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 September 30, 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 (Zip Code)
offices)
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 November 12, 2003, 81,237,320 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 Statements of Operations
- Three and Nine Month Periods Ended September 30, 3
2003 and 2002
Consolidated Balance Sheets
as of September 30, 2003 and December 31, 2002 4
Consolidated Statements of Cash Flows
- Nine Month Periods Ended September 30, 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 18
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 28
Item 4 Controls and Procedures 29
PART II OTHER INFORMATION 30
Item 6 (a) Exhibits 30
(b) Reports on Form 8-K 30
Signatures 31
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
THREE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUE:
PRODUCT SALES $ 65,587 $ 30,896 $ 173,888 $ 88,893
COLLABORATIVE AGREEMENTS AND OTHER REVENUE 6,066 1,556 9,453 6,442
ROYALTY REVENUE 2,679 1,806 7,366 3,238
------------ ------------ ------------ ------------
TOTAL REVENUE 74,332 34,258 190,707 98,573
------------ ------------ ------------ ------------
EXPENSES:
COST OF GOODS SOLD 13,639 4,429 29,909 12,203
RESEARCH AND DEVELOPMENT 33,270 20,549 89,095 57,584
SELLING, GENERAL AND ADMINISTRATIVE 26,517 15,738 75,229 50,154
------------ ------------ ------------ ------------
TOTAL EXPENSES 73,426 40,716 194,233 119,941
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 906 (6,458) (3,526) (21,368)
OTHER INCOME AND EXPENSE:
INTEREST AND OTHER INCOME 6,439 5,432 15,654 17,820
INTEREST EXPENSE 2,674 11 3,266 26
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES 4,671 (1,037) 8,862 (3,574)
INCOME TAXES 378 -- 723 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 4,293 $ (1,037) $ 8,139 $ (3,574)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ 0.05 $ (0.01) $ 0.10 $ (0.05)
============ ============ ============ ============
DILUTED $ 0.05 $ (0.01) $ 0.10 $ (0.05)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK UTILIZED TO CALCULATE NET
INCOME (LOSS) PER COMMON SHARE:
BASIC 81,047,000 78,583,000 80,760,000 76,872,000
============ ============ ============ ============
DILUTED 86,329,000 78,583,000 85,214,000 76,872,000
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 313,195 $ 85,475
MARKETABLE SECURITIES AVAILABLE FOR SALE 347,680 175,707
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE OF $1,225 AND $1,020
AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2002, RESPECTIVELY 29,924 17,659
INVENTORY 8,426 4,806
OTHER CURRENT ASSETS 13,181 12,449
------------ ------------
TOTAL CURRENT ASSETS 712,406 296,096
PLANT AND EQUIPMENT, NET 22,341 19,600
INTANGIBLE ASSETS, NET 2,774 3,010
GOODWILL 2,771 2,973
OTHER ASSETS 32,639 5,608
------------ ------------
TOTAL ASSETS $ 772,931 $ 327,287
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 16,633 $ 16,516
ACCRUED EXPENSES 45,609 26,976
CURRENT PORTION OF DEFERRED REVENUE 688 109
CURRENT PORTION OF CAPITAL LEASES AND NOTE OBLIGATION 52 86
OTHER CURRENT LIABILITIES 1,433 599
------------ ------------
TOTAL CURRENT LIABILITIES 64,415 44,286
LONG TERM CONVERTIBLE NOTE 400,000 --
DEFERRED REVENUE,NET OF CURRENT PORTION 1,005 1,390
CAPITALIZED LEASES AND NOTE OBLIGATION, NET OF CURRENT PORTION 96 40
OTHER NON-CURRENT LIABILITIES 7,088 4,873
------------ ------------
TOTAL LIABILITIES 472,604 50,589
------------ ------------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $.01 PAR VALUE PER SHARE,
5,000,000 AUTHORIZED; NONE OUTSTANDING AT
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002 -- --
COMMON STOCK, $.01 PAR VALUE PER SHARE
120,000,000 SHARES AUTHORIZED;
ISSUED AND OUTSTANDING 81,186,051 AND 80,176,713 SHARES
AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2002, RESPECTIVELY 812 802
ADDITIONAL PAID-IN CAPITAL 604,654 591,277
ACCUMULATED DEFICIT (314,228) (322,367)
NOTES RECEIVABLE FROM STOCKHOLDERS -- (42)
ACCUMULATED OTHER COMPREHENSIVE INCOME 9,089 7,028
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 300,327 276,698
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 772,931 $ 327,287
============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
NINE MONTH PERIOD ENDED
SEPTEMBER 30,
2003 2002
------------ ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 8,139 $ (3,574)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION OF LONG-TERM ASSETS 6,142 4,808
RECOVERY FOR ACCOUNTS RECEIVABLE ALLOWANCES (34) (1)
REALIZED GAIN ON MARKETABLE SECURITIES AVAILABLE
FOR SALE (6,096) (4,284)
NON-CASH STOCK-BASED COMPENSATION 593 1,375
AMORTIZATION OF PREMIUM/DISCOUNT ON MARKETABLE
SECURITIES AVAILABLE FOR SALE, NET 312 303
AMORTIZATION OF DEBT ISSUANCE COST 812 --
SHARES ISSUED FOR EMPLOYEE BENEFIT PLANS 2,775 966
CHANGE IN CURRENT ASSETS AND LIABILITIES:
INCREASE IN ACCOUNTS RECEIVABLE (12,231) (177)
INCREASE IN INVENTORY (3,620) (1,770)
INCREASE IN OTHER OPERATING ASSETS (5,115) (3,409)
INCREASE IN ACCOUNTS PAYABLE AND
ACCRUED EXPENSES 22,002 1,514
INCREASE (DECREASE) IN DEFERRED REVENUE 193 (3,431)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 13,872 (7,680)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (7,783) (9,446)
INVESTMENT IN CONVERTIBLE NOTES (12,000) --
INCREASE IN NOTES RECEIVABLE -- (8,500)
PROCEEDS FROM SALES AND MATURITIES OF MARKETABLE
SECURITIES AVAILABLE FOR SALE 91,702 116,385
PURCHASES OF MARKETABLE SECURITIES
AVAILABLE FOR SALE (255,831) (40,116)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (183,912) 58,323
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM EXERCISE OF COMMON STOCK
OPTIONS AND WARRANTS 10,018 3,411
PROCEEDS FROM CONVERTIBLE NOTE 400,000 --
DEBT ISSUANCE COST (12,212) --
PROCEEDS FROM NOTES RECEIVABLE FROM STOCKHOLDERS 42 --
REPURCHASE OF EMPLOYEE STOCK OPTIONS -- (2)
REPAYMENT OF CAPITAL LEASE AND NOTE OBLIGATIONS (88) (542)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 397,760 2,867
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 227,720 53,510
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 85,475 47,141
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 313,195 $ 100,651
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(THOUSANDS OF DOLLARS)
NINE MONTH PERIOD ENDED
SEPTEMBER 30,
2003 2002
--------------- -------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITY:
CHANGE IN NET UNREALIZED GAIN(LOSS) ON
MARKETABLE SECURITIES AVAILABLE FOR SALE $ 2,061 $ (2,319)
============= ============
CONVERSION OF CONVERTIBLE NOTES $ -- $ 11,714
============= ============
EQUIPMENT ACQUISITIONS ON CAPITAL LEASES $ 110 $ --
============= ============
DEFERRED COMPENSATION RELATING TO STOCK OPTIONS $ -- $ 294
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
INTEREST PAID $ 123 $ 26
============= ============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
1. Organization and Basis of Presentation
--------------------------------------
Celgene Corporation and subsidiaries ("Celgene" or the "Company") is
an integrated biopharmaceutical company engaged primarily in the discovery,
development and commercialization of novel therapies for the treatment of cancer
and inflammatory diseases through gene and protein regulation.
The unaudited consolidated financial statements included herein have
been prepared from the books and records of the Company pursuant to the rules
and regulations of the Securities and Exchange Commission for reporting on Form
10-Q. Certain information and footnote disclosures normally included in complete
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. 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.
Interim results may not be indicative of the results that may be
expected for the year. In the opinion of management, all adjustments considered
necessary for a fair presentation of these interim statements have been included
and are of a normal and recurring nature.
2. Earnings Per Share
------------------
Basic earnings per common share is computed by dividing net income
available to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per common share is computed by
dividing net income available to common stockholders by the weighted-average
number of common shares outstanding during the period increased to include all
additional common shares that would have been outstanding assuming potentially
dilutive common shares had been issued and any proceeds thereof used to
repurchase common stock at the average market price during the period. The
proceeds used to repurchase common stock are assumed to be the sum of the amount
to be paid to the Company upon exercise of options, the amount of compensation
cost attributed to future services and not yet recognized and, if applicable,
the amount of income taxes that would be credited to or deducted from capital
upon exercise.
The assumed conversion of all potentially dilutive common shares is not
included in the diluted loss per share computation for the three and nine month
periods ended September 30, 2002, since the Company recognized a net loss for
those periods and including potentially dilutive common shares in the diluted
earnings per share computation when there is a net loss will result in an
anti-dilutive per share amount. The potential common shares related to the
convertible notes issued June 3, 2003 (see Note 5) were anti-dilutive and were
excluded from the diluted earnings per share computation for the three and nine
month periods ended September 30, 2003.
At September 30, 2003 and 2002, there were an aggregate of 11,132,159
and 9,768,103 potential common shares, respectively, excluded from the diluted
earnings per share computation because their inclusion would have had an
anti-dilutive effect on earnings (loss) per share.
7
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
The following represents the weighted average number of common shares
outstanding used in the basic and diluted earnings (loss) per share calculation
for the three and nine month periods ended September 30, 2003 and 2002:
Three month period ended
September 30, 2003 September 30, 2002
------------------ ------------------
Weighted average number of shares of common stock
outstanding - basic 81,047,000 78,583,000
Effect of dilutive securities:
- ------------------------------
Assumed exercise of stock options,
warrants and restricted stock 5,282,000 --
---------- ----------
Weighted average number of shares of common stock and
dilutive potential common stock outstanding 86,329,000 78,583,000
========== ==========
Nine month period ended
September 30, 2003 September 30, 2002
------------------ ------------------
Weighted average number of shares of common stock
outstanding - basic 80,760,000 76,872,000
Effect of dilutive securities:
- ------------------------------
Assumed exercise of stock options,
warrants and restricted stock 4,454,000 --
---------- ----------
Weighted average number of shares of common stock and
dilutive potential common stock outstanding 85,214,000 76,872,000
========== ==========
3. New Accounting Pronouncement
----------------------------
In May 2003, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables" ("EITF 00-21"). EITF 00-21 provides guidance on how to determine
when an arrangement that involves multiple revenue-generating activities or
deliverables should be divided into separate units of accounting for revenue
recognition purposes, and if this division is required, how the arrangement
consideration should be allocated among the separate units of accounting. The
guidance in the consensus is effective for revenue arrangements entered into in
quarters beginning after June 15, 2003. The adoption of EITF 00-21 did not
impact the Company's consolidated financial position or results of operations,
but could affect the timing or pattern of revenue recognition for future
collaborative research and/or license agreements.
8
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
4. Anthrogenesis Acquisition
-------------------------
On December 31, 2002, the Company completed the acquisition of
Anthrogenesis Corp., which now operates as Celgene Cellular Therapeutics, 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.
The following unaudited pro forma information presents a summary of
consolidated results of operations for the three and nine month periods ended
September 30, 2002 as if the acquisition of Anthrogenesis had occurred on
January 1, 2002. The unaudited pro forma net loss and net loss per share amounts
for the nine month period ended September 30, 2002 include a charge for
in-process research and development of approximately $55.7 million, which was
expensed at the acquisition date, and the pro forma amounts for the three and
nine month periods ended September 30, 2002 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 and nine month periods ended
September 30, 2002 and have been adjusted, where appropriate, to present their
financial position and results of operations in accordance with accounting
principles generally accepted in the United States.
Pro Forma Pro Forma
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
--------------------- ---------------------
Total revenues $35,052 $100,466
Net (loss) ($ 2,573) ($65,224)
Net (loss) per share $ (0.03) $ (0.85)
5. Convertible Notes
-----------------
On June 3, 2003, the Company issued $400 million of unsecured
convertible notes to institutional investors. The notes have a five-year term
and a coupon rate of 1.75% payable semi-annually commencing December 1, 2003.
The notes have a conversion rate of $48.45 per share, which represents a 50%
premium to the closing price of the Company's common stock
9
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
on May 28, 2003. The debt issuance costs related to these notes, which totaled
approximately $12.2 million, are classified under "Other Assets" on the
Consolidated Balance Sheet and are being amortized over five years. Under the
terms of the Purchase Agreement, the note holders can convert the notes into
8,255,920 common shares at any time at the conversion price, and also have the
right to require the Company to redeem the notes prior to maturity in the event
of a "fundamental change", as defined within the Agreement. The Company is
required to register the notes and common stock issuable upon conversion with
the Securities and Exchange Commission, and to use reasonable best efforts to
keep it effective for the defined period. The Company may not merge or transfer
substantially all assets, as defined, unless certain conditions are met.
6. 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 September 30, 2003 and December 31, 2002 were as follows:
Gross Gross Estimated
September 30, 2003 Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------------- ---------------- -------------------- -------------------
Government agency mortgage
obligations $ 200,623 $ 1,722 $ (281) $ 202,064
Government agency bonds 150 -- -- 150
Corporate debt
securities 137,818 8,066 (418) 145,466
---------------- ---------------- -------------------- -------------------
Total $ 338,591 $ 9,788 $ (699) $ 347,680
================ ================ ==================== ===================
Gross Gross Estimated
December 31, 2002 Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
-------------- -------------- ----------------- ----------------
Government agency bonds and notes $ 704 $ 7 $ -- $ 711
Corporate debt
securities 167,975 9,429 (2,408) 174,996
-------------- -------------- ----------------- ----------------
Total $ 168,679 $ 9,436 $ (2,408) $ 175,707
============== ============== ================= ================
7. Inventory
---------
Inventory consisted of the following:
September 30, December 31,
2003 2002
----------------- ------------------
Raw materials $2,918 $2,681
Work in process 1,479 555
Finished goods 4,029 1,570
----------------- ------------------
Total $8,426 $4,806
================= ==================
10
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
8. Stock Based Compensation
------------------------
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, in accounting for its fixed
stock option plans. As such, compensation expense is recorded on the date of
grant only if the current market price of the Company's stock exceeds the
exercise price. Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") as amended, establishes
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As permitted under SFAS
123, the Company has elected to continue applying the intrinsic value-based
method of accounting described above, and has adopted the disclosure
requirements of SFAS 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 such amounts to
expense over the vesting period of the options. Options or stock awards issued
to non-employees and consultants are recorded at fair value as determined in
accordance with SFAS 123 and EITF Issue 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 expensed over the related
vesting period.
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 123 had
been applied:
Three Month Period Ended
September 30,
2003 2002
-------------- ------------
Net income (loss) applicable to common stockholders:
As reported $ 4,293 $ (1,037)
Add stock-based employee compensation
expense included in reported net income
(loss) 63 374
Deduct total stock-based employee
compensation expense determined under
fair-value-based method for all awards (4,873) (4,754)
-------------- --------------
Pro forma $ (517) $ (5,417)
============== ==============
Net income(loss) per common share:
Basic, as reported $ 0.05 $ (0.01)
Basic, pro forma $ (0.01) $ (0.06)
Diluted, as reported $ 0.05 $ (0.01)
Diluted, pro forma $ (0.01) $ (0.06)
11
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
Nine Month Period Ended
September 30,
2003 2002
------------- --------------
Net income (loss) applicable to common stockholders:
As reported $ 8,139 $ (3,574)
Add stock-based employee compensation
expense included in reported net income
(loss) 187 1,288
Deduct total stock-based employee
compensation expense determined under
fair-value-based method for all awards (13,812) (15,296)
------------- --------------
Pro forma $ (5,486) $ (17,582)
============= ==============
Net income(loss) per common share
Basic, as reported $ 0.10 $ (0.05)
Basic, pro forma $ (0.07) $ (0.23)
Diluted, as reported $ 0.10 $ (0.05)
Diluted, pro forma $ (0.07) $ (0.23)
The pro forma effects on net income (loss) per common share for the
periods ended September 30, 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 $10.39 and $8.13 for
stock options granted in the nine month periods ended September 30, 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:
Three Month Period Ended
September 30,
2003 2002
----------------- --------------
Risk-free interest rate 2.10% 2.14%
Expected stock price volatility 42% 58%
Expected term until exercise (years) 3.1 3.2
Expected dividend yield 0% 0%
Nine Month Period Ended
September 30,
2003 2002
----------------- --------------
Risk-free interest rate 2.00% 2.02%
Expected stock price volatility 45% 58%
Expected term until exercise (years) 2.8 2.9
Expected dividend yield 0% 0%
12
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
9. Intangible Assets
-----------------
The Company's intangible assets relate to its December 31, 2002
acquisition of Anthrogenesis Corporation (see Note 3), and are amortized over
their estimated useful lives. The gross carrying amount and accumulated
amortization, by major intangible asset class at September 30, 2003 was as
follows:
Gross Intangible
carrying Accumulated assets,
amount amortization net
---------------- ------------------ ------------------
Supplier relationships $ 710 $ 106 $ 604
Customer lists 1,700 85 1,615
Technology 600 45 555
---------------- ------------------ ------------------
Total $ 3,010 $ 236 $ 2,774
================ ================== ==================
Amortization of acquisition intangibles for the three and nine month
periods ended September 30, 2003 was $79 and $237, respectively. Assuming no
changes in the gross carrying amount of intangible assets, the amortization of
intangible assets for the next five fiscal years is estimated to be
approximately $315 per year.
The amount assigned to goodwill in connection with the Anthrogenesis
acquisition was initially recorded at $2,973. Since the acquisition, goodwill
has decreased to $2,771 due to adjustments made to the estimated liabilities
assumed. Additional adjustments to the purchase price allocation, including
estimated assumed liabilities, may still be required. Goodwill has been
allocated to the Company's Stem Cell Therapy segment and in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets," is not amortized, but rather is
reviewed at least annually for impairment.
13
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
10. Comprehensive Income(Loss)
--------------------------
The components of comprehensive income, which represents the change
in equity from non-owner sources, for the three and nine month periods ended
September 30, 2003 and 2002 were as follows:
Three Month Period Ended
September 30,
-------------------------------------
2003 2002
-------------------------------------
Net income (loss) $ 4,293 $(1,037)
Other comprehensive income (loss):
Change in net unrealized gains on
available-for-sale investments 1,405 6,287
Less: reclassification adjustment
for gains included in net
income(loss) (1,851) (1,506)
--------------- ---------------
Net unrealized income(loss) on
available-for-sale investments (446) 4,781
--------------- ---------------
Total comprehensive income $ 3,847 $ 3,744
=============== ===============
Nine Month Period Ended
September 30,
-------------------------------------
2003 2002
-------------------------------------
Net income (loss) $ 8,139 $ (3,574)
Other comprehensive income (loss):
Change in net unrealized gains on
available-for-sale investments 8,157 1,965
Less: reclassification adjustment
for gains included in net
income(loss) (6,096) (4,284)
--------------- ---------------
Net unrealized income(loss) on
available-for-sale investments 2,061 (2,319)
--------------- ---------------
Total comprehensive income(loss) $ 10,200 $ (5,893)
=============== ===============
11. 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 was being amortized over the vesting period of the options, and as
of December 31, 2002, the Company had
14
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
recorded as expense or reversed the full amount of the $9.4 million of deferred
compensation. Approximately $311 and $1,100 of expense was recorded during the
three and nine month periods ended September 30, 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 December 2002.
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 $188 and $74 for the three month
periods ended September 30, 2003 and 2002, respectively and approximately $406
and $87 for the nine month periods ended September 30, 2003 and 2002,
respectively.
Stock Incentive Plan
At the Company's Annual Meeting of Stockholders on June 10, 2003, the
stockholders of the Company approved an amendment to the 1998 Stock Incentive
Plan (known prior to April 23, 2003 as the 1998 Long-Term Incentive Plan) to
increase the number of shares that may be subject to awards granted thereunder
from 8,500,000 to 12,500,000 and to authorize the award of certain
performance-based awards.
Rights Plan
On August 13, 2003, the Company amended the Rights Agreement, dated
September 16, 1996, as amended, to permit a qualified institutional investor to
beneficially own up to 17% of the Company's common stock outstanding without
being deemed an Acquiring Person, if such institutional investor meets certain
requirements.
12. Segments
--------
Effective with the acquisition of Anthrogenesis on December 31, 2002,
the Company operates in two business segments - human pharmaceuticals and stem
cell therapies. Expenses incurred at the consolidated level are included in
the results of the human pharmaceuticals segment. Revenues and income (loss)
before taxes by segment for the three and nine months ended September 30, 2003
were as follows:
Three Months Nine Months
Ended Ended
September 30, 2003 September 30, 2003
---------------------- ----------------------
Revenues:
---------
Human pharmaceuticals $ 73,827 $ 188,157
Stem cell therapies 505 2,550
---------------------- ----------------------
Total $ 74,332 $ 190,707
====================== ======================
Income(loss)before taxes:
-------------------------
Human pharmaceuticals $ 9,477 $ 19,701
Stem cell therapies (4,806) (10,839)
---------------------- ----------------------
Total $ 4,671 $ 8,862
====================== ======================
15
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
13. 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 purchases Alkeran
tablets and Alkeran for injection from GSK and sells and distributes 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, which
aggregates $56.6 million over such period.
14. Pharmion Agreements
-------------------
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. 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, four quarterly
installments of $750,000 each in 2004 and four quarterly installments of
$500,000 each in 2005. The Company received the first two installments totaling
$2 million, which was recognized as collaborative agreement revenue.
In April, 2003, the Company entered into a Securities Purchase
Agreement with Pharmion Corporation whereby Celgene purchased for $12 million a
Senior Convertible Promissory Note (the "Note") with a principal amount of $12
million, and a warrant with a five year term to purchase up to 363,636 shares of
Pharmion's common stock at a purchase price of $11.00 per share, adjusted for
Pharmion's recent four-for-one reverse stock split. 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 $11.00 per share of Common Stock and is automatically
convertible into common stock under certain conditions. The Note is classified
under "Other Assets" in the Company's balance sheet.
15. Termination Agreement
---------------------
In October 2002, the Company entered into an agreement with Cell
Pathways, Inc. for the co-promotion of GelclairTM, primarily in the U.S.
oncology market. Subsequently, on June 12, 2003, the Company entered into an
agreement with OSI Pharmaceuticals Inc., which acquired Cell Pathways, Inc. in
June 2003, to terminate the aforementioned agreement. The effective date of the
termination agreement is July 1, 2003 and under that agreement, the Company
received $3.0 million in July 2003, upon the transfer of promotional materials
as specified in the agreement, and will receive an additional $3.0 million on
the first anniversary of the effective date assuming the Company successfully
provides the transitional
16
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(Thousands of dollars, except share and per share amounts,
unless otherwise indicated)
services through December 31, 2003, as defined in the agreement. The aggregate
revenue of $6.0 million is being recognized as collaborative agreement revenue
on a straight-line basis over the six-month service period ending December 31,
2003. Under the agreement, the Company may also receive a milestone payment upon
the achievement of a specified amount of Gelclair net sales.
17
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 September 30, 2003 vs.
Three month period ended September 30, 2002
- -------------------------------------------
Total revenue: Total revenue for the three month period ended September
30, 2003 increased approximately 117% to $74.3 million compared with $34.3
million in the same period of 2002. Total revenue in the 2003 period consisted
of: product sales of approximately $65.6 million, which included THALOMID(R)
sales of $57.6 million, Alkeran(R) sales of $6.8 million and Focalin(TM) sales
of $1.2 million, collaborative agreements and other revenue of approximately
$6.1 million and Ritalin(R) product royalties of approximately $2.7 million.
This compares with product sales of $30.9 million, which included THALOMID sales
of approximately $30.5 million, Focalin sales of approximately $0.4 million,
collaborative agreements and other revenue of approximately $1.6 million and
Ritalin product royalties of approximately $1.8 million in the 2002 period.
THALOMID sales increased approximately 89% due to the combination of price
increases, increasing use by oncologists in the treatment of various types of
cancer, especially first line use in multiple myeloma, and the market
introduction of two new higher strength formulations during the first half of
2003. The Alkeran supply and distribution agreement with GlaxoSmithKline was
executed on March 31, 2003 and sales of Alkeran began during the second quarter
of 2003. Consequently, sales for this product are reflected only in the 2003
period. Focalin sales were higher in the 2003 period due to the timing of
shipments to Novartis for their commercial distribution.
Collaborative agreements and other revenue for the three month period
ended September 30, 2003 included $3.0 million related to the agreement to
terminate the Gelclair co-promotion agreement between OSI Pharmaceuticals Inc.
and Celgene, $1.3 million of research and license funding received in connection
with the Pharmion collaboration agreements, $1.3 million of reimbursements from
Novartis for shipments of bulk raw material used in the formulation of Focalin
LA and utilized in clinical studies conducted by Novartis and about $0.4 million
of revenue from the Stem Cell Therapies segment, which became effective with the
acquisition of Anthrogenesis on December 31, 2002. The 2002 period included
about $1.3 million of revenue from the up-front payment received from Novartis
Pharma AG in connection with the SERM license agreement. The increase in royalty
revenue was due to higher Ritalin(R) LA sales in the 2003 period, accentuated by
an increase in the royalty rate.
Cost of goods sold: Cost of goods sold were approximately $13.6 million
for the three month period ended September 30, 2003, compared
18
with approximately $4.4 million in the same period of 2002. The increase of $9.2
million, or 208% was primarily due to increased sales volumes of THALOMID during
2003, the introduction of Alkeran in 2003 and to a lesser extent, higher Focalin
sales. Cost of goods sold, as a percentage of product sales was approximately
21% for the three month period ended September 30, 2003, compared with
approximately 14% in the 2002 period. The increase was primarily due to the
introduction of Alkeran, which has a much higher cost structure than THALOMID
and to a lesser extent, higher Focalin sales, which also has a higher cost
structure than THALOMID. Partially offsetting these increases were higher profit
margins on THALOMID sales in 2003 due to price increases initiated during the
year. Focalin actual cost of goods sold were lower than the standard cost for
both the 2003 and 2002 periods as some manufacturing costs incurred prior to
Focalin's approval in November 2001 were expensed as research and development
expenses. Focalin actual costs will continue to be lower than standard costs
until the product previously expensed is completely sold.
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 three
month period ended September 30, 2003 increased 62% to approximately $33.3
million from $20.5 million in the 2002 period. During the 2003 period,
approximately $22.7 million was spent on THALOMID and its follow on compounds,
the IMiDs(R) and SeLCIDs(TM), primarily for preclinical toxicology, phase I/II
and phase III clinical trials and regulatory expenses, approximately $9.1
million was spent in gene regulation, target and drug discovery and
agro-chemical programs, and approximately $1.5 million was spent on programs
within the Stem Cell Therapies segment, primarily for internal headcount related
personnel expenses, laboratory supplies and product development costs. As a
percent of total revenue, research and development expenses were about 45% and
60% for the three month periods ended September 30, 2003 and 2002, respectively.
As total revenue increases, research and development expense may continue to
decrease as a percent of total revenue, however the actual dollar amount will
continue to increase as earlier stage compounds are moved through the
preclinical and clinical stages. Generally, the time to completion is estimated
as follows:
Phase I ----- 1-2 years
Phase II ---- 2-3 years
Phase III --- 2-3 years
Moreover, due to the significant risk factors and uncertainties
inherent in preclinical tests and clinical trials associated with each of our
research and development projects, the cost to complete such
19
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 to bring a
project to completion.
Selling, general and administrative expenses: In general, 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,
insurance, audit, tax and investor activities and allocations of facilities
costs, principally for rent, utilities and property taxes. Selling, general and
administrative expenses for the three month period ended September 30, 2003,
were approximately $26.5 million, compared with $15.7 million in the same period
of 2002. The increase of $10.8 million, or about 68% was primarily due to
expenses of approximately $3.8 million within the Stem Cell Therapies segment,
which did not exist in the 2002 period, an increase of approximately $2.6
million in commercial expenses related to the expansion of the sales and
marketing organization and an increase in customer service staff and an increase
of approximately $2.9 million in general administrative and medical affairs
expenses. As a percent of total revenue, selling, general and administrative
expenses decreased from approximately 46% in the 2002 period to approximately
36% in the 2003 period.
Interest and other income: Interest and other income was $6.4 million
for the three month period ended September 30, 2003, compared with $5.4 million
in the same period of 2002. The increase was due to higher interest income as a
result of higher average balances of cash, cash equivalents and marketable
securities. Also, realized gains on marketable securities were $0.3 million
higher in the 2003 period. Partially offsetting these increases was the impact
of lower interest rates in 2003. The increase in cash, cash equivalents and
marketable securities average balances was primarily due to the $400 million
convertible notes issuance on June 3, 2003.
Interest expense was approximately $2.7 million for the three month
period ended September 30, 2003 and reflects interest on the $400 million
convertible notes issued on June 3, 2003. Interest expense for the 2002 period
was immaterial.
Net income (loss): Net income for the three month period ended
September 30, 2003 was $4.3 million, or $0.05 per diluted share, compared with a
net loss of $1.0 million, or $(0.01) per diluted share for the same period of
2002. The increase was primarily due to an increase in total revenues of
approximately $40.1 million, lead by an increase in THALOMID sales of $27.1
million and first-time Alkeran sales of $6.8 million, offset by an increase in
operating costs and
20
expenses of approximately $32.7 million, a decrease in other income and expense
of approximately $1.7 million and an income taxes provision of $0.4, which was
recorded in the 2003 period.
Nine month period ended September 30, 2003 vs.
Nine month period ended September 30, 2002
- ------------------------------------------
Total revenue: Total revenue for the nine month period ended September
30, 2003 increased approximately 93% to $190.7 million compared with $98.6
million in the same period of 2002. Total revenue in 2003 period consisted of:
product sales of approximately $173.9 million, which included THALOMID sales of
$158.1 million, Alkeran sales of $12.8 million and Focalin sales of $2.5
million, collaborative agreements and other revenue of approximately $9.5
million and Ritalin product royalties of approximately $7.4 million. This
compares with product sales of $88.9 million, which included THALOMID sales of
approximately $85.1 million and Focalin sales of approximately $3.8 million,
collaborative agreements and other revenue of approximately $6.4 million and
Ritalin product royalties of approximately $3.2 million in the 2002 period.
THALOMID sales increased approximately 86% due to the combination of price
increases, increasing use by oncologists in the treatment of various types of
cancer, especially first line use in multiple myeloma, and the market
introduction of two new higher strength formulations during the first half of
2003. The Alkeran supply and distribution agreement with GlaxoSmithKline was
executed on March 31, 2003 and sales of Alkeran began during the second quarter
of 2003. Consequently, sales for this product are reflected only in the 2003
period. Focalin sales were lower in the 2003 period due to the timing of
shipments to Novartis for their commercial distribution.
Collaborative agreements and other revenue for the nine month period
ended September 30, 2003 included $3.0 million related to the agreement to
terminate the Gelclair co-promotion agreement between OSI Pharmaceuticals Inc.
and Celgene, $2.9 million of research and license funding received in connection
with the Pharmion collaboration agreements, $1.3 million of reimbursements from
Novartis for shipments of bulk raw material used in the formulation of Focalin
LA and utilized in clinical studies conducted by Novartis and about $2.1 million
of revenue from the Stem Cell Therapies segment, which became effective with the
acquisition of Anthrogenesis on December 31, 2002. The 2002 period included
about $4.8 million of revenue from up-front and milestone payments received from
Novartis Pharma AG in connection with the SERM license agreement, $0.9 million
of license revenue from Pharmion and $0.5 million of certain other milestone
payments. The increase in royalty revenue was due to higher Ritalin LA sales in
the 2003 period, accentuated by an increase in the royalty rate.
Cost of goods sold: Cost of goods sold were approximately $29.9 million
for the nine month period ended September 30, 2003, compared
21
with approximately $12.2 million in the same period of 2002. The increase of
$17.7 million, or 145% was primarily due to increased sales volumes of THALOMID
during 2003 and the introduction of Alkeran in 2003, partially offset by lower
Focalin sales. Cost of goods sold, as a percentage of product sales was
approximately 17% for the nine month period ended September 30, 2003, compared
with approximately 14% in the 2002 period. The increase was primarily due to the
introduction of Alkeran, which has a much higher cost structure than THALOMID,
partially offset by higher profit margins on THALOMID sales in 2003 due to price
increases initiated during the year and by higher 2002 sales of Focalin, which
also has a higher cost structure than THALOMID. Focalin actual cost of goods
sold were lower than the standard cost for both the 2003 and 2002 periods as
some manufacturing costs incurred prior to Focalin's approval in November 2001
were expensed as research and development expenses. Focalin actual costs will
continue to be lower than standard costs until the product previously expensed
is completely sold.
Research and development expenses: Research and development expenses
for the nine month period ended September 30, 2003 increased approximately 55%
to $89.1 million from $57.6 million in the 2002 period. The increase was due to
the initiation of several large studies related to our clinical programs in the
second half of 2002. During the 2003 period, approximately $57.6 million was
spent on THALOMID and its follow on compounds, the IMiDs and SelCIDs, and
Focalin, primarily for preclinical toxicology, phase I/II and phase III clinical
trials and regulatory expenses, approximately $27.8 million was spent in gene
regulation, target and drug discovery and agro-chemical programs, and
approximately $3.7 million was spent on programs within the Stem Cell Therapies
segment, primarily for internal headcount related expenses, laboratory supplies
and product development costs. As a percent of total revenue, research and
development expenses were approximately 47% and 58% for the nine month periods
ended September 30, 2003 and 2002, respectively. As total revenue increases,
research and development expense may continue to decrease as a percent of total
revenue, however the actual dollar amount will continue to increase as earlier
stage compounds are moved through the preclinical and clinical stages.
Selling, general and administrative expenses: Selling, general and
administrative expenses for the nine month period ended September 30, 2003, were
approximately $75.2 million, compared with approximately $50.1 million in the
same period of 2002. The increase of $25.1 million, or about 50% was primarily
due to expenses of approximately $9.6 million within the Stem Cell Therapies
segment, which did not exist in the 2002 period, an increase of approximately
$7.4 million in commercial expenses related to the expansion of the sales and
marketing organization and an increase in customer service staff and an increase
of approximately $7.6 million in general administrative and medical affairs
expenses. As a percent of total revenue, selling, general and administrative
expenses decreased from
22
approximately 51% in the 2002 period to approximately 39% in the 2003 period.
Interest and other income: Interest and other income was $15.7 million
for the nine month period ended September 30, 2003, compared with $17.8 million
in the same period of 2002. The decrease was primarily due to lower interest
income as a result of lower interest rates in 2003 and lower average balances of
cash, cash equivalents and marketable securities, partially offset by an
increase of $1.8 million in realized gains on marketable securities.
Interest expense: Interest expense was approximately $3.3 million for
the nine month period ended September 30, 2003 and reflects interest on the $400
million convertible notes issued on June 3, 2003. Interest expense for the 2002
period was immaterial.
Net income (loss): Net income for the nine month period ended September
30, 2003 was $8.1 million, or $0.10 per diluted share, compared with a net loss
of $3.6 million, or $(0.05) per diluted share for the same period of 2002. The
increase was primarily due to an increase in total revenues of approximately
$92.1 million, lead by an increase in THALOMID sales of $73.0 million and
first-time Alkeran sales of $12.8 million, offset by an increase in operating
costs and expenses of approximately $74.3 million, a decrease in other income
and expense of approximately $5.4 million and an income taxes provision of $0.7,
which was recorded in the 2003 period.
Liquidity and Capital Resources
- -------------------------------
Since the Company's inception, working capital requirements have been
financed primarily through product sales, private and public sales of debt and
equity securities, income earned on the investment of such securities and
revenue from research contracts and license and milestone payments. Since its
initial product launch in the third quarter of 1998, the Company has recorded
net product sales totaling approximately $470.5 million through September 30,
2003. On June 3, 2003, the Company issued convertible notes to institutional
investors in the amount of $400.0 million. Proceeds to the Company from the
transaction, net of debt issuance costs, were approximately $387.8 million.
Net working capital, (i.e., current assets minus current liabilities)
at September 30, 2003 increased approximately 157% to $648.0 million from $251.8
million at December 31, 2002. The increase was primarily due to higher total
cash, cash equivalents and marketable securities balances, as well as increases
in both inventory, with the addition of Alkeran, and trade receivables, due to
the increase in THALOMID sales, partially offset by an increase in accrued
expenses.
23
Cash and cash equivalents increased to $313.2 million at September 30,
2003 from $85.5 million at December 31, 2002 and investments in marketable
securities available for sale increased to $347.7 million at September 30, 2003,
from $175.7 million at December 31, 2002. The increase in cash, cash equivalents
and marketable securities was primarily due to the net proceeds of $387.8
million received in connection with the $400 million convertible note offering
on June 3, 2003.
The Company expects the rate of spending to increase as a 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 and increased capital investments. Existing
cash and cash equivalents and marketable securities available for sale, combined
with increasing THALOMID product sales, the introduction of Alkeran and various
research agreements and collaborations are expected to provide sufficient
capital for our operations for the foreseeable future.
Contractual Obligations
- -----------------------
The Company's major outstanding contractual obligations relate
primarily to its convertible note obligation, operating (facilities) leases and
Alkeran purchase commitments.
On June 3, 2003, the Company issued to institutional investors
unsecured convertible notes in the amount of $400 million. The notes have a five
year term and a coupon rate of 1.75% with interest payable on a semi-annual
basis. The notes have a conversion rate of $48.45 per share, which represents a
50% premium to the closing price of the Company's common stock on May 28, 2003.
The debt issuance costs related to these notes, which totaled approximately
$12.2 million, are classified under "Other Assets" on the Consolidated Balance
Sheet and are being amortized over five years. Under the terms of the Purchase
Agreement, the note holders can convert the notes into 8,255,920 common shares
at any time at the conversion price, and also have the right to require the
Company to redeem the notes prior to maturity in the event of a "fundamental
change", as defined within the Agreement. The Company is required to register
the notes and common stock issuable upon conversion with the Securities and
Exchange Commission, and to use reasonable best efforts to keep it effective for
the defined period. The Company may not merge or transfer substantially all
assets, as defined, unless certain conditions are met.
The Company leases a 44,500-square foot laboratory and office facility
in Warren, New Jersey, under a lease with an unaffiliated party, which has a
term ending in May 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, an 11,400-square foot facility with a term ending in June 2005 with a
five-year renewal option and a 7,200-square foot facility with a term ending in
June
24
2005 with a five-year renewal option. Monthly rental expenses for these
facilities are approximately $87,000. The Company also leases 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 March 2009 with two
five-year renewal options. Monthly rental expenses for this facility are
approximately $40,500.
The Company leases a 78,200-square foot laboratory and office facility
in San Diego, California under a lease with an unaffiliated party, which has a
term ending in August 2012. Monthly rental expenses for this facility are
approximately $172,000.
The Company had leased three other facilities in San Diego, which
covered 44,000-square feet of laboratory and office space. Those facilities were
vacated in the fourth quarter of 2002 to consolidate the Company's San Diego
operations. The leases are coterminous and end in December 2003. Upon
transferring the Company's 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. On
July 3, 2003, one of the three leases was terminated and under the remaining two
leases, the Company reimburses the landlord for taxes, insurance and operating
costs associated with the properties and has an outstanding letter of credit for
$150,000 in favor of the landlord that is fully collateralized by cash.
In connection with the December 31, 2002 acquisition of Anthrogenesis,
the Company assumed two separate leases for approximately 15,000 square feet of
office and laboratory space in Cedar Knolls, New Jersey and a lease for 11,000
square feet of laboratory space in Baton Rouge, Louisiana. Monthly rental
expense for the Cedar Knolls, New Jersey leases is approximately $10,000. Both
leases have original five year terms with one expiring in 2004 and the other
expiring in 2007, with a five year renewal option. The Baton Rouge, Louisiana
lease has a five year term with a three year renewal option. Monthly rental
expense for this facility is approximately $7,500. In May 2003, the Company
entered into a third lease in Cedar Knolls for an additional 5,300-square foot
facility for office and laboratory space which has a term ending in May 2008
with a five-year renewal option. Monthly rental expense for this facility is
approximately $7,000.
On March 31, 2003, the Company entered into a Distribution and Supply
Agreement with SmithKline Beecham Corporation, d/b/a GlaxoSmithKline ("GSK") in
which the Company has obtained the exclusive rights to market, promote, sell and
distribute GSK's Alkeran brand products approved by the FDA. Under the terms of
the agreement, the Company purchases Alkeran tablets and Alkeran for injection
from GSK and sells and distributes the products in the United States under the
Company's marketing label. Under the agreement, the Company is required to
purchase certain minimum quantities each year of the
25
initial three year term of the agreement under a take-or-pay arrangement, which
aggregates $56.6 million over such period.
Outlook
- -------
In its October 23, 2003 earnings release, the Company set forth
management's earnings estimate for full year 2003. The Company stated that,
based on strong performance during the first nine months of 2003, the Company
was increasing THALOMID revenue guidance to a range of $215 million to $220
million from its prior guidance of $200 million to $210 million. The 2003
revenue target for the Ritalin family of drugs remains at a range of $15
million, and at a range of $40 million and $60 million, in 2004 and 2005,
respectively. The Company expects 2003 research and development expenses to be
in the range of $125 million to $130 million, an increase of approximately 45%,
year-over-year, as the Company aggressively accelerates spending to support
multiple pivotal programs and multiple accelerated regulatory approval programs
for REVIMID. The earnings goal for 2003 was stated at or slightly above the high
end of the previous range of $0.10 to $0.15 per diluted share. Although
management believes that the October 23, 2003 earnings projection continues to
reflect the current thinking of management, there can be no assurance that sales
or earnings will develop in the manner projected or if the analysis, on which
the earnings projection were based, were to be redone on the date hereof that
there would be no change in the guidance.
Critical Accounting Policies
- ----------------------------
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. The Company's significant accounting policies are fully described in
Note 2 to the Consolidated Financial Statements included in the Company's 2002
Annual Report on Form 10K. The Company's critical accounting policies are
disclosed in the Management's Discussion and Analysis of Financial Condition and
Results of Operation section of the Company's 2002 Annual Report on Form 10K.
There have been no significant changes with respect to such accounting policies.
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 the Company's 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,
26
actions by the FDA and other factors detailed herein and in the Company's other
filings with the Securities and Exchange Commission.
27
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
At September 30, 2003, the Company's market risk sensitive instruments
consisted of U.S. government agency mortgage obligations, U.S. government agency
bonds and corporate debt securities, which have been classified as marketable
securities available for sale and carried at fair value. 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 and other income. The Company has not used financial
derivative instruments for investment or trading purposes.
The Company has established guidelines relative to the diversification
and maturities of investments to maintain safety and liquidity. These guidelines
are reviewed periodically and may be modified depending on market conditions.
Although investments may be subject to credit risk, the Company's Investment
Policy specifies credit quality standards for its investments and limits the
amount of credit exposure from any single issue, issuer or type of investment.
The Company's investments are also subject to interest rate risk and will
decrease in value if market interest rates increase. Due to the Company's
limited number of foreign currency transactions, foreign exchange currency risk
is minimal. The table below presents the principal amounts and related weighted
average interest rates by year of maturity for the marketable securities
portfolio at September 30, 2003:
2008 and
2003 2004 2005 2006 2007 beyond Total Fair Value
----------- ----------- ------------ ------------- ----------- -------------- ------------- -------------
(in Thousands $)
Fixed Rate $23,620 $80,220 $51,044 $104,059 $20,336 $24,737 $304,016 $323,020
Average Interest
Rate 2.27% 4.14% 6.66% 6.33% 6.27% 5.67% 5.43%
Variable Rate -- -- -- -- -- $27,150 $ 27,150 $ 24,660
Average Interest
Rate -- -- -- -- -- 7.00% 7.00%
----------- ----------- ------------ ------------- ----------- -------------- ------------- -------------
Total $23,620 $80,220 $51,044 $104,059 $20,336 $51,887 $331,166 $347,680
----------- ----------- ------------ ------------- ----------- -------------- ------------- -------------
28
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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended), based on their evaluation of these controls and
procedures as of September 30, 2003, are effective.
(b) Changes in Internal Control Over Financial Reporting. There have not
been any changes in our internal control over financial reporting
during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification by the Company's Chief Executive Officer dated
November 14, 2003.
31.2 Certification by the Company's Chief Financial Officer dated
November 14, 2003.
32.1 Certification by the Company's Chief Executive Officer pursuant
to 18 U.S.C. Section 1350 dated November 14, 2003.
32.2 Certification by the Company's Chief Financial Officer pursuant
to 18 U.S.C. Section 1350 dated November 14, 2003.
(b) Reports on Form 8-K
The Company furnished a Form 8-K, on August 4, 2003 under Item 12
thereof, which included the Company's earnings press release for
the quarter ended June 30, 2003. The information included in this
Current Report on Form 8-K shall not be deemed filed for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended,
or otherwise subject to the liabilities of that section, nor shall
it be deemed incorporated by reference in this filing.
The Company filed a Form 8-K, on August 14, 2003 under Item 5 with
respect to their Amendment No. 1 to the shareholders rights
agreement.
30
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 November 14, 2003 BY /S/Robert J. Hugin
------------------------- ---------------------------------
Robert J. Hugin
Senior Vice President
Chief Financial Officer
DATE November 14, 2003 BY /s/James R. Swenson
------------------------- ---------------------------------
James R. Swenson
Controller
(Chief Accounting Officer)
31