46,215
Deferred revenue, net of current portion ................................ 1,389,888 --
Other non-current liabilities ........................................... 4,872,784 1,829,251
-------------- --------------
Total liabilities .................................................... 50,588,776 43,556,951
-------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value per share, 5,000,000 authorized; none
outstanding at December 31, 2002 and December 31, 2001 ................. -- --
Common stock, $.01 par value per share 120,000,000 shares
authorized; issued 80,176,713 and 75,574,785 shares at December 31,
2002 and December 31, 2001, respectively. .............................. 801,768 755,748
Common stock in treasury, at cost; none at December 31, 2002, and
282 shares at December 31, 2001. ....................................... -- (2,804)
Additional paid-in capital ................................................. 591,277,196 527,023,001
Accumulated deficit ........................................................ (322,367,256) (222,367,088)
Deferred compensation ...................................................... -- (1,592,490)
Notes receivable from stockholders ......................................... (42,000) (42,000)
Accumulated other comprehensive income ..................................... 7,028,244 6,651,100
-------------- --------------
Total stockholders' equity ........................................... 276,697,952 310,425,467
-------------- --------------
Total liabilities and stockholders' equity ........................... $ 327,286,728 $ 353,982,418
============== ==============
See accompanying notes to consolidated financial statements.
F-3
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
2002 2001 2000
------------------- ----------------- ------------------
Revenue:
Product sales ......................................... $ 122,921,166 $ 84,194,839 $ 62,675,879
Research contract and royalty income .................. 12,824,614 28,149,501 15,882,112
Related-party collaborative agreement revenue ......... -- 1,898,605 6,349,996
--------------- ------------- --------------
Total revenue ...................................... 135,745,780 114,242,945 84,907,987
--------------- ------------- --------------
Expenses:
Cost of goods sold .................................... 17,322,108 13,571,401 9,986,743
Research and development .............................. 84,924,323 67,653,087 56,172,848
Selling, general and administrative ................... 69,716,760 57,961,795 46,389,311
Litigation settlement and related agreements .......... 32,211,500 -- --
Acquired in-process research and development .......... 55,700,000 -- --
Merger-related costs .................................. -- -- 6,668,110
--------------- ------------- --------------
Total expenses ..................................... 259,874,691 139,186,283 119,217,012
--------------- ------------- --------------
Operating loss ......................................... (124,128,911) (24,943,338) (34,309,025)
Other income and expense:
Interest and other income ............................. 23,057,635 20,890,006 17,576,856
Interest expense ...................................... 27,334 82,971 2,080,981
--------------- ------------- --------------
Loss before tax benefit ................................ (101,098,610) (4,136,303) (18,813,150)
Tax benefit ............................................ 98,442 1,231,964 1,809,677
--------------- ------------- --------------
Loss from continuing operations ........................ (101,000,168) (2,904,339) (17,003,473)
Discontinued operations:
Gain on sale of chiral assets ......................... 1,000,000 991,973 719,103
--------------- ------------- --------------
Net loss ............................................... $ (100,000,168) $ (1,912,366) $ (16,284,370)
=============== ============= ==============
Per share of common stock-basic and diluted:
Loss from continuing operations ....................... $ (1.31) $ (0.04) $ (0.25)
Discontinued operations:
Gain on sale of chiral assets ....................... $ 0.01 $ 0.01 $ 0.01
Net loss applicable to common stockholders ............ $ (1.29) $ (0.03) $ (0.24)
Weighted average number of shares of common
stock outstanding -- basic and diluted .............. 77,337,000 75,108,000 66,598,000
=============== ============= ==============
See accompanying notes to consolidated financial statements.
F-4
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
SIGNAL CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------------- --------------- ------------ ------------
Balances at January 1, 2000 ............. 24,492,639 $ 41,330,800 17,858,476 $ 178,584
Exercise of stock options and
warrants ............................... 2,424,930 24,250
Issuance of common stock for
employee benefit plans ................. 40,394 404
Issuance of common stock in
follow-on offering ..................... 2,934,000 29,340
Costs related to follow-on offering .....
Conversion of long term convertible
notes .................................. 4,358,260 43,583
Shares issued for stock split ........... 43,305,104 433,051
Conversion of Signal preferred stock (24,492,639) (41,330,800) 3,078,725 30,787
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 ........... -- $ -- 73,999,889 $ 739,999
=========== ============= ========== =========
COMMON STOCK NOTES
IN TREASURY ADDITIONAL RECEIVABLE
----------------- PAID-IN ACCUMULATED DEFERRED FROM
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION STOCKHOLDERS
-------- -------- ---------------- ------------------- ----------------- --------------
Balances at January 1, 2000 ............. -- $ -- $ 154,393,662 $ (204,170,352) $ (1,272,014) $ (95,600)
Exercise of stock options and
warrants ............................... 10,433,513
Issuance of common stock for
employee benefit plans ................. 1,047,351
Issuance of common stock in
follow-on offering ..................... 278,524,620
Costs related to follow-on offering ..... (885,160)
Conversion of long term convertible
notes .................................. 26,780,983
Shares issued for stock split ........... (433,051)
Conversion of Signal preferred stock 41,301,822
Deferred compensation ................... 6,706,274 (6,706,274)
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 ............................
Total comprehensive loss ................
Balances at December 31, 2000 ........... -- $ -- $ 519,290,323 $ (220,454,722) $ (4,890,607) $ (62,000)
== ==== ============= =============== ============= ==========
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
(LOSS) TOTAL
-------------- -----------------
Balances at January 1, 2000 ............. $ (91,904) $ (9,726,824)
Exercise of stock options and
warrants ............................... 10,457,763
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 1,809
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 1,001,783
-------------
Total comprehensive loss ................ (15,282,587)
-------------
Balances at December 31, 2000 ........... $ 909,879 $ 295,532,872
========== =============
See accompanying notes to consolidated financial statements.
F-5
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
SIGNAL
CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK IN TREASURY ADDITIONAL
----------------- ------------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------- ------ ----------- ------------ -------- ------------- ----------------
Balances at January 1, 2001 ......... -- $ -- 73,999,889 $ 739,999 -- $ -- $ 519,290,323
Exercise of stock options and
warrants ........................... 1,544,625 15,446 6,760,473
Issuance of common stock for
employee benefit plans ............. 29,014 290 741,219
Issuance of common stock for
services ........................... 1,257 13 37,776
Purchase of treasury stock .......... (282) (2,804)
Reduction of deferred
compensation for terminations ...... (832,711)
Amortization of deferred
compensation .......................
Expense related to non-employee
stock options and restricted stock
granted to employees ............... 1,025,921
Collection of notes receivable from
stockholders .......................
Comprehensive income:
Net loss ...........................
Net change in unrealized gain
(loss) on available for sale
securities .........................
Less: reclassification adjustment
for gain included in net loss ......
Net unrealized gain (loss) on
securities .........................
Total comprehensive income ..........
Balances at December 31, 2001 ....... -- $ -- 75,574,785 $ 755,748 (282) $ (2,804) $ 527,023,001
== ==== ========== ========= ==== ========= =============
ACCUMULATED
NOTES OTHER
RECEIVABLE COMPREHENSIVE
ACCUMULATED DEFERRED FROM INCOME
DEFICIT COMPENSATION STOCKHOLDERS (LOSS) TOTAL
------------------- ----------------- -------------- -------------- ----------------
Balances at January 1, 2001 ......... $ (220,454,722) $ (4,890,607) $ (62,000) $ 909,879 $ 295,532,872
Exercise of stock options and
warrants ........................... 6,775,919
Issuance of common stock for
employee benefit plans ............. 741,509
Issuance of common stock for
services ........................... 37,789
Purchase of treasury stock .......... (2,804)
Reduction of deferred
compensation for terminations ...... 832,711 --
Amortization of deferred
compensation ....................... 2,465,406 2,465,406
Expense related to non-employee
stock options and restricted stock
granted to employees ............... 1,025,921
Collection of notes receivable from
stockholders ....................... 20,000 20,000
Comprehensive income:
Net loss ........................... (1,912,366) (1,912,366)
Net change in unrealized gain
(loss) on available for sale
securities ......................... 6,760,396 6,760,396
Less: reclassification adjustment
for gain included in net loss ...... (1,019,175) (1,019,175)
Net unrealized gain (loss) on
securities ......................... 5,741,221
-------------
Total comprehensive income .......... 3,828,855
-------------
Balances at December 31, 2001 ....... $ (222,367,088) $ (1,592,490) $ (42,000) $ 6,651,100 $ 310,425,467
=============== ============= ========== ============ =============
See accompanying notes to consolidated financial statements.
F-6
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
SIGNAL
CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK IN TREASURY
----------------- ------------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- ------------ ------------ --------- -------------
Balances at January 1, 2002 ........... -- $ -- 75,574,785 $ 755,748 (282) $ (2,804)
Exercise of stock options and
warrants ............................. 1,246,600 12,466
Issuance of common stock for
employee benefit plans ............... 35,398 354 1,160 4,351
Purchase of treasury stock ............ (878) (1,547)
Conversion of long term
convertible notes .................... 1,864,549 18,645
Shares issued for Anthrogenesis
acquisition .......................... 1,455,381 14,555
Reduction of deferred
compensation for terminations ........
Amortization of deferred
compensation .........................
Expense related to non-employee
stock options and restricted stock
granted to employees .................
Income tax benefit upon exercise of
stock options ........................
Comprehensive loss:
Net loss .............................
Net change in unrealized gain
(loss) on available for sale
securities ..........................
Less: reclassification adjustment
for gain included in net loss .......
Net unrealized gain (loss) on
securities ..........................
Total comprehensive loss ..............
Balances at December 31, 2002 ......... -- $ -- 80,176,713 $ 801,768 -- $ --
== ==== ========== ========= ===== =========
ACCUMULATED
NOTES OTHER
ADDITIONAL RECEIVABLE COMPREHENSIVE
PAID-IN ACCUMULATED DEFERRED FROM INCOME
CAPITAL DEFICIT COMPENSATION STOCKHOLDERS (LOSS)
---------------- ------------------- ----------------- -------------- --------------
Balances at January 1, 2002 ........... $ 527,023,001 $ (222,367,088) $ (1,592,490) $ (42,000) $ 6,651,100
Exercise of stock options and
warrants ............................. 3,955,141
Issuance of common stock for
employee benefit plans ............... 961,055
Purchase of treasury stock ............
Conversion of long term
convertible notes .................... 11,694,955
Shares issued for Anthrogenesis
acquisition .......................... 47,426,482
Reduction of deferred
compensation for terminations ........ (327,748) 327,748
Amortization of deferred
compensation ......................... 1,264,742
Expense related to non-employee
stock options and restricted stock
granted to employees ................. 467,223
Income tax benefit upon exercise of
stock options ........................ 77,087
Comprehensive loss:
Net loss ............................. (100,000,168)
Net change in unrealized gain
(loss) on available for sale
securities .......................... 6,323,272
Less: reclassification adjustment
for gain included in net loss ....... (5,946,128)
Net unrealized gain (loss) on
securities ..........................
Total comprehensive loss ..............
Balances at December 31, 2002 ......... $ 591,277,196 $ (322,367,256) $ -- $ (42,000) $ 7,028,244
============= =============== ============= ========== ============
TOTAL
----------------
Balances at January 1, 2002 ........... $ 310,425,467
Exercise of stock options and
warrants ............................. 3,967,607
Issuance of common stock for
employee benefit plans ............... 965,760
Purchase of treasury stock ............ (1,547)
Conversion of long term
convertible notes .................... 11,713,600
Shares issued for Anthrogenesis
acquisition .......................... 47,441,037
Reduction of deferred
compensation for terminations ........ --
Amortization of deferred
compensation ......................... 1,264,742
Expense related to non-employee
stock options and restricted stock
granted to employees ................. 467,223
Income tax benefit upon exercise of
stock options ........................ 77,087
Comprehensive loss:
Net loss ............................. (100,000,168)
Net change in unrealized gain
(loss) on available for sale
securities .......................... 6,323,272
Less: reclassification adjustment
for gain included in net loss ....... (5,946,128)
--------------
Net unrealized gain (loss) on
securities .......................... 377,144
--------------
Total comprehensive loss .............. (99,623,024)
--------------
Balances at December 31, 2002 ......... $ 276,697,952
==============
See accompanying notes to consolidated financial statements.
F-7
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
2002 2001 2000
------------------- ----------------- ------------------
Cash flows from operating activities:
Loss from continuing operations ............................... $ (101,000,168) $ (2,904,339) $ (17,003,473)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of long-term assets ............ 5,181,708 5,086,048 3,722,467
Provision for accounts receivable allowances ................. 294,533 553,168 130,000
Realized gain on marketable securities available for sale (5,946,128) (1,019,175) --
Non-cash acquired in-process research and development 55,700,000 -- --
Non-cash stock-based compensation ............................ 467,223 3,529,116 4,057,990
Amortization of premium on marketable securities
available for sale ......................................... 366,967 212,066 --
Amortization of debt issuance and warrant costs .............. -- 28,560 700,000
Amortization of discount on note obligations ................. -- -- 274,848
Shares issued for employee benefit plans ..................... 965,760 741,509 1,047,755
Change in current assets & liabilities, excluding the effect
of acquisition:
Increase in accounts receivable .............................. (4,166,202) (4,122,269) (4,938,569)
(Increase)decrease in inventory .............................. (1,198,433) 662,795 (1,810,198)
(Increase)decrease in other operating assets ................. (2,916,715) 2,284,583 (10,649,979)
Increase in accounts payable and accrued expenses ............ 19,298,041 5,750,073 9,793,831
Increase(decrease) in deferred revenue ....................... (4,866,000) (12,456,906) 13,239,782
--------------- -------------- --------------
Net cash used in operating activities ......................... (37,819,414) (1,654,771) (1,435,546)
--------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures .......................................... (11,077,313) (7,869,661) (9,637,333)
Cash outflow on Anthrogenesis acquisition, net of cash
acquired ..................................................... (10,298,604) -- --
Proceeds from sales and maturities of marketable securities
available for sale ........................................... 133,265,430 119,789,801 139,575,925
Purchases of marketable securities available for sale ......... (40,115,630) (231,373,743) (276,264,605)
Proceeds from sale of chiral intermediate assets .............. 1,000,000 991,973 719,103
--------------- -------------- --------------
Net cash used in investing activities ......................... 72,773,883 (118,461,630) (145,606,910)
--------------- -------------- --------------
Cash flows from financing activities:
Net proceeds from follow-on public offering ................... -- -- 277,668,800
Proceeds from notes receivable from stockholders .............. -- 20,000 33,600
Proceeds from exercise of common stock options and
warrants ..................................................... 3,967,607 6,775,919 10,457,762
Purchase of treasury stock .................................... (1,547) (2,804) --
Repayment of capital lease and note obligations ............... (586,732) (929,258) (1,593,127)
--------------- -------------- --------------
Net cash provided by financing activities ..................... 3,379,328 5,863,857 286,567,035
--------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents .......... 38,333,797 (114,252,544) 139,524,579
Cash and cash equivalents at beginning of period .............. 47,141,291 161,393,835 21,869,256
--------------- -------------- --------------
Cash and cash equivalents at end of period .................... $ 85,475,088 $ 47,141,291 $ 161,393,835
=============== ============== ==============
See accompanying notes to consolidated financial statements.
F-8
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2002 2001 2000
---------------- -------------- --------------
Supplemental schedule of non-cash investing and
financing activity:
Change in net unrealized gain(loss) on marketable
securities available for sale ............................... $ (377,144) $ 5,741,221 $ 1,001,783
============ =========== ============
Issuance of common stock upon the conversion of
convertible notes and accrued interest thereon, net ......... $ 11,713,600 $ -- $ 26,737,824
============ =========== ============
Issuance of common stock upon the conversion of
convertible preferred stock and Signal preferred stock $ -- $ -- $ 41,330,800
============ =========== ============
Deferred compensation relating to stock options .............. $ (327,748) $ (832,711) $ 6,706,274
============ =========== ============
Issuance of common stock, options and warrants in
connection with acquisition of Anthrogenesis ................ $ 47,441,037 $ -- $ --
============ =========== ============
Supplemental disclosure of cash flow information:
Interest paid ................................................ $ 27,334 $ 82,971 $ 3,114,144
============ =========== ============
Cash received related to tax benefit ......................... $ -- $ 1,231,964 $ 1,809,677
============ =========== ============
See accompanying notes to consolidated financial statements.
F-9
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
(1) NATURE OF BUSINESS AND BASIS OF PRESENTATION
Celgene Corporation and its subsidiaries (collectively "Celgene" or the
"Company") is a fully-integrated biopharmaceutical company engaged in the
discovery, development and commercialization of novel therapies designed to
treat cancer and immunological diseases through regulation of cellular, genomic
and proteomic targets. THALOMID(Reg. TM) (thalidomide), the Company's lead
product, was approved for sale in the United States by the U.S. Food and Drug
Administration on July 16, 1998, and sales of THALOMID(Reg. TM) in 2002 totaled
$119.1 million. THALOMID(Reg. TM) is being evaluated in clinical trials for the
treatment of solid tumor and hematological cancers as well as serious
inflammatory diseases.
In November 2001, Celgene received FDA approval for Focalin(TM), its
refined version of Ritalin(Reg. TM), for the treatment of attention deficit
disorder/attention deficit hyperactivity disorder. Focalin(TM) is marketed by
Novartis Pharma AG. Under the agreement with Novartis, Celgene will collect
royalties on the entire Ritalin(Reg. TM) family of products.
Several classes of small molecule drugs highlight Celgene's product
pipeline: IMiDs(TM) (Immunomodulatory Drugs), SelCIDs(TM) (Selective Cytokine
Inhibitory Drugs), SERMs (Selective Estrogen Receptor Modulators), benzopyrans,
kinase inhibitors, tubulin inhibitors and ligase modulators. These classes are
novel and proprietary oral agents that are being developed for the treatment of
solid tumor and hematological cancers and chronic inflammatory diseases, such
as Crohn's disease and rheumatoid arthritis.
On August 31, 2000, the Company completed its merger with Signal
Pharmaceuticals, Inc., 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 purchase price also included approximately $6.7
million representing merger related costs which consisted of transaction fees
for financial advisors, attorneys, accountants and other related charges. 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.
On December 31, 2002, the Company completed its merger with Anthrogenesis
Corporation, a privately held New Jersey based biotherapeutics company
pioneering the recovery of stem cells from human placental tissue following the
completion of a full-term, successful pregnancy. The Company issued 1,455,381
shares of its common stock for all the outstanding common shares of
Anthrogenesis at an exchange ratio of .4545 of a share of Celgene common stock
for each share of Anthrogenesis common stock. An additional 1,247,203 shares
are issuable upon the exercise of Anthrogenesis' outstanding stock options and
warrants. Including the fair value of the options and warrants and direct costs
of the merger, the purchase price of the merger was approximately $60.0
million. The merger was accounted for using the purchase method of accounting.
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.
F-10
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH EQUIVALENTS
At December 31, 2002 and 2001, 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 value because of the
short maturity of these investments.
(B) MARKETABLE SECURITIES
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.
A decline in the market value of any available-for-sale below cost that is
deemed to be other than temporary results in a reduction in carrying amount to
fair value. The impairment is charged to earnings and a new cost basis for the
security is established.
Premiums and discounts are amortized or accreted over the life of the
related available-for-sale security as an adjustment to yield using the
effective-interest method. Dividend and interest income are recognized when
earned.
(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 and
agency 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. The Company has for a
majority of its investments held them 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) PLANT AND EQUIPMENT
Plant and equipment are stated at cost. Depreciation of plant and
equipment is provided using the straight-line method. The estimated useful
lives of fixed assets are as follows:
Laboratory equipment and machinery ..... 5 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.
F-11
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
(F) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of costs over the fair value of
identifiable net assets of businesses acquired. The Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and
intangible assets acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets. At the time of
adoption of SFAS No. 142, the Company did not have any goodwill or other
intangible assets with an indefinite useful life.
(G) IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 144 provides a single accounting model for long-lived assets to
be disposed of. SFAS No. 144 also changes the criteria for classifying an asset
as held for sale and broadens the scope of businesses to be disposed of that
qualify for reporting as discontinued operations and changes the timing of
recognizing losses on such operations. The Company adopted SFAS No. 144 on
January 1, 2002. The adoption of SFAS No. 144 did not affect the Company's
financial statements.
In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment, software costs and purchased intangibles subject to
amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the consolidated balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer depreciated. The
assets and liabilities of a disposed group classified as held for sale would be
presented separately in the appropriate asset and liability sections of the
consolidated balance sheet.
Goodwill and intangible assets not subject to amortization are tested at
least annually for impairment, and are tested for impairment more frequently if
events and circumstances indicate that the asset might be impaired. An
impairment loss is recognized to the extent that the carrying amount exceeds
the asset's fair value.
Prior to the adoption of SFAS No. 144, the Company accounted for
long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
(H) OTHER ASSETS
Other assets include capitalized costs associated with a new customer
service system, an enhanced S.T.E.P.S.(Reg. TM) system, certain patent rights
and licensed technology. Costs associated with the customer service system and
the enhanced S.T.E.P.S.(Reg. TM) system, which were developed and implemented
during 2000 and 2001, respectively, 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 are amortized over their estimated
useful life of three years from the date the system was ready for its intended
use. At December 31, 2002 and 2001, computer software costs totaled
approximately $4.2 million and $5.3 million, respectively, which is net of $4.4
million and $2.0 million in accumulated amortization, respectively. The cost of
patent rights is amortized using the straight-line method over the
F-12
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
life of the patents. The weighted average remaining patent life at December 31,
2002 is 9 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, 2002 and 2001, patent rights and licensed technology totaled $0.9
million and $1.0 million, respectively which is net of $1.6 million and $1.5
million in accumulated amortization, respectively.
(I) BUSINESS COMBINATIONS
In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS
No. 141 requires that all business combinations be accounted for under a single
method--the purchase method. Use of the pooling-of-interests method no longer
is permitted. SFAS No. 141 requires that the purchase method be used for
business combinations initiated after June 30, 2001. Subsequent to SFAS 141
becoming effective, the Company completed its merger with Anthrogenesis on
December 31, 2002, which was accounted for using the purchase method of
accounting. The Company's merger with Signal, which was completed on August 31,
2000, was accounted for as a pooling-of-interests.
(J) ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT ("IPR&D")
The value assigned to acquired in-process research and development is
determined by identifying those acquired specific in-process research and
development projects that would be continued and for which (a) technological
feasibility has not been established at the acquisition date, (b) there is no
alternative future use, and (c) the fair value is estimable with reasonable
reliability.
(K) RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred. These include
all internal costs, external costs related to services contracted by the
Company and research services conducted for others. Research and development
costs consist primarily of salaries and benefits, contractor fees, clinical
drug supplies for preclinical and clinical development programs, consumable
research supplies and allocated facility and administrative costs.
(L) 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.
(M) REVENUE RECOGNITION
Revenue from the sale of products is recognized upon product shipment.
Provisions for discounts for early payments, rebates and sales returns under
terms customary in the industry are provided for in the same period the related
sales are recorded. Revenue under research contracts is recorded as earned
under the contracts, as services are provided. In accordance with SEC Staff
Accounting Bulletin No. 101, upfront 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, which represent the achievement of a significant step in the
research and development process, are recognized when and if the milestones are
achieved. Continuation of certain contracts and grants are dependent upon the
Company achieving specific
F-13
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
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.
Until October 2001, Axys Pharmaceutical was treated as 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. The initial term of that agreement expired in
October 2001. Therefore revenue recognized subsequent to October 2001 is no
longer classified as related party. Accordingly, there was no related party
revenue recorded in 2002, and $1.9 million and $2.5 million of related party
revenue was recorded in 2001 and 2000, respectively.
Serono S.A. was treated as a related party based on its ownership interest
in Signal at the time Signal and Serono entered into a collaboration agreement.
The initial term of the agreement expired in November 2000 and while the
agreement has been extended, Serono is no longer considered a related party.
Accordingly, revenue from Serono of $3.8 million was recognized in 2000 as
related party revenue.
As a result of the merger with Signal, revenues from these companies have
ceased being classified as related party revenue upon the expiration of the
initial term of the respective agreements.
(N) 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, as amended, established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123, as amended.
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.
F-14
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
The following table illustrates the effect on net loss and net loss per
share as if the fair-value-based method under SFAS No. 123 had been applied.
2002 2001 2000
------------------- ----------------- ------------------
Net loss applicable to common stockholders:
As reported ....................................... $ (100,000,168) $ (1,912,366) $ (16,284,370)
Add stock-based employee compensation
expense included in reported net income ......... 1,515,208 2,675,074 3,087,681
Deduct total stock-based employee
compensation expense determined under
fair-value-based method for all rewards ......... (18,101,000) (22,990,000) (21,727,000)
--------------- -------------- --------------
Pro forma ......................................... $ (116,585,960) $ (22,227,292) $ (34,923,689)
Net loss per common share basic and diluted:
As reported ....................................... $ (1.29) $ (0.03) $ (0.24)
Pro forma ......................................... (1.51) (0.30) (0.52)
The pro forma effects on net loss applicable to common stockholders and
net loss per common share for 2002, 2001 and 2000 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 weighted-average fair value per share was $8.13, $9.83 and $16.44 for
stock options granted in 2002, 2001 and 2000, respectively. The Company
estimated the fair values using the Black-Scholes option pricing model and used
the following assumptions:
2002 2001 2000
---------- ---------- ----------
Risk-free interest rate ....................... 2.02% 3.52% 4.84%
Expected stock price volatility ............... 58% 57% 57%
Expected term until exercise (years) .......... 2.89 2.81 2.81
Expected dividend yield ....................... 0% 0% 0%
(O) 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 number of common stock equivalents excluded from the calculation were
11,046,271 in 2002, 10,128,670 in 2001 and 11,033,930 in 2000.
(P) COMPREHENSIVE INCOME (LOSS)
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).
(Q) FINANCIAL INSTRUMENTS
The fair value, which equals carrying value, of marketable securities
available for sale is based on quoted market prices. For all other financial
instruments, their carrying value approximates fair value due to the short
maturity of these instruments.
F-15
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
(R) WAREHOUSING AND DISTRIBUTION EXPENSES
Warehousing and distribution expenses are included in selling, general and
administrative expenses and totaled approximately $3.5 million, $5.4 million
and $4.5 million in 2002, 2001, and 2000, respectively.
(S) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity. The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of
the Interpretation are applicable to guarantees issued or modified after
December 31, 2002 and are not expected to have a material effect on the
Company's financial statements. The disclosure requirements are effective for
consolidated financial statements of interim or annual periods ending after
December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
(3) ANTHROGENESIS ACQUISITION
As discussed in Note 1, on December 31, 2002, Celgene completed the
acquisition of Anthrogenesis Corp., for an aggregate purchase price of $60.0
million. Anthrogenesis is an early-stage biotherapeutics company delivering
stem cell therapies produced from renewable human placental sources/materials.
The Company acquired Anthrogenesis to realize the substantial therapeutic and
commercial potential of placental stem cells through its commercial and
developmental infrastructure. The merger was consummated pursuant to the
Purchase Option Agreement and Plan of Merger, dated April 26, 2002, as amended.
The Company issued 1,455,381 shares of common stock valued at $31.2 million for
all the outstanding shares of Anthrogenesis at an exchange ratio of .4545 of a
share of Celgene common stock for each share of Anthrogenesis common stock
outstanding. The Company also issued 1,247,203 Celgene stock options and
warrants in exchange for all the Anthrogenesis stock options and warrants at
the same exchange ratio. All of the Anthrogenesis options and warrants were
vested at the time of their assumption by Celgene, or the exercise price of
such options and warrants exceeded the market price of Celgene stock on the
date of acquisition. The fair value of these options and warrants aggregating
$16.7 million was included in the acquisition purchase price and were
determined using the Black-Scholes model using the following assumptions:
F-16
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
-- Fair market value of the underlying shares was based on the average
closing price of Celgene's common stock on December 31, 2002.
-- Risk free interest rate of 2%.
-- Expected stock price volatility of 65%.
-- Expected term until exercise 2.5 to 3 years.
-- Expected dividend yield 0%.
In addition, an outstanding convertible loan of $8.5 million due to the
Company from Anthrogenesis, bearing interest at prime plus 2%, was also
included in the purchase price. The purchase price also includes $3.6 million
representing acquisition related costs, which consisted of transaction fees for
financial advisors, attorneys, accountants and other related charges.
The acquisition of Anthrogenesis was structured as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code and was
accounted for using the purchase method of accounting for business
combinations. The consolidated financial statements as of December 31, 2002
includes the net assets and liabilities of Anthrogenesis. The purchase price
was allocated to the assets purchased and liabilities assumed based upon their
respective fair values, with the excess of the purchase price over the
estimated fair market value of net tangible and intangible assets acquired
allocated to goodwill based on a third-party valuation report, as follows:
Current assets ........................... $ 2,671,319
Property and equipment ................... 649,028
Non current assets ....................... 8,864
IPR&D .................................... 55,700,000
Intangible assets ........................ 3,010,000
Goodwill ................................. 2,972,784
------------
Total assets acquired .................... 65,011,995
------------
Current liabilities ...................... (3,547,463)
Non current liabilities .................. (1,429,740)
------------
Total liabilities assumed ................ (4,977,203)
------------
Net assets acquired ...................... $ 60,034,792
============
Approximately $55.7 million of the purchase price represents the estimated
fair value of IPR&D projects that had not yet reached technological feasibility
and had no alternative future use. Accordingly, this amount was immediately
expensed in the consolidated statement of income upon the acquisition date.
Intangible assets acquired represent supplier agreements and customer
lists and have a weighted average useful life of 11.6 years. Amortization
expense for the next five fiscal years is expected to be approximately $315,000
per year.
The goodwill from the Anthrogenesis acquisition has been allocated to the
Company's Stem Cell Therapy segment. In accordance with SFAS 142, Goodwill and
Other Intangible Assets, the Company will not amortize goodwill resulting from
this acquisition, but will review it at least annually for potential impairment
issues. This goodwill is not deductible for tax purposes.
The allocation may be adjusted over the next three quarters as integration
plans are finalized, as allowed by SFAS 141, Business Combinations.
IPR&D represents that portion of the purchase price of an acquisition
related to the research and development activities which are yet to demonstrate
their technological feasibility and have no alternative future use.
Accordingly, the IPR&D of $55.7 million was charged to operations upon the
acquisition date. The estimated fair value of these projects was determined by
employment of a
F-17
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
discounted cash flow model. The discount rates used take into account the stage
of completion and the risks surrounding the successful development and
commercialization of each of the purchased in-process technology projects that
were valued. The analysis included forecasted future cash flows that were
expected to result from the progress made on the in-process project prior to
the purchase dates. Appropriate operating expenses were deducted from the total
forecasted net revenues to establish a forecast of net returns on the completed
portion of the in-process technology. Finally, these net returns were
discounted to a present value using discount rates that incorporate the
weighted average cost of capital relative to the biotech industry and the
Company as well as product specific risks associated with the purchased
in-process research and development products. The product specific risk factors
included the product's phase of development, likelihood of success,
manufacturing process capability, scientific rationale, pre-clinical safety and
efficacy data, target product profile, and development plan. In addition to the
product specific risk factors, an overall discount rate of 36% was used for the
purchase valuation, which represents a risk premium to the Company's weighted
average cost of capital.
The forecast data in the analysis was based on internal product level
forecast information maintained by management in the ordinary course of
managing the business. The inputs used by management in analyzing IPR&D was
based on assumptions, which management believed to be reasonable but which are
inherently uncertain and unpredictable. These assumptions may be incomplete or
inaccurate, and no assurance can be given that unanticipated events and
circumstances will not occur.
The following unaudited pro forma results of operations of Celgene for the
years ended December 31, 2002 and 2001, assumes the acquisition of
Anthrogenesis has been accounted for using the purchase method of accounting as
of January 1, 2002 and 2001, and assumes the purchase price has been allocated
to the assets purchased and the liabilities assumed based on fair values at the
date of acquisition. Anthrogensis' results of operations included in the
following unaudited pro forma financial information are derived from their
unaudited financial statements for the year ended December 31, 2002 and their
audited financial statements for the year ended December 31, 2001. The
unaudited pro forma net loss and loss per share amounts for both the years
include the charge for purchased research and development of approximately
$55.7 million, which was recognized at the acquisition date, and also include
an adjustment to reflect amortization of intangibles recorded in conjunction
with the acquisition. The unaudited pro forma results of operations is
presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial positions that would have occurred if the
transactions had been consummated at the dates indicated, nor is it necessarily
indicative of future operating results or financial position of the combined
companies and should not be construed as representative of these amounts for
any future dates or periods.
YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001
----------------- ---------------
Total revenues ............. $ 138,000,424 $ 115,521,280
Net loss ................... (112,897,451) (63,930,099)
Net loss per share ......... $ (1.43) $ (0.83)
Prior to the merger, when two senior executives of the Company served on
the Board of Directors of Anthrogenesis, the Company entered into the following
transactions with Anthrogenesis:
In April 2001, the Company entered into a license and development
agreement with Anthrogenesis for the development of a human angiogenesis assay
system for screening the effect of certain molecules on the process of
neovascularization. The Company paid $250,000 for a one year exclusive,
royalty-free license to all assay system technology. This payment was expensed
upon the signing of the agreement.
In December 2001, the Company entered into a second development agreement
with Anthrogenesis for a period of one year which required Anthrogenesis to
perform certain development work on several of the Company's compounds. The
Company recorded a development fee of $250,000 which was amortized over the
term of the agreement.
F-18
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
(4) LITIGATION SETTLEMENT AND RELATED AGREEMENTS
On December 31, 2002, the Company entered into a series of agreements with
EntreMed, Inc. and Children's Medical Center Corporation to effectively
terminate ongoing litigation relating to patents for thalidomide analogs and to
grant an exclusive license to Celgene for the rights to those patents. Under
the terms of an Asset Purchase Agreement the Company paid to EntreMed,
$10,000,000 in cash for all thalidomide analog patents and associated clinical
data and records and the termination of any litigation surrounding those
patents. Under the terms of a Securities Purchase Agreement, the Company
acquired from EntreMed 3,350,000 shares of Series A Convertible Preferred Stock
and warrants exercisable into an additional 7,000,000 common shares for an
aggregate cash consideration of $16,750,000. The Series A Convertible Preferred
Stock is convertible, at the option of the Company, into an aggregate of
16,750,000 shares of common stock at an initial conversion price of $1.00 per
share provided, however, that the conversion price in effect from time to time
shall be subject to certain adjustments. Dividends will accrue at 6% per annum
on the preferred stock. The Company shall have the right to one vote for each
share of Common Stock into which such share of Series A Convertible Preferred
Stock could then be converted and with respect to such vote the Company shall
have full voting rights and powers equal to the voting rights and powers of the
holders of shares of Common Stock. The warrants have an exercise price of $1.50
per share, vest after six months from the date of grant and expire after seven
years from the date of grant. The Company completed an assessment of the
estimated realizable value of the investment. Considering the level of the
Company's ownership interest in EntreMed, its history of operating losses and
the fact that EntreMed is a clinical-stage biopharmaceutical company engaged
primarily in research and development activities with proposed products and
research programs in the early stage of clinical development, and, based on
such assessment, the entire amount of such Preferred Stock was written down.
The Company signed an exclusive license agreement with CMCC which
terminated any existing thalidomide analog agreements between CMCC and EntreMed
and directly granted to Celgene an exclusive worldwide license for the analog
patents. The Company paid to CMCC $2,500,000 under this agreement with another
$2,500,000 payable between 2004 and 2006, the present value relating to which
aggregating $2,201,500 was charged to 2002 operations. Additional payments are
possible under the agreement depending on the successful development and
commercialization of thalidomide analogs.
Celgene recorded a charge to earnings for the cost of these agreements and
related expenses of $32,211,500 in 2002 including write down of the EntreMed
Convertible Preferred Stock and certain legal expenses incurred in connection
with the settlement.
(5) 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 and class of security at December 31, 2002 and 2001, were as
follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2002 COST GAIN LOSS VALUE
- ------------------------------------ ---------------- ------------ --------------- --------------
Government agencies ................ $ 149,906 1,795 -- 151,701
Government bonds and notes ......... 553,593 5,235 -- 558,828
Corporate debt securities .......... 167,974,812 9,428,832 (2,407,618) 174,996,026
------------- --------- ---------- -----------
$ 168,678,311 9,435,862 (2,407,618) 175,706,555
============= ========= ========== ===========
F-19
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2001 COST GAIN LOSS VALUE
- ------------------------------------ --------------- -------------- ----------------- ---------------
Government agencies ................ $ 24,668,882 $ 318,218 $ -- $ 24,987,100
Government bonds and notes ......... 553,594 15,076 -- 568,670
Corporate debt securities .......... 231,026,473 7,603,951 (1,286,145) 237,344,279
------------- ----------- ------------ -------------
$ 256,248,949 $ 7,937,245 $ (1,286,145) $ 262,900,049
============= =========== ============ =============
Maturities of debt securities classified as available-for-sale were as
follows at December 31, 2002:
AMORTIZED FAIR
COST VALUE
--------------- ---------------
Due within one year ............................ $ 21,122,872 $ 21,237,984
Due after one year through five years .......... 107,152,079 111,899,755
Due after five years through ten years ......... 38,560,675 40,568,816
Due after ten years ............................ 1,842,682 2,000,000
------------- -------------
$ 168,678,308 $ 175,706,555
============= =============
(6) INVENTORY
DECEMBER 31,
-------------------------------
2002 2001
-------------- --------------
Raw materials ................................. $ 2,680,398 $ 763,662
Work in process ............................... 555,232 1,710,305
Finished goods ................................ 1,570,140 1,129,495
----------- -----------
$ 4,805,770 $ 3,603,462
=========== ===========
(7) PLANT AND EQUIPMENT
Plant and equipment consists of the following:
DECEMBER 31,
--------------------------------
2002 2001
--------------- --------------
Laboratory equipment and machinery ......... $ 16,306,960 $ 9,172,226
Leasehold improvements ..................... 10,915,557 7,297,768
Computer equipment ......................... 3,944,806 2,957,346
Furniture and fixtures ..................... 3,456,798 2,731,996
Leased equipment ........................... 1,089,617 3,514,146
Construction in progress ................... 388,121 68,511
------------ ------------
36,101,859 25,741,993
Less: accumulated depreciation and
amortization .............................. 16,501,796 15,096,346
------------ ------------
$ 19,600,063 $ 10,645,647
============ ============
F-20
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
(8) ACCRUED EXPENSES
Accrued expenses consists of the following:
DECEMBER 31,
-------------------------------
2002 2001
-------------- --------------
Professional and consulting fees ......... $ 2,949,560 $ 3,514,287
Accrued compensation 11,579,121 4,847,558
Accrued interest, royalties and license fees .. 3,852,105 1,925,109
Accrued sales returns and rebates ............. 4,728,674 1,710,903
Accrued facility costs ........................ 2,445,025 --
Other ......................................... 2,020,488 1,669,165
---------- ----------
$27,574,973 $13,667,022
========== ==========
(9) CONVERTIBLE DEBT
On September 16, 1998, the Company issued convertible notes to an
institutional investor in the amount of $8.75 million. The notes had a
five-year term and a coupon rate of 9.25% with interest payable 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 $15.0 million. The notes had a five year
term and a coupon rate of 9% with interest payable on a semi-annual basis. The
notes contained a conversion feature that allowed the note holders to convert
the notes into common shares after one year at $6.00 per share. Issuance costs
of $750,000 incurred in connection with these notes were being amortized over
three years. Just prior to the Company's follow-on offering on February 16,
2000, a portion of the notes totaling $9.3 million were converted into
1,548,000 common shares and included in the public offering. On May 17, 2000,
an additional $4.0 million of the notes were converted into 666,399 common
shares and issued to the note holders. On June 14, 2002, the remaining notes
having a carrying value of $1.7 million were converted into 285,601 common
shares.
On July 6, 1999, the Company issued to an institutional investor
convertible notes in the amount of $15.0 million. The notes had a five year
term and a coupon rate of 9% with interest payable on a semi-annual basis. The
notes contained a conversion feature that allows the note holders to convert
the notes into common shares after one year at $6.33 per share. There was no
fee or discount associated with these notes. On July 6, 2000, $5.0 million of
the notes were converted to 789,474 common shares. On June 14, 2002, the
remaining notes having a carrying value of $10.0 million were converted into
1,578,948 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 waived the right to the receipt of any
interest after the effective date of August 24, 2000.
At December 31, 2001, the fair value of the Company's convertible notes
exceeded their carrying value reflecting the increase to $31.92 per share in
the market value of the Company's common stock. An increase in the market price
of the Company's common stock over the conversion price has the effect of
increasing the fair value of the convertible notes.
(10) SECURED PROMISSORY NOTE
In November 1996, the Company issued a secured promissory note for $3.0
million. 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.
F-21
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
(11) 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.
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.
(12) STOCK BASED COMPENSATION
(A) STOCK OPTIONS AND RESTRICTED STOCK AWARDS
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 8,500,000 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.
As a result of the acquisition of Anthrogenesis, the Company also assumed
the former Anthrogenesis stock option plans. Options that had been granted
prior to Celgene's acquisiton of Anthrogenesis were granted at the fair market
value of Anthrogenesis at the date of grant, as determined by the Anthrogenesis
Board of Directors. Anthrogenesis options generally vested immediately and have
a life of ten years from the date of grant. The Anthrogenesis options converted
into Celgene options at an exchange ratio of .4545. 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 1992 Plan terminated in 2002 and the 1998 Plan
will terminate in 2008.
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.
F-22
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
On and after September 19, 2000, stock options granted to executives at
the vice-president level and above contain a reload feature which provides that
if (1) the optionee exercises all or any portion of the stock option (a) at
least six months prior to the expiration of the stock option, (b) while
employed by the Company and (c) prior to the expiration date of the 1998
Long-Term Incentive Plan and (2) the optionee pays the exercise price for the
portion of the stock option exercised or pays applicable withholding taxes by
using common stock owned by the optionee for at least six months prior to the
date of exercise, the optionee shall be granted a new stock option under the
1998 Long-Term Incentive Plan on the date all or any portion of the stock
option is exercised to purchase the number of shares of common stock equal to
the number of shares of common stock exchanged by the optionee to exercise the
stock option or to pay withholding taxes thereon. The reload stock option will
be exercisable on the same terms and conditions as apply to the original stock
option except that (x) the reload stock option will become exercisable in full
on the day which is six months after the date the original stock option is
exercised, (y) the exercise price shall be the fair market value (as defined in
the 1998 Long-Term Incentive Plan) of the common stock on the date the reload
stock option is granted and (z) the expiration of the reload stock option will
be the date of expiration of the original stock option. An optionee may not
reload the reload stock option unless otherwise permitted by the Company's
Compensation Committee. As of December 31, 2002, the Company has issued 620,000
stock options to executives which contain the reload features noted above.
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.
F-23
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
The following table summarizes the stock option activity for the
aforementioned Plans:
OPTIONS OUTSTANDING
----------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE
AVAILABLE PRICE PER
FOR GRANT SHARES SHARE
--------------- --------------- ----------
Balance January 1, 2000 ........... 3,279,374 7,355,531 4.50
Authorized ....................... 2,417,100 -- --
Expired .......................... -- -- --
Granted .......................... (3,266,281) 3,261,281 42.20
Exercised ........................ -- (2,569,570) 3.66
Cancelled ........................ 99,555 (99,555) 19.62
Repurchases ...................... 2,197 -- --
---------- ---------- ------
Balance December 31, 2000 ......... 2,531,945 7,947,687 20.05
Authorized ....................... 2,000,000 -- --
Expired .......................... -- -- --
Granted .......................... (1,111,450) 1,111,450 26.04
Exercised ........................ -- (1,304,960) 4.74
Cancelled ........................ 457,249 (457,249) 34.49
Repurchases ...................... 190 -- --
---------- ---------- ------
Balance December 31, 2001 ......... 3,877,934 7,296,928 $ 22.80
Authorized ....................... -- -- --
Expired .......................... (73,706) -- --
Granted .......................... (3,204,884) 3,204,884 21.13
Exercised ........................ -- (279,117) 5.58
Cancelled ........................ 423,627 (423,627) 30.19
Repurchases ...................... 721 -- --
Assumed on acquisition ........... 137,031 1,030,364 11.37
---------- ---------- -------
Balance December 31, 2002 ......... 1,160,723 10,829,432 21.37
========== ========== =======
The following table summarizes information concerning options outstanding
under the Incentive Plans at December 31, 2002:
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
OUTSTANDING EXERCISE REMAINING EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICE AT 12/31/02 PRICE TERM (YRS.) AT 12/31/02 PRICE
- ------------------------- ------------- ---------- ------------- ------------- -----------
$0.15 - 3.50 ............ 854,656 $ 2.26 4.8 854,656 $ 2.26
3.51 - 6.00 ............ 2,193,854 3.00 5.6 2,069,568 5.11
6.01 - 24.00 ........... 3,381,771 16.67 9.0 3,062,688 16.21
24.01 - 30.00 .......... 2,895,075 26.04 8.0 2,059,419 26.25
30.01 - 50.00 .......... 368,526 36.63 7.6 230,893 35.71
50.01 - 70.00 .......... 1,135,550 64.27 7.6 761,522 64.11
--------- -------- --- --------- --------
10,829,432 $ 21.37 7.5 9,038,746 $ 19.27
========== ======== === ========= ========
The Company recorded $6,706,274 and $1,024,244 of deferred compensation
for options granted under the former Signal plans during 2000 and 1999,
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 amortized the deferred compensation over the
vesting period of the options and recorded $1,264,742, $2,465,406 and
$3,087,681 of compensation expense during the years
F-24
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
ended December 31, 2002, 2001 and 2000, respectively. During 2002, the Company
reversed $327,748 of deferred compensation related to option holders who are no
longer providing services to the Company.
During 2001, the Company issued to certain employees an aggregate of
52,500 restricted stock awards. Such restricted stock awards will vest on
September 19, 2006 unless certain conditions are met prior to the vesting date.
The restricted stock awards provide for accelerated vesting during specified
intervals in 25% increments if certain milestones relating to research and
development activities and the level of the Company's stock price are met over
the next three years. The fair value of these restricted stock awards at the
grant date amounted to $1,385,625 which is being recorded as compensation
expense over the contractual vesting period. During 2002 and 2001, the Company
recorded $250,466 and $209,668, respectively, in compensation expense relating
to these restricted stock awards, which is classified as selling, general and
administrative expenses.
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 2002, 2001 and 2000 the Company recorded $216,757,
$854,042 and $970,309 in compensation expense relating to stock, stock options
or warrants issued to consultants, advisors or financial institutions,
respectively.
(B) WARRANTS
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 at an exercise price of $2.50 per share with a term of four years
from the issuance date which ended on June 1, 2002. In May 2002, the remaining
967,693 warrants were exercised and the equivalent number of common shares were
issued. As of December 31, 2002, there were no warrants outstanding.
Upon the completion of the Anthrogenesis acquisition, Celgene assumed the
Anthrogenesis warrants then outstanding. Anthrogenesis had issued warrants to
investors at exercise prices equivalent to the per share price of their
investment. Celgene has 216,839 warrants outstanding to acquire an equivalent
number of shares of Celgene common stock at an average exercise price of $13.14
per warrant.
(13) 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 $2.9 million in 2002, $1.4 million in 2001 and $1.2 million in
2000.
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. The
Company recorded $371,150, $359,608 and $52,541 in expense associated with the
matching of the deferral of compensation for 2002, 2001 and 2000, respectively.
All amounts are 100% vested at all times, except with respect to restricted
stock, which will not be vested
F-25
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
until the date the applicable restrictions lapse. At December 31, 2002 and
2001, the Company had a deferred compensation liability included in other
non-current liabilities in the consolidated balance sheets of approximately
$2.7 million and $1.6 million, respectively, which included the participant's
elected deferral of salaries and bonuses, the Company's matching contribution
and earnings on deferred amounts as of that date. The plan provides
participants eight investment options for amounts they elect to defer. Such
options include a combination of funds that offer the investor the option to
spread their risk across a diverse group of investments. These investment
choices include an equity and equity index fund, a bond fund, a fund that is
balanced between equities and bonds, a fund that invests worldwide, a growth
fund and a fund that invests in mid to large cap companies and seeks capital
appreciation.
(14) SPONSORED RESEARCH AND LICENSE AGREEMENT
Novartis Pharma AG
On April 19, 2000, the Company entered into an agreement with Novartis
Pharma AG wherein the Company granted to Novartis an exclusive worldwide
license for the development and marketing of d-methylphenidate, or d-MPH, its
chirally pure version of Ritalin(Reg. TM). The Company also granted rights to
all its related intellectual property and patents, including new formulations
of the currently marketed Ritalin(Reg. TM). Celgene received a $10.0 million,
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(Reg. TM) drugs. The upfront license fee of $10.0 million was
recognized as revenue over a 17 month period commencing June 2000 which was
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. The
Company received FDA approval to market the drug in November 2001. Accordingly,
the Company recognized approximately $5.4 million and $4.6 million of research
contract revenue in 2001 and 2000, respectively. The Company also received a
milestone payment of $5.0 million in December 2000 upon acceptance of the New
Drug Application, or NDA, by the FDA for d-MPH. The milestone payment was
recognized as research contract revenue in December 2000. The Company received
an additional milestone payment of $12.5 million in November 2001, upon FDA
approval to market the drug which was recognized as research contract revenue.
The Company incurred costs related to the agreement of approximately $0.0, $2.8
million and $9.4 million in 2002, 2001 and 2000, respectively.
In December 2000, the Company signed a collaborative research agreement
with Novartis for joint research of selective estrogen receptor modulator
compounds, or SERMs, for the treatment and prevention of osteoporosis. The
Company received a nonrefundable, upfront payment of $10.0 million 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 was amortized over the
two year research period. The Company incurred costs of approximately $1.8
million and $2.0 in 2002 and 2001, respectively, related to this agreement. The
agreement was extended in December 2002 for an additional six months.
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 $2.0 million,
which was amortized over the term of the agreement, and the potential to
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 also has the right to 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 agreed to
pay the Company certain amounts for the full time equivalent
F-26
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
personnel working on the research. During 2001 and 2000, Axys paid $1.1 million
and $1.5 million, respectively, to the Company, which represents the
approximate cost of the full-time equivalent personnel working on the related
research. This agreement expired in October 2001 and has not been renewed.
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 agreed to pay the Company certain amounts for the full-time equivalent
personnel working on the research. Nippon Kayaku paid $2.3 million in 2000 to
the Company, which represents the approximate cost of the full-time equivalent
personnel working on the related research. Each party was obligated to pay the
other royalties on future product sales arising from the collaboration. This
agreement expired in 2000 and has not been renewed.
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
In December 1997, the Company entered into a three-year collaborative
research and license agreement with DuPont Pharmaceuticals 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 $1.0 million, which was amortized over
the term of the agreement, and the potential to 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 agreed
to pay the Company certain amounts for the full time equivalent personnel
working on the research. Dupont paid $2.0 million in 2000 to the Company, which
represents the approximate cost of the full-time equivalent personnel working
on the related research. The agreement expired in 2000 and has not been
renewed.
Serono
In 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-(Kappa Beta). 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
made quarterly payments to the Company to fund research efforts. During 2001 and
2000, Serono paid $2.8 million and $3.0 million, respectively, to the Company,
which represents the approximate cost of the full-time equivalent personnel
working on the related research. Serono purchased shares of Signal's Series F
Preferred Stock (which were ultimately exchanged into Celgene shares pursuant to
the Signal merger) in conjunction with the license agreement. The original
agreement was extended for one year and expired in November 2001. The agreement
has not been renewed and the selected compounds have been transferred to Serono
for further development, for which the Company will receive royalties upon
commercial sales of such products, if any, as described above.
F-27
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
(15) INCOME TAXES
At December 31, 2002 and 2001, the tax effects of temporary differences
that give rise to deferred tax assets are as follows:
2002 2001
---------------- ----------------
Deferred assets:
Federal and state net operating loss carryforwards ........ $ 143,719,598 $ 131,547,226
Capitalized research expenses ............................. 7,011,354 7,008,725
Research and experimentation tax credit carryforwards ..... 7,686,315 7,366,596
Plant and equipment, principally due to differences in
depreciation ............................................. 1,879,831 1,841,857
Patents, principally due to differences in amortization ... 5,615,352 113,569
Accrued and other expenses ................................ 4,801,761 6,261,988
Unrealized losses on securities ........................... 6,686,332 --
-------------- --------------
Total deferred tax assets ................................ 177,400,543 154,139,961
Valuation allowance ......................................... (177,400,543) (154,139,961)
-------------- --------------
Net deferred tax assets .................................. $ -- $ --
============== ==============
During 2002, 2001 and 2000, the Company recognized a tax benefit of
$652,618, $1,231,964 and $1,809,677, respectively, from the sale of certain
State net operating loss carryforwards. In 2002, the Company also recognized
state tax expense of $554,176 as a result of recent legislation in New Jersey,
which has placed a temporary suspension on the usage of state net operating
losses.
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, 2002, the Company had Federal net operating loss carryforwards of
approximately $371,400,000 and combined State net operating loss carryforwards
of approximately $228,824,000 that will expire in the years 2003 through 2022.
State net operating loss carryforwards differ from Federal net operating loss
carryforwards primarily due to the fact that the Company sold approximately
$84,150,000 of its State net operating loss carryforwards through December 31,
2002, and approximately $58,426,000 has expired. The Company also has research
and experimentation credit carryforwards of approximately $7,686,000 that
expire in the years 2003 through 2022. 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. Anthrogenesis also
experienced an ownership change when acquired at December 31, 2002.
Approximately $8,500,000 of deferred tax assets acquired in the Anthrogenesis
acquisition at December 31, 2002 consisted primarily of net operating losses:
as such there may be an annual limitation on the Company's ability to utilize
the acquired net operating losses in the future. Upon realization of the
Anthrogenesis acquired tax assets, the Company will credit the benefit to the
related acquired goodwill and other intangibles.
Of the deferred tax asset related to the Federal and State net operating
loss carryforwards, approximately $67,304,000 relates to a tax deduction for
non qualified stock options. The Company will increase paid in capital when
these benefits are realized for tax purposes. The Company realized stock option
deduction benefits in 2002 for New Jersey state income tax purposes and has
increased paid in capital in the amount of approximately $77,000.
F-28
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
(16) DISCONTINUED OPERATION
On January 9, 1998, the Company concluded an agreement with Cambrex
Corporation for Cambrex to acquire Celgene's chiral intermediate business for
approximately $15.0 million. The Company received $7.5 million upon the closing
of the transaction, and will receive future royalties with a present value not
exceeding $7.5 million, with certain minimum royalty payments in the third
through sixth year following the closing of the transaction. Included in the
transaction are the rights to Celgene's enzymatic technology for the production
of chirally pure intermediates for the pharmaceutical industry, including the
current pipeline of third party products and the equipment and personnel
associated with the business. Pursuant to the minimum royalty provision of the
agreement, the Company received $1.0 million, $991,973 and $719,103 during
2002, 2001 and 2000, respectively.
(17) 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 2004 and 2012 and each
agreement includes renewal options ranging from one or two additional three or
five-year terms. Under the terms of one of these lease arrangements, the
Company has an outstanding letter of credit for $150,000 in favor of the
lessor, which is fully collateralized by cash. 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
entered into a new lease arrangement in December 2001 to consolidate the
Company's California research division into one building. The division
completed the occupation of the new facility during the fourth quarter of 2002.
The lease obligation relating to the remaining term of the old lease
arrangement, which expires on December 31, 2003, aggregating approximately $1.0
million, was recognized as an expense for the year ended December 31, 2002 and
the net book value with respect to related leasehold improvements and other
unamortized assets aggregating $1.1 million was written off during the same
period. The Company leased an additional 11,400 square feet of office space in
Warren, N.J. in September, 2002.
In July 1997, the Company entered into an equipment leasing agreement;
under the agreement, the Company could lease up to $1.0 million of equipment
for a three year term after which the Company could purchase the equipment for
a nominal value. The Company leased $675,000 of laboratory equipment under this
agreement in two separate take-downs, and the second three year term expired in
June of 2001. Accordingly, the Company has purchased all the equipment for a
nominal value. 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, net of accumulated amortization of $218,231 and
$1,039,214 as of December 31 2002 and 2001, respectively, are included in plant
and equipment and the amortization of these assets is included with
depreciation expense.
F-29
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
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, 2002 are:
OPERATING CAPITAL
YEAR ENDING DECEMBER 31 LEASES LEASES
- -------------------------------------------------- -------------- -----------
2003 ...................................... $ 4,261,914 $ 91,072
2004 ...................................... 3,301,510 31,726
2005 ...................................... 3,338,176 9,603
2006 ...................................... 3,203,857 --
2007 ...................................... 3,264,012 --
Thereafter ................................ 12,261,125 --
------------
Total minimum lease payments .............. $ 29,630,594 132,401
============
Less amount representing interest ......... 6,231
--------
Present value of net minimum capital
lease payments ........................... 126,170
Less current installments of obligations
under capital leases ..................... 86,318
--------
Obligations under capital leases, excluding
current installments ..................... $ 39,852
========
Total facilities rental expense under operating leases, excluding the
write-off of the old Signal facility, amounted to $3.0 million, $2.3 million
and $2.1 million in 2002, 2001 and 2000, respectively.
(B) EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain officers and employees.
Employment contracts provide for an increase in compensation reflecting annual
reviews and related salary adjustment. Compensation expense related to the
contracts aggregated $1.7 million in 2002. The outstanding commitment for
ongoing employment contracts as of December 31, 2002 is approximately $2.1
(excluding any change in control provisions).
(C) CONTRACTS
Pursuant to the terms of a research and development agreement with The
Rockefeller University , the Company has purchased for cash and stock options
the world-wide exclusive license to manufacture and market any drugs, including
THALOMID(Reg. TM), 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 was committed to pay Rockefeller $504,000
annually for research. The agreement expired in 2002 and has not been renewed.
The Company has an agreement with Penn Pharmaceutical, Ltd. of Great
Britain for the production of THALOMID(Reg. TM). Penn manufactures
THALOMID(Reg. TM) and sells it exclusively to the Company. The agreement has
been extended through 2003 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.(Reg. TM) (System for
THALOMID(Reg. TM) Education and Prescribing Safety) program for all
THALOMID(Reg. TM) patients. The contract is renewable for one year terms upon
agreement of both parties and is currently being renegotiated for 2003.
F-30
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
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 is renewable for one year
terms. The agreement has been renewed for 2003.
In 1998, the Company paid $280,000 in cash and issued shares of common
stock related to a license agreement with the University of Massachusetts and
capitalized the value as purchased technology. The Company has future
commitments to make additional payments 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
shares of common stock, which would be recorded at fair value at the date of
issuance.
In March 2001, the Company entered into a Master Services Agreement with
PPD Development, LLC, ("PPD"), a contract research organization, under which
project addenda may be executed from time to time for PPD to provide services
in support of clinical development projects. In 2001, the Company executed such
project agreements. The Company incurred expenses of $1.1 million in 2002 and
it is anticipated that it will incur expenses of approximately $1.2 million in
2003.
In May 2001, the Company entered into an agreement with Pharmacia to
conduct a collaborative study of THALOMID(Reg. TM) in combination with
CAMPTOSAR(Reg. TM) (irinotecan) and 5-fluorouracil and leucovorin for the
treatment of metastatic colorectal cancer. The Company incurred expenses of
approximately $1.3 million in 2002 and expects to incur expenses of
approximately $2.2 million in 2003.
In November, 2001, the Company entered into a license agreement with
Pharmion Corporation and Pharmion GmbH ("Pharmion") in which the Company
granted an exclusive royalty-bearing license for its intellectual property
covering thalidomide and S.T.E.P.S.(Reg. TM) in Europe and selected other
countries outside North America in exchange for licensing payments and
royalties. The agreement will terminate upon the tenth anniversary of the
initial European regulatory approval of thalidomide, and pursuant to the
agreement, the Company will receive $300,000 on a quarterly basis beginning in
December 2001 until the initial European regulatory approval is received.
In November, 2001, concurrent with the Pharmion License agreement, the
Company entered into an agreement with Penn Pharmaceuticals, Ltd and its
shareholders in which Penn granted an option to purchase their thalidomide
Dedicated Containment Facilities, or DCF, and related thalidomide assets. The
Company has three years in which to exercise the option. The purchase price
will be determined in the future based on a formula defined in the agreement.
In December, 2002, the Company signed a Master Services Agreement with
PharmaNet, Inc., a contract research organization, to provide services in the
management of two pivotal clinical trials for Thalomid in multiple myeloma. The
Company incurred expenses of approximately $1.9 million in 2002 and anticipates
expenses of approximately $8.0 million in 2003.
The Company has signed a letter of intent and anticipates signing a master
services agreement in the near future with Icon Clinical Research, a contract
research organization, to provide services in the management of several pivotal
clinical trials for REVIMID(TM) in multiple myeloma and metastatic melanoma.
The Company incurred expenses of $2.8 million in 2002 and anticipates expenses
of approximately $7.7 million in 2003.
(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,
F-31
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
storage and disposal of solid and hazardous wastes. The Company reviews the
effects of such laws and regulations on its operations and modifies its
operations as appropriate. The Company believes it is in substantial compliance
with all applicable environmental laws and regulations.
(18) 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
management of the Company has determined that pursuant to the acquisition of
Anthrogenesis (see Note 3), as of December 31, 2002, the Company operates in
two business segments--human pharmaceuticals and stem cell therapies. The
accounting policies of the segments are the same as described in the summary of
accounting policies.
HUMAN PHARMACEUTICALS
The human pharmaceutical segment is engaged in the discovery, development
and commercialization of pharmaceutical therapies designed to treat cancer and
immunological diseases. The segment markets and sells its products in the
United States and Canada. All of the Company's customers are located in North
America. In 2002, 2001 and 2000, six customers accounted for 92%, 87% and 85%
of total product sales revenue, respectively. At December 31, 2002, 2001 and
2000, these same customers had outstanding accounts receivable balances that
represented 92%, 88% and 80% of the total accounts receivable balance,
respectively. The segment 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.
STEM CELL THERAPIES
The stem cell segment delivers stem cell therapies that are produced from
renewable human placental sources and initially directed toward major, unmet
medical needs in the cancer field, with a primary focus on blood cancers such
as leukemias, lymphomas and myelomas. The segment also engages in the private
client banking of autologous stem cells and the development of an allogeneic
bank for stem cell transplants.
A reconciliation of the segment assets to the consolidated total assets as
of December 31, 2002 is provided below:
Human Pharmaceuticals ................ $ 56,793,090
Stem Cell Therapies .................. 9,311,995
Unallocated Corporate Assets ......... 261,181,643(1)
----------------
Total Assets ......................... $ 327,286,728
================
(1) Unallocated corporate assets consist of cash and cash equivalents and
marketable securities available for sale.
F-32
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
(19) QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED,
---------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30,
2002 2002 2002
-------------- --------------- --------------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE
AMOUNTS)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total revenue ....................... $ 37,173 $ 34,258 $ 33,621
Gross profit (1) .................... 28,909 26,467 26,249
Litigation settlement and related
agreements ......................... 32,212 -- --
Acquired in-process research and
development ........................ 55,700 -- --
Tax benefit ......................... 98 -- --
Net income(loss) .................... $ (96,425) $ (1,037) $ (1,715)
=========== ============ ============
Per share of common stock-
basic and diluted:
Net income(loss)-basic .............. $ (1.22) $ (0.01) $ (0.02)
Net income(loss)-diluted ............ $ (1.22) $ (0.01) $ (0.02)
Weighted average number of
shares of common stock
outstanding-basic .................. 78,715,000 78,583,000 76,377,000
Weighted average number of
shares of common stock
outstanding-diluted ................ 78,715,000 78,583,000 76,377,000
THREE MONTHS ENDED,
---------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2002 2001 2001 2001 2001
-------------- -------------- --------------- -------------- --------------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total revenue ....................... $ 30,694 $ 41,735 $ 26,178 $ 23,931 $ 22,399
Gross profit (1) .................... 23,974 22,006 18,463 15,841 14,313
Litigation settlement and related
agreements ......................... -- -- -- -- --
Acquired in-process research and
development ........................ --
Tax benefit ......................... -- 1,232 -- -- --
Net income(loss) .................... $ (823) $ 6,736 $ (6,342) $ (2,419) $ 113
============ ============ ============ ============ ============
Per share of common stock-
basic and diluted:
Net income(loss)-basic .............. $ (0.01) $ 0.09 $ (0.08) $ (0.03) $ 0.00
Net income(loss)-diluted ............ $ (0.01) $ 0.08 $ (0.08) $ (0.03) $ 0.00
Weighted average number of
shares of common stock
outstanding-basic .................. 75,625,000 75,511,000 75,356,000 75,113,000 74,439,000
Weighted average number of
shares of common stock
outstanding-diluted ................ 75,625,000 81,674,000 75,356,000 75,113,000 80,608,000
(1) Gross profit is calculated as Product sales less Cost of goods sold
F-33
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
CELGENE CORPORATION
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
YEAR EXPENSE OR SALES DEDUCTIONS YEAR
-------------- -------------------- ------------ -----------
Year ended December 31, 2002
Allowance for doubtful accounts .......... 707,690 294,533 272,967 729,256
Allowance for sales returns .............. 857,494 4,777,853 (1) 2,852,561 2,782,786
Allowance for customer discounts ......... 290,705 2,411,966 (1) 2,412,167 290,504
------- --------------- --------- ---------
1,855,889 7,484,352 5,537,695 3,802,546
========= ================= ========= =========
Year ended December 31, 2001 ..............
Allowance for doubtful accounts .......... 231,437 553,168 76,915 707,690
Allowance for sales returns .............. 381,088 2,440,460 (1) 1,964,054 857,494
Allowance for customer discounts ......... 151,140 1,785,306 (1) 1,645,741 290,705
--------- ----------------- --------- ---------
763,665 4,778,934 3,686,710 1,855,889
========= ================= ========= =========
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
========= ================= ========= =========
(1) Amounts are a reduction from gross sales
F-34