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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark one)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to _____________
Commission File Number 0-16132
CELGENE CORPORATION
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2711928
-------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
7 Powder Horn Drive, Warren, NJ 07059
-------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 732-271-1001.
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 Rule 12b-2 of the Exchange Act).
Yes x No
--- ---
At April 29, 2003, 80,771,598 shares of Common Stock par value $.01 per share,
were outstanding.
CELGENE CORPORATION
INDEX TO FORM 10-Q
Page No.
PART I FINANCIAL INFORMATION
Item I Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
as of March 31, 2003
and December 31, 2002 3
Consolidated Statements of Operations
- Three-Month Period Ended
March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows
- Three-Month Period Ended
March 31, 2003 and 2002 5
Notes to Unaudited Consolidated
Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 20
Item 4 Controls and Procedures 21
PART II OTHER INFORMATION 22
Item 6 Exhibits 22
Signatures 23
Certifications 24
2
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 117,464,101 $ 85,475,088
Marketable securities available for sale 139,565,721 175,706,555
Accounts receivable, net of allowance of $1,143,157 and $1,019,760
at March 31, 2003 and December 31, 2002, respectively 25,618,344 17,659,065
Inventory 5,237,231 4,805,770
Other current assets 9,430,356 12,449,429
------------- -------------
Total current assets 297,315,753 296,095,907
Plant and equipment, net 20,945,784 19,600,063
Goodwill 2,972,784 2,972,784
Intangible assets 2,931,167 3,010,000
Other assets 6,092,598 5,607,974
------------- -------------
Total assets $ 330,258,086 $ 327,286,728
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,605,549 $ 16,515,634
Accrued expenses 26,302,523 26,975,632
Current portion of capital leases and note obligation 51,600 86,318
Current portion of deferred revenue 571,852 109,327
Other current liabilities 1,877,307 599,341
------------- -------------
Total current liabilities 39,408,831 44,286,252
Capitalized leases and note obligation, net of current portion 32,791 39,852
Deferred revenue,net of current portion 1,043,092 1,389,888
Other non-current liabilities 6,167,448 4,872,784
------------- -------------
Total liabilities 46,652,162 50,588,776
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value per share,
5,000,000 authorized; none outstanding at
March 31, 2003 and December 31, 2002 -- --
Common stock, $.01 par value per share,
120,000,000 shares authorized;
issued and outstanding 80,727,684 and 80,176,713 shares
at March 31, 2003 and December 31, 2002, respectively 807,277 801,768
Additional paid-in capital 597,677,506 591,277,196
Accumulated deficit (321,414,793) (322,367,256)
Notes receivable from stockholders (42,000) (42,000)
Accumulated other comprehensive income 6,577,934 7,028,244
------------- -------------
Total stockholders' equity 283,605,924 276,697,952
------------- -------------
Total liabilities and stockholders' equity $ 330,258,086 $ 327,286,728
============= =============
See accompanying notes to unaudited consolidated financial statements.
3
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Period Ended March 31,
----------------------------------
2003 2002
---- ----
Revenue:
Product sales $ 45,803,958 $ 27,638,509
Collaborative agreements and other revenue 1,078,934 2,329,831
Royalty revenue 2,205,772 725,806
------------ ------------
Total revenue 49,088,664 30,694,146
------------ ------------
Expenses:
Cost of goods sold 4,661,609 3,664,142
Research and development 24,720,511 17,524,109
Selling, general and administrative 23,373,182 16,297,854
------------ ------------
Total expenses 52,755,302 37,486,105
------------ ------------
Operating loss (3,666,638) (6,791,959)
Other income and expense:
Interest and other income 4,754,588 5,978,595
Interest expense 488 9,876
------------ ------------
Income (loss) before taxes 1,087,462 (823,240)
Income tax 135,000 --
------------ ------------
Net income (loss) $ 952,462 $ (823,240)
============ ============
Net income (loss) per common share:
Basic $ 0.01 $ (0.01)
============ ============
Diluted $ 0.01 $ (0.01)
============ ============
Weighted average number of shares of
common stock utilized to calculate net
income (loss) per common share:
Basic 80,384,000 75,625,000
============ ============
Diluted 83,940,000 75,625,000
============ ============
See accompanying notes to unaudited consolidated financial statements.
4
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Month Period Ended March 31,
----------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net Income (loss) $ 952,462 $ (823,240)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization of long-term assets 2,012,735 1,580,216
(Recovery)provision for accounts receivable allowances (72,235) 89,665
Realized gain on marketable securities available
for sale (2,543,084) (1,154,676)
Non-cash stock-based compensation 175,698 637,261
Amortization of premium/discount on marketable securities
available for sale, net 438,688 37,218
Shares issued for employee benefit plans 2,047,809 614,037
Change in current assets and liabilities:
Increase in accounts receivable (7,887,044) (449,985)
Increase in inventory (431,461) (3,293,543)
Decrease in other operating assets 2,311,509 164,705
Increase(decrease) in accounts payable and
accrued expenses (4,010,564) 1,855,994
Increase(decrease) in deferred revenue 115,729 (1,256,250)
------------- -------------
Net cash used in operating activities (6,889,758) (1,998,598)
------------- -------------
Cash flows from investing activities:
Capital expenditures (3,056,683) (1,902,294)
Proceeds from sales and maturities of marketable
securities available for sale 37,794,920 4,020,874
Purchases of marketable securities
available for sale -- (39,965,724)
------------- -------------
Net cash provided by investing activities 34,738,237 (37,847,144)
------------- -------------
Cash flows from financing activities:
Proceeds from exercise of common stock
options and warrants 4,182,313 458,660
Repurchase of employee stock options -- (1,547)
Repayment of capital lease and note obligation (41,779) (227,460)
------------- -------------
Net cash provided by financing activities 4,140,534 229,653
------------- -------------
Net increase (decrease) in cash and cash
equivalents 31,989,013 (39,616,089)
Cash and cash equivalents at beginning of period 85,475,088 47,141,291
------------- -------------
Cash and cash equivalents at end of period $ 117,464,101 $ 7,525,202
============= =============
See accompanying notes to unaudited consolidated financial statements.
5
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Three Month Period Ended March 31,
2003 2002
---------- -----------
Supplemental schedule of non-cash investing and
financing activity:
Change in net unrealized gain(loss) on
marketable securities available for sale $ (450,310) $(5,662,184)
========== ===========
Deferred compensation relating to stock options $ -- $ 42,269
========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 488 $ 9,876
========== ===========
See accompanying notes to unaudited consolidated financial statements.
6
CELGENE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
1. Organization and Basis of Presentation
--------------------------------------
The unaudited consolidated financial statements have been prepared
from the books and records of Celgene Corporation and subsidiaries ("Celgene" or
the "Company") in accordance with accounting principles generally accepted in
the United States of America for interim financial information pursuant to Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required for complete annual financial statements.
Celgene is an 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. On December 31, 2002, Celgene completed the acquisition
of Anthrogenesis Corp. for an aggregate purchase price of approximately $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 acquisition was accounted for using the
purchase method of accounting for business combinations.
In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. Interim results may not be indicative of the results that may be
expected for the year. Certain adjustments and reclassifications were made to
conform to the current year presentation.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10K.
2. Earnings per Share
------------------
Basic earnings per share is computed by dividing the net income
available to common stockholders by the weighted average number of shares of
Common Stock issued and outstanding during the periods. For purposes of
calculating diluted earnings per share for the three months ended March 31,
2003, the denominator includes both the weighted average number of shares of
Common Stock outstanding and the number of dilutive Common Stock equivalents.
The number of dilutive Common Stock equivalents includes the effect of stock
options and warrants calculated using the treasury stock method and the number
of shares issuable upon the vesting of certain restricted stock awards. Due to
the net loss recorded for the three months ended March 31, 2002, the exercise or
conversion of all dilutive potential common shares is not included for purposes
of the diluted loss per share calculation. As of March 31, 2003 and 2002, the
Company had 7,265,918 and 10,993,779 dilutive potential common shares
outstanding, respectively, that could potentially dilute future earnings per
share calculations.
7
The following represents the weighted average number of common shares
outstanding for the three months ended March 31, 2003 and 2002 used in the basic
and diluted earnings (loss) per common share calculations:
Three month period ended
----------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Weighted average number of common
stock outstanding - basic 80,384,000 75,625,000
Effect of dilutive securities:
Assumed exercise of stock options,
warrants and restricted stock 3,556,000 --
---------- ----------
Weighted average number of
common stock and dilutive potential
common stock outstanding 83,940,000 75,625,000
========== ==========
3. Anthrogenesis Acquisition
-------------------------
The following unaudited pro forma results of operations of the Company
for the quarter ended March 31, 2002 assumes the acquisition of Anthrogenesis
has been accounted for using the purchase method of accounting as of January 1,
2002 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. The
unaudited pro forma net loss and loss per share amounts for the three months
ended March 31, 2002 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 that would have occurred if the transaction
had been consummated at the date indicated, nor is it necessarily indicative of
future operating results of the combined companies and should not be construed
as representative of these amounts for any future dates or periods.
Anthrogenesis' results of operations included in the following pro forma
financial information are derived from their unaudited financial statements for
the three-month period ended March 31, 2002 and has been adjusted, where
appropriate, to present their financial position and results of operations in
accordance with accounting principles generally accepted in the United States.
8
Pro Forma
Three Months Ended March 31,
----------------------------
2002
----
Total revenues $ 30,694,146
Net (loss) ($56,602,073)
Net (loss) per share $ (0.75)
Intangible assets acquired pursuant to this acquisition 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.
4. Marketable Securities Available for Sale
----------------------------------------
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value of available for sale securities by major security
type at March 31, 2003 and December 31, 2002 were as follows:
Gross Gross Estimated
March 31, 2003 Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---- ---- ---- -----
Government agencies $ 149,906 $ 1,100 $ -- $ 151,006
Government bonds and notes 301,759 2,835 -- 304,594
Corporate debt securities 132,536,121 8,876,324 (2,302,324) 139,110,121
------------ ------------ ------------ ------------
Total $132,987,786 $ 8,880,259 $ (2,302,324) $139,565,721
============ ============ ============ ============
Gross Gross Estimated
December 31, 2002 Amortized Unrealized Unrealized Fair
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
------------ ------------ ------------ ------------
Total $168,678,311 $ 9,435,862 $ (2,407,618) $175,706,555
============ ============ ============ ============
9
5. Inventory
---------
Inventory consists of the following:
March 31, December 31,
2003 2002
---- ----
Raw materials $2,572,775 $2,680,398
Work in process 1,406,183 555,232
Finished goods 1,258,273 1,570,140
---------- ----------
Total $5,237,231 $4,805,770
========== ==========
6. Stock Based Compensation
------------------------
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.
10
The following table illustrates the effect on net income (loss) and net
income (loss) per share as if the fair-value-based method under SFAS No. 123 had
been applied.
Three Month Period Ended March 31,
----------------------------------
2003 2002
---- ----
Net income (loss):
As reported $ 952,462 $ (823,240)
Add stock-based employee compensation
expense included in reported net income 61,759 442,000
Deduct total stock-based employee
compensation expense determined under
fair-value-based method for all awards (4,067,759) (5,159,000)
------------ -----------
Pro forma $ (3,053,538) $(5,540,240)
============ ===========
Net income(loss) per common
share basic and diluted:
Basic, as reported $ 0.01 $ (0.01)
Basic, pro forma $ (0.04) $ (0.07)
Diluted, as reported $ 0.01 $ (0.01)
Diluted, pro forma $ (0.04) $ (0.07)
The pro forma effects on net income (loss) per common share for the
quarters ended March 31, 2003 and 2002 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 $9.31 and $10.55 for
stock options granted in the three month periods ended March 31, 2003 and 2002,
respectively. The company estimated the fair values of each option grant on
their respective grant dates using the Black-Scholes option pricing model based
on the following assumptions:
2003 2002
---- ----
Risk-free interest rate 2.15% 2.04%
Expected stock price volatility 55% 58%
Expected term until exercise (years) 3.22 2.94
Expected dividend yield 0% 0%
7. Comprehensive Income(Loss)
--------------------------
Comprehensive income (loss) includes net income (loss) and other
comprehensive income (loss) which refers to those revenues, expenses, gains and
losses which are excluded from net income (loss). Other comprehensive income
(loss) includes net unrealized gains and losses on marketable securities
classified as available-for-sale.
11
Three Month Period Ended
March 31,
------------------------
2003 2002
---- ----
Net income (loss) $ 952,462 $ (823,240)
Other comprehensive income (loss):
Unrealized holding gains (losses)
arising during the period 2,092,774 (4,507,508)
Less: reclassification adjustment
for gains included in net
income(loss) (2,543,084) (1,154,676)
----------- -----------
Net unrealized loss on
securities (450,310) (5,662,184)
----------- -----------
Total comprehensive income(loss) $ 502,152 $(6,485,424)
=========== ===========
8. Stockholders' Equity
--------------------
Deferred Compensation Expense
Prior to the Company's merger with Signal Pharmaceuticals, Inc.,
Signal recorded an aggregate of approximately $9.4 million of deferred
compensation for stock options granted from 1997 through 2000, representing the
difference between the option exercise price and the estimated fair value of the
underlying stock for financial statement presentation purposes. The deferred
compensation is being amortized over the vesting period of the options. Through
March 31, 2003, the Company has recorded the full amount of the $9.4 million of
deferred compensation and expensed $0.0 and approximately $442,000 during the
three month periods ended March 31, 2003 and 2002, respectively. Upon the
termination of certain employees and consultants, the Company reversed
approximately $1.1 million of unamortized deferred compensation relating to
their unvested options through March 2003.
The Company recorded compensation expense relating to stock options
and warrants issued to consultants, advisors or financial institutions and other
stock-based compensation of approximately $176,000 and $195,000 for the three
month periods ended March 31, 2003 and 2002, respectively.
12
9. Segments
--------
Effective with the acquisition of Anthrogenesis on December 31, 2002,
the Company operates in two business segments -human pharmaceuticals and stem
cell therapies. Revenues and income (loss) before taxes by segment, for the
three months ended March 31, 2003 were as follows:
Revenues:
---------
Human pharmaceuticals $ 48,168,577
Stem cell therapies 920,087
------------
Total $ 49,088,664
============
Income(loss)before taxes:
-------------------------
Human pharmaceuticals $ (950,047)
Stem cell therapies (2,716,591)
Corporate and unallocated 4,754,100
------------
Total $ 1,087,462
============
10. Distribution Agreement
----------------------
On March 31, 2003, the Company entered into a distribution and supply
agreement with GlaxoSmithKline ("GSK") in which GSK granted to Celgene the
exclusive right to market, promote, sell and distribute Alkeran (melphalan) in
all dosage forms. Under the terms of the agreement, Celgene will purchase
Alkeran tablets and Alkeran for injection from GlaxoSmithKline and sell and
distribute the products in the United States under Celgene's label. The
agreement requires Celgene to purchase certain minimum quantities each year of
the initial three year term of the agreement under a take-or-pay arrangement
that aggregates to $56.6 million over such period.
11. Subsequent Event
----------------
In April 2003, the Company entered into a Securities Purchase
Agreement with Pharmion Corporation whereby Celgene purchased a Senior
Convertible Promissory Note (the "Note") with a principal amount of $12 million,
and a warrant to purchase up to 1,454,545 shares of Pharmion's common stock at a
purchase price of $2.75 per share. The Note has a term of five years with an
annual interest rate of 6% compounded semi-annually. The Note has a conversion
price of $2.75 per share of Common Stock.
In April 2003, the Company entered into an Amendment to the License
Agreement, dated November 16, 2001, with Pharmion Corporation whereby Pharmion
has agreed to provide the Company an aggregate of $8 million in research funding
for the further clinical development of THALOMID(R) during the period commencing
on the date of the agreement and ending December 31, 2005. During 2003, the
research funding will consist of three installments of $1 million each, payable
upon execution of the agreement, September 30, 2003 and December 31, 2003.
13
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
- ---------------------
Three month period ended March 31, 2003 vs.
Three month period ended March 31, 2002
- ---------------------------------------
Total revenue: Our total revenue for the three months ended March 31,
2003 increased approximately 60% to $49.1 million compared to $30.7 million in
the same period of 2002. Revenue in 2003 included product sales of $45.8 million
consisting primarily of THALOMID(R) sales of $45.6 million, royalty revenue of
$2.2 million on Ritalin(R) sales and collaborative agreement revenue of $1.1
million compared to product sales of $27.6 million consisting of THALOMID(R)
sales of $26.2 million and Focalin(TM) sales of $1.4 million, collaborative
agreement revenue of $2.4 million and royalty revenue of $0.7 million on
Ritalin(R) sales in the same period of 2002. Increasing use of THALOMID(R) by
oncologists in the treatment of various types of cancer combined with price
increases contributed to the 74% growth in THALOMID(R) product sales.
Focalin(TM) sales are recognized through the shipment of stock inventory to
Novartis for their commercial distribution. There have been no such shipments
during the first three months of 2003. The decrease in collaborative agreement
income is primarily attributable to the completion of the amortization of the
up-front payment from Novartis Pharma AG related to the SERM license agreement,
partially offset by revenue from our Cellular Therapeutics division. The
increase in royalty income was the result of the marketing approval and
subsequent launch in August 2002 of Ritalin(R) LA, Novartis' long-acting version
of Ritalin(R).
Cost of goods sold: Cost of goods sold during the first three months of
2003 increased approximately 27% to $4.7 million compared to approximately $3.7
million in the comparable period in 2002. The cost of goods sold relates
primarily to sales of THALOMID(R) in 2003 and to both sales of THALOMID(R) and
Focalin(TM) in 2002, and accordingly, the increase in cost of goods sold is
related primarily to the increased volume of THALOMID(R) sales during 2003. Cost
of goods sold for the first quarter of 2002 relating to Focalin(TM) sales was
lower than the normal cost at standard as some manufacturing costs incurred
prior to Focalin's(TM) approval in November 2001 were expensed as research and
development expenses. This favorability will continue until
14
the quantity previously expensed is completely sold. Cost of goods sold as a
percentage of product sales was approximately 10% during the first three months
of 2003 compared to approximately 13% in the comparable period in 2002. The
decrease was primarily related to a higher margin on THALOMID(R) sales in 2003
due to price increases in 2002, and to the 2002 sales of Focalin(TM) which has a
higher cost as a percentage of sales than THALOMID(R).
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 for the first
quarter of 2003 increased 41% to $24.7 million from $17.5 million in 2002. The
increase was due to the initiation of several large studies related to our
clinical programs in the second half of 2002. During the first quarter of 2003,
we spent approximately $14.2 million on THALOMID(R) and its follow on compounds,
the IMiDs(R) and SelCIDs(TM), and Focalin(TM), primarily for preclinical
toxicology, phase I/II and phase III clinical trials and regulatory expenses. We
spent approximately $9.7 million in our gene regulation, target discovery and
agro-chemical programs, and $0.8 million in our stem cell development 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 50% and 57% for the quarters ended March 31, 2003 and 2002,
respectively. As a result of increasing revenue, research and development
expense may continue to decrease as a percent of total revenue although the
actual dollar amount will continue to increase as we move our earlier stage
compounds through preclinical and clinical programs. In general, time to
completion would be as follows:
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
15
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 to bring 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 expenses to support the
sales force and the education and registration efforts underlying the
S.T.E.P.S.(R) 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 by
approximately 44% for the three months ended March 31, 2003 to $23.4 million
from $16.3 million in the same period in 2002. The increase was due primarily to
the expansion of the sales and marketing organization and related expenses and
an increase in customer service staff. As a percent of total revenue, selling,
general and administrative expenses were approximately 47% and 53% for the three
month periods ended March 31, 2003 and 2002, respectively.
Interest and other income: Interest and other income for the first
three months of 2003 decreased approximately 20% to approximately $4.8 million
from $6.0 million in the same period in 2002. The decrease was primarily due to
lower interest income as a result of lower interest rates in 2003 on decreased
balances of total cash, cash equivalents and marketable securities, partially
offset by an increase in realized gains of $1.4 million on the sale of
marketable securities available for sale.
Net income (loss): We recorded net income of $952,000 in the three
month period ended March 31, 2003 compared to a net loss of $823,000 in the same
period in 2002. The increase in net income was due to an increase in product
sales of $18.2 million and an increase in royalty revenue of $1.5 million,
offset by a decrease in collaborative agreement and other revenue of $1.3
million, a decrease in interest and other income of $1.2 million and an increase
in operating costs and expenses of $15.3 million.
16
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 $342.4 million through March
31, 2003.
Our net working capital at March 31, 2003 increased approximately 24.2%
to $257.9 million from $251.8 million at December 31, 2002. The increase in
working capital was primarily due to higher trade receivables on increasing
THALOMID(R) sales offset by lower total cash, cash equivalents and marketable
securities, and a decrease in accounts payable.
Cash and cash equivalents increased to $117.5 million in the first
quarter of 2003 from $85.5 million at December 31, 2002 while investments in
marketable debt securities decreased to $139.6 million from $175.7 million in
the same period. Total cash, cash equivalents and marketable securities
decreased by approximately $4.1 million reflecting primarily the decrease in
accounts payable.
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(R) and increased capital investments. In
February, 2000, we completed a public offering of our common stock, the net
proceeds of which to Celgene were approximately $278.0 million. These funds,
combined with the increasing revenue from sales of Thalomid(R) 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 primarily to our
Alkeran(R) purchase commitments and our operating (facilities) leases.
We lease a 44,500-square foot laboratory and office facility in Warren,
New Jersey, under a lease with an
17
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.
On March 31, 2003 we entered into a Distribution and Supply Agreement
with SmithKline Beecham Corporation, d/b/a GlaxoSmithKline ("GSK") in which we
have obtained the exclusive rights to market, promote, sell and distribute GSK's
Alkeran(R)
18
brand products approved by the FDA. Under the terms of the agreement, we will
purchase Alkeran(R) tablets and Alkeran(R) for injection from GSK and sell and
distribute the products in the United States under our marketing label. The
agreement requires us to purchase certain minimum quantities each year of the
initial three year term of the agreement under a take-or-pay arrangement which
aggregates $56.6 million over such period.
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 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. Our
significant accounting policies are fully described in Note 2 to our
consolidated financial statements included in our annual report on Form 10K. Our
critical accounting policies are disclosed in the MD&A section on Form 10-K.
There have been no significant changes with respect to such accounting policies.
Certification of Financial Statements
The certifications by the Company's Chief Executive Officer and Chief
Financial Officer of this report on Form 10-Q as required by section 906 of the
Sarbanes-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.
Cautionary Statements for Forward-Looking Information
The Management's Discussion and Analysis of Financial Condition and
Results of Operations provided above contains certain forward-looking statements
which involve known and unknown risks, delays, uncertainties and other factors
not under our control which may cause actual results, performance and
achievements of Celgene to be materially different from the results, performance
or other expectations implied by these forward-looking statements. These factors
include the results of current or pending clinical trials, actions by the FDA
and other factors detailed herein and in our other filings with the Securities
and Exchange Commission.
19
Item 3 - Quantitative and Qualitative Disclosures About 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 the ongoing liquidity needs of the Company.
Unrealized gains and losses (which are deemed to be temporary) on available for
sale securities, if any, are reported as 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 income and other income. We do not use
financial derivatives for investment or trading purposes. As of March 31, 2003,
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.
20
The table below presents the principal amounts and related weighted average
interest rates by year of maturity for our investment portfolio as of March 31,
2003:
2008 and
2003 2004 2005 2006 2007 beyond Total Fair Value
---- ---- ---- ---- ---- ------ ----- ----------
(in Thousands $)
Fixed Rate $ 5,550 $ -- $ 20,510 $ 64,345 $ 14,500 $ 25,275 $130,180 $137,566
Average Interest
Rate 6.92% -- 8.02% 6.78% 6.68% 7.71% 7.15%
Variable Rate -- -- -- -- -- $ 2,000 $ 2,000 $ 2,000
Average Interest
Rate -- -- -- -- -- 8.00% 8.00%
-------- ---- -------- -------- -------- -------- -------- --------
Total $ 5,550 $ -- $ 20,510 $ 64,345 $ 14,500 $ 27,275 $132,180 $139,566
-------- ---- -------- -------- -------- -------- -------- --------
Item 4 - 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
Quarterly Report on Form 10-Q, 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.
21
PART II - OTHER INFORMATION
Item 1. - None
Item 2. - None
Item 3. - None
Item 4. - None
Item 5. - Other Information:
None
Item 6. - Exhibits
10.1 Distribution and Supply Agreement by and between SmithKline Beecham
Corporation, d/b/a GlaxoSmithKline and Celgene Corporation, entered into
as of March 31, 2003.
22
SIGNATURES
Pursuant to the requirements 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
DATE May 15, 2003 BY /s/ Robert J. Hugin
---------------- ---------------------------------------
Robert J. Hugin
Senior Vice President
Chief Financial Officer
DATE May 15, 2003 BY /s/ James R. Swenson
---------------- ---------------------------------------
James R. Swenson
Controller
(Chief Accounting Officer)
23
Certifications
I, John W. Jackson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Celgene
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly 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 quarterly 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: May 15, 2003
------------
/s/ John W. Jackson
-------------------
John W. Jackson
Chairman of the Board
Chief Executive Officer
24
I, Robert J. Hugin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Celgene
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly 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
quarterly 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: May 15, 2003
------------
/s/ Robert J. Hugin
-------------------
Robert J. Hugin
Chief Financial Officer
25