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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee Required) For the fiscal year ended December 31, 2003
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No Fee Required)
For the transition period from ___________ to ___________
Commission File No. 0-16132
CELGENE CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-2711928
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)
7 Powder Horn Drive
Warren, New Jersey 07059
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(Address of principal executive offices) (Zip Code)
(732) 271-1001
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in 12b-2 of the Act).
Yes X No
---
The aggregate market value of voting stock held by non-affiliates of the
registrant on June 30, 2003, the last business day of the registrant's most
recently completed second quarter, was $2,401,293,857 based on the last reported
sale price of the registrant's Common Stock on the NASDAQ National Market on
that date. There were 81,476,216 shares of Common Stock outstanding as of March
1, 2004.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
DOCUMENTS INCORPORATED BY REFERENCE
- -----------------------------------
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2003. The proxy statement is incorporated herein by reference into the following
parts of the Form 10K:
Part III, Item 10, Directors and Executive Officers of the Registrant;
Part III, Item 11, Executive Compensation;
Part III, Item 12, Security Ownership of Certain Beneficial Owners and
Management and related Stockholder Matters;
Part III, Item 13, Certain Relationships and Related Transactions;
Part III, Item 14, Principal Accountant Fees and Services.
CELGENE CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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Item No. Page
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Part I
1. Business 1
2. Properties 26
3. Legal Proceedings 26
4. Submission of Matters to a Vote of
Security Holders 26
Part II
5. Market for Registrant's Common Equity
and Related Stockholder Matters 27
6. Selected Consolidated Financial Data 29
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 30
7a. Quantitative and Qualitative Disclosures About Market Risk 42
8. Financial Statements and Supplementary Data 45
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 45
9a. Controls and Procedures 45
Part III
10. Directors and Executive Officers of the
Registrant 46
11. Executive Compensation 46
12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters 46
13. Certain Relationships and Related
Transactions 46
14. Principal Accountant Fees and Services 46
Part IV
15. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 47
Signatures 52
i
PART I
ITEM 1. BUSINESS
We are an integrated biopharmaceutical company, incorporated in 1986 as a
Delaware corporation. We are primarily engaged in the discovery, development and
commercialization of innovative therapies designed to treat cancer and
immunological diseases through regulation of cellular, genomic and proteomic
targets. We had total revenues of $271.5 million in 2003 and net income of $13.5
million. We had an accumulated deficit of $308.9 million at December 31, 2003.
On August 31, 2000, we acquired Signal Pharmaceuticals, Inc., a privately held
San Diego-based biopharmaceuticals company focused on the discovery and
development of drugs that regulate genes associated with diseases. Signal
operates as a wholly owned subsidiary. On December 31, 2002, we acquired
Anthrogenesis Corporation, a privately held New Jersey based biotherapeutics
company and cord blood banking business, which is pioneering the recovery of
stem cells from human placental tissues following the completion of full-term,
successful pregnancies. Anthrogenesis now operates as our wholly owned
subsidiary under the name Celgene Cellular Therapeutics ("CCT").
We have built a discovery, development and commercialization platform for drug
and cell-based therapies that allows us to both create and retain significant
value within our therapeutic franchise areas of cancer and immune/inflammatory
diseases. This target-to-therapeutic platform integrates both small molecule and
cell-based therapies and spans the key functions required to generate a broad,
deep and diverse pipeline of new drugs and cell therapy candidates, including:
(i) cell biology, genomics, proteomics and informatics technologies for
identifying and validating clinically important therapeutic targets; (ii) high
throughput screening systems combined with diverse and focused compound
libraries for discovering new drug leads; (iii) medicinal chemistry and
structure based drug design for optimizing drug candidates; (iv) in vitro and in
vivo models of disease for preclinical evaluation of drug efficacy and safety;
and (v) a clinical and regulatory organization highly experienced in the
successful development of pharmaceutical agents. The ongoing development of
immunomodulatory agents, cell-signaling inhibitors, as well as cellular and
tissue therapeutics may allow us to provide physicians/clinicians with a more
comprehensive and integrated set of therapeutic solutions for managing complex
human diseases such as cancer and immune/inflammatory-related diseases.
COMMERCIAL STAGE PROGRAMS: Our commercial stage programs include pharmaceutical
sales of THALOMID(R) and ALKERAN(R), a licensing agreement with Novartis for
Focalin(R) and the entire Ritalin(R) family of drugs and biotherapeutic products
through CCT.
THALOMID(R) (THALIDOMIDE): THALOMID, which had net product sales totaling
$223.7 million in 2003, was approved by the U.S. Food and Drug
Administration ("FDA") in July 1998 for the treatment of acute cutaneous
manifestations of moderate to severe erythema nodosum leprosum ("ENL") and
as maintenance therapy to prevent and suppress cutaneous manifestation
recurrences. ENL, an inflammatory complication of leprosy, is a chronic
bacterial disease associated with excess Tumor Necrosis Factor alpha
("TNFa") production. Although, leprosy is relatively rare in the United
States, the disease afflicts millions worldwide. ENL occurs in about 30% of
leprosy patients and is characterized by skin lesions, acute inflammation,
fever and anorexia.
We distribute THALOMID in the United States through our approximate
190-person U.S. pharmaceutical commercial organization. Working with the
FDA, we developed a proprietary strategic comprehensive education and
distribution program, the "System for Thalidomide Education and Prescribing
Safety," or S.T.E.P.S.(R), with four issued U.S. patents, that is designed
to support the safe and appropriate use of THALOMID. In February 2004, the
FDA accepted our THALOMID
1
Supplemental New Drug Application ("sNDA"), which we filed in December
2003, for the treatment of multiple myeloma. Multiple myeloma is the second
most common blood cancer affecting approximately 50,000 people in the U.S.
About 14,000 new cases of multiple myeloma are diagnosed each year and
there are an estimated 11,000 deaths. We anticipate a decision from the FDA
on our sNDA review in the fall of 2004.
Additionally, THALOMID has been, or is being, evaluated in more than 200
clinical cancer studies worldwide for hematological and solid tumor
cancers. As a result of these clinical studies and subsequent publications,
including the Mayo Clinic and M.D. Anderson studies published in The
Journal Of Clinical Oncology ("JCO") in November 2002 and January 2003,
respectively, and inclusion in the National Comprehensive Cancer Network
("NCCN") guidelines, physicians are prescribing THALOMID for use in
combination therapy for newly diagnosed myeloma patients.
THALOMID is the first drug approved under a special "Restricted
Distribution for Safety" regulation. Our innovative S.T.E.P.S. system
includes managed delivery programs for products or drugs that are either
teratogens (causing birth defects) or have other adverse effects that make
them contraindicated for certain patients. This patented program includes
comprehensive physician, pharmacist and patient education. All patients are
required to use contraception, and female patients of child bearing
potential are given pregnancy tests regularly. All patients are subject to
other requirements, including informed consent. Physicians are also
required to comply with the educational, contraception counseling, informed
consent and pregnancy testing and other elements of the program. Under the
S.T.E.P.S. program, automatic refills are not permitted and each
prescription may not exceed four weeks dosing. A new prescription is
required each month.
The S.T.E.P.S. intellectual property estate includes four U.S. patents,
expiring between the years 2018 and 2020, which cover methods of delivering
drugs, including THALOMID, in a manner that significantly decreases the
risks of adverse events. Two of these patents were issued in 2003 and
expand the scope of coverage contained in the two previously issued
patents. S.T.E.P.S. is designed as a blueprint for pharmaceutical products
that offer life saving or other important therapeutic benefits but have
potentially problematic side effects. Furthermore, we hold patents
protecting methods of use for THALOMID to treat symptoms associated with
abnormal concentrations of TNFa and unrestricted angiogenesis that expire
after 2012.
ALKERAN(R): In March 2003, we entered into a three-year supply and
distribution agreement with GlaxoSmithKline to distribute, promote and sell
ALKERAN (melphalan), a therapy approved by the FDA for the palliative
treatment of multiple myeloma and for palliation of carcinoma of the ovary.
Under the terms of the agreement, we purchase ALKERAN tablets and ALKERAN
for injection from GlaxoSmithKline and distribute the products in the
United States under the Celgene label. This agreement is strategically
valuable to us because it provides us with an approved oncology product
that complements our clinical candidates, THALOMID and REVLIMID(TM), which
are demonstrating potential in late stage clinical trials for the treatment
of multiple myeloma and myelodysplastic syndromes. At the 2003 American
Society of Hematology ("ASH") meeting, ALKERAN had a notable presence. In
combination with other anti-cancer therapeutics, including THALOMID,
ALKERAN was a key component of a number of important investigational
myeloma studies, which may positively impact product usage in the oncology
market.
RITALIN(R) FAMILY OF DRUGS: We have a major collaboration with Novartis
Pharma AG concerning the entire Ritalin family of drugs. We developed
Focalin (d-MPH), the chirally pure version of Ritalin, which is approved
for the treatment of attention deficit disorder and attention deficit
hyperactivity disorder ("ADD/ADHD") in school-age children. The use of
chirally pure compounds, such as Focalin, can result in significant
clinical benefits. Many non-chirally pure pharmaceuticals contain two
2
configurations, known as isomers, which are mirror images of each other.
Generally these isomers interact differently with their biological targets
causing one isomer to have a beneficial effect for one target and the other
isomer to have a beneficial effect on another target, or in some cases, one
isomer may have either no effect or potentially an undesirable side effect
with respect to a target. In April 2000, we granted Novartis an exclusive
license (excluding Canada) for the development and marketing of Focalin in
return for substantial milestone payments and royalties on Focalin and the
entire Ritalin family of drugs. In 2002, Novartis launched Focalin and
Ritalin(R) LA, the long-acting version of Ritalin, in the United States.
Novartis is completing two Phase III pivotal trials for Focalin LA in
adults and children.
Our intellectual property position was strengthened with the issuance of a
new U.S. patent in 2003 for once-a-day formulations covering both Focalin
LA and Ritalin LA. We have retained the exclusive commercial rights to
Focalin and Focalin LA for oncology-related disorders, such as chronic
fatigue associated with chemotherapy. We have recently completed a
double-blinded randomized placebo-controlled trial evaluating the use of
Focalin for the treatment of fatigue symptoms associated with chemotherapy.
We are currently formulating the appropriate clinical and regulatory
development strategy.
CELLULAR THERAPEUTICS: With the acquisition of Anthrogenesis Corporation in
December 2002, we acquired a biotherapeutics company pioneering the
development of stem cell therapies and biomaterials derived from human
placental tissue that now operates as Celgene Cellular Therapeutics
("CCT"). CCT has organized its business into three main units: (1) stem
cells banking for transplantation, (2) private stem cell banking and (3)
the development of biomaterials for organ and tissue repair. CCT has
developed proprietary methods for producing biomaterials for organ and
tissue repair (i.e. Ambio-dry(TM)). Additionally, CCT has developed
proprietary technology for collecting, processing and storing placental
stem cells with potentially broad therapeutic applications in cancer, as
well as autoimmune, cardiovascular, neurological, and degenerative
diseases.
PRECLINICAL AND CLINICAL-STAGE PIPELINE: Our preclinical and clinical-stage
pipeline of new drug candidates, in addition to our cell therapies, is
highlighted by six classes of small molecule, orally administered therapeutic
agents designed to selectively regulate disease-associated genes and proteins.
These drug candidates and therapies in our pipeline are at various stages of
preclinical and clinical development. Successful results in preclinical or Phase
I/II studies may not be an accurate predictor of the ultimate safety or
effectiveness of the drug or therapy.
IMMUNOMODULATORY DRUGS (IMIDS(TM)): IMiDs are novel small molecule, orally
available compounds that modulate the immune system through multiple
mechanisms of action that are based on the thalidomide structure. Our
IMiDs are designed to potentially have the beneficial attributes of
thalidomide, while minimizing its negative side effects. We have advanced
two IMiDs, REVLIMID (CC-5013) and ACTIMID(TM) (CC-4047), into clinical
trials in cancer and inflammatory diseases and a third IMiD, (CC-11006), is
presently undergoing preclinical evaluation.
REVLIMID(TM): Our lead clinical IMiD, is an orally available compound with
multiple mechanisms of action that affects several cellular pathways and
biological targets. REVLIMID, which we believe has significant potential in
hematological malignancies and solid tumor cancers, has received fast track
designation from the FDA for the treatment of multiple myeloma and
myelodysplastic syndromes, malignant blood disorders that affect
approximately 200,000 and 300,000 people worldwide, respectively. REVLIMID
is being tested in two pivotal Phase III Special Protocol Assessment
("SPA") trials in multiple myeloma and metastatic melanoma. Targeted
enrollment in these trials is on or ahead of their planned patient accrual
timelines. Additionally, in 2003, we initiated three accelerated Phase II
clinical trials; one in multiple myeloma and two in myelodysplastic
syndromes ("MDS"). Targeted enrollment in the Phase II MDS trial and the
Phase II MDS/5Q minus syndrome
3
trial has been completed and planned patient accrual timelines in the Phase
II multiple myeloma trial remains on schedule. With all of these key
REVLIMID trials on or ahead of planned patient accrual timelines, we
believe that we have made significant progress in our effort for potential
regulatory approval of REVLIMID by 2005 year end.
In addition to our pivotal Phase III and accelerated Phase II REVLIMID
trials, the Southwest Oncology Group ("SWOG"), one of the largest adult
cancer clinical trials organization in the world, selected REVLIMID with
the intention of initiating a major clinical study in a randomized
controlled Phase III trial designed to evaluate REVLIMID versus REVLIMID
plus Dexamethasone to determine its safety and efficacy in newly diagnosed
multiple myeloma patients. The SWOG membership and network consists of
almost 4,000 of the nation's leading physicians at 283 institutions
throughout the U.S. and Canada.
At the 2003 ASH meeting, data showing results in clinical studies of
REVLIMID as a therapeutic approach for patients with refractory anemias due
to low-risk and intermediate-1 risk myelodysplastic syndromes were
presented. The results of the clinical study demonstrated that red blood
cell production was restored in 67% of the evaluable patients, and
transfusion independence was achieved in 90% of patients for those
responding to REVLIMID and more than 90% of patients with the abnormal
chromosomal abnormality, 5Q minus, achieved complete response. Furthermore,
data evaluating clinical results on REVLIMID as a therapy for patients with
refractory or relapsed multiple myeloma ("MM") reported that 91% of
evaluable patients achieved stabilization of disease or better in
relapsed/refractory myeloma.
ACTIMID(TM): Our second clinical stage IMiD is being tested in a Phase I/II
clinical trial in refractory multiple myeloma and a Phase II trial in
hormone refractory prostate cancer. At the 2003 ASH meeting, interim data
from the myeloma trial showed that ACTIMID has anti-tumor activity and has
a manageable toxicity profile. ACTIMID and REVLIMID have different activity
profiles each of which may be better suited for different disease types or
used in the same therapeutic regimen at different stages of disease.
(CC-11006): Our third IMiD, is currently undergoing preclinical efficacy
and safety evaluation. The broad, deep IMiD class of drug candidates is
covered by an extensive and comprehensive intellectual property estate of
U.S. and foreign issued patents and pending patent applications including
composition-of-matter and use patents.
SELECTIVE CYTOKINE INHIBITORY DRUGS (SELCIDS(TM)): SelCIDs are novel small
molecule, orally available modulators of the phosphodiesterase type 4 ("PDE
4") enzymes that inhibit multiple cytokines linked to the onset and
progression of inflammatory diseases and potentially cancer, including
TNF(alpha), and interleukin-1 ("IL-1"). Our lead SelCID (CC-10004) will be
entering early-stage clinical trials as a potential treatment for chronic
inflammatory and respiratory diseases. In 2003, we successfully completed
Phase I testing of CC-10004 in healthy human volunteers. This preliminary
Phase I study indicated that the compound has the potential to be a safe
and well-tolerated compound with an excellent therapeutic index. To date
the compound is showing significant bioavailability, pharmacokinetics
("pk") and tolerability in humans and we anticipate advancing CC-10004 into
inflammatory and respiratory disease trials in 2004.
BENZOPYRANS/SELECTIVE ESTROGEN RECEPTOR MODULATORS (SERMS(TM)): The CC-8490
Benzopyran compound completed a Phase I safety trial and was well-tolerated
in healthy human volunteers. CC-8490 demonstrated anti-proliferative
effects and the ability to induce apoptosis in preclinical models of
cancer. As a result of a cooperative research and development agreement
("CRADA") with the National Cancer Institute, we initiated a Phase I/II
clinical trial of CC-8490 in glioblastoma (a primary
4
brain cancer). This Phase I/II clinical study will identify the maximum
tolerated dose of CC-8490 and evaluate the preliminary efficacy of CC-8490
in patients with recurrent high-grade gliomas and in combination with other
agents that specifically target the destruction of cancer cells in the
brain. SERMs are compounds that are designed to mimic the positive effects
of estrogen while blocking the hormone's negative effects. Estrogen is a
hormone that has a broad spectrum of effects on tissues in both women and
men. Although the hormone's biological effects are often beneficial,
estrogen is also a potent growth factor in breast and other reproductive
tissues that can cause or contribute to cancer. For cancer indications, our
SERMs are designed to block certain harmful stimulatory effects of estrogen
and other factors targeted by these agents. In treating osteoporosis, our
SERMs are designed to mimic the positive effects of estrogen by inhibiting
bone loss and providing potential cardiovascular protection in pre- and
post-menopausal women, while avoiding some of estrogen's adverse effects
such as increased risk of breast and uterine cancer.
KINASE INHIBITORS. Our kinase inhibitors include inhibitors of c-Jun
N-terminal Kinase ("JNK"). Kinases are regulatory proteins that control
cell growth, differentiation and survival/death by transmitting biological
signals from a cell's exterior environment to its nucleus, where genes that
maintain health and genes that cause disease are turned on and off in
response to these signals. Kinase inhibitors, such as JNK, are designed to
bind to and block the activity of gene-regulating kinases thereby
inhibiting the ability of kinase proteins to turn on specific genes that
cause or contribute to disease. We have a major JNK drug discovery and
development program, and we presently hold or own a significant portion of
the private intellectual property for kinase inhibitors dominating the JNK,
and other important kinases, with an expanding and comprehensive
intellectual property estate including 17 issued or pending patents. The
CC-401 kinase inhibitor compound completed a Phase I safety trial.
Additional efficacy trials are ongoing.
TUBULIN INHIBITORS. The newest class of compounds that we have developed is
the tubulin inhibitors. This novel chemical class of anti-proliferative
compounds contains multiple drug candidates that have numerous potential
anti-cancer activities. In preclinical models, our proprietary tubulin
inhibitors have demonstrated activity against drug resistant cancer cells,
inhibition of inflammatory cytokines and anti-angiogenic activity.
LIGASE MODULATORS. Ubiquitin ligases are important molecules that control
key cellular functions by maintaining appropriate levels and types of
proteins within cells. Ubiquitin-mediated protein modulation regulates a
broad range of cellular processes including cell proliferation,
differentiation and survival/death. Our novel ubiquitin ligases are
designed to modulate key cell signaling proteins and are potentially
accessible targets for developing selective small molecule drugs to treat
cancer and inflammatory diseases. Based on these data, we have established
a drug discovery program for small molecule inhibitors of certain key
ligases. We are building a leading intellectual property estate in the
emerging field of ubiquitin ligase-biogenetic activities and mediated
protein turnover that includes a number of potentially proprietary ligase
targets.
5
CELGENE PRODUCT OVERVIEW
The commercial status of THALOMID, ALKERAN, Ambio-dry, Ritalin Family of Drugs
(including Focalin) and the target disease indications and the development of
our leading drug candidates are outlined in the following table:
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DISEASE
PRODUCT INDICATION COLLABORATOR STATUS
- ------------------------------------------------------------------------------------------------------------
THALOMID ENL Marketed.
Multiple Myeloma Phase III trials ongoing.
Additional trials ongoing and
planned.
Renal Cancer Phase II trials ongoing.
MDS Phase III trial ongoing.
Prostate Cancer Phase II trials ongoing.
Inflammatory Diseases Phase II trials ongoing and
planned.
ALKERAN Multiple Myeloma & GlaxoSmithKline Marketed.
Ovarian Cancer
AMBIO-DRY Ophthalmology Marketed.
RITALIN FAMILY OF
DRUGS:
Focalin ADD/ADHD Novartis Marketed.
Cancer Fatigue Phase II trials completed
Focalin LA ADD/ADHD Novartis Pediatric & adult Phase III trials
completed.
Ritalin LA ADD/ADHD Novartis Marketed.
IMIDS:
REVLIMID Multiple Myeloma Phase II and Pivotal Phase III
SPA trials ongoing.
Malignant Metastatic Pivotal Phase III SPA trials
Melanoma ongoing - targeted enrollment
completed
Multiple Myeloma Southwest Oncology Initiating Major Phase III trial
Group ("SWOG")
Myelodysplastic Accelerated Phase II trials
Syndromes ongoing - targeted enrollment
completed.
Myelodysplastic Accelerated Phase II trials
Syndromes with 5Q ongoing - targeted enrollment
minus completed.
Solid Tumor Cancers Phase I/II trials ongoing and
expanded. Additional trials
planned.
Inflammatory & Phase I/II trials ongoing and
Immunological Diseases planned.
ACTIMID Multiple Myeloma Phase I/II trial ongoing.
Prostate Cancer Phase II trials ongoing.
CC-11006 Cancer/Inflammatory Preclinical studies ongoing.
6
- ------------------------------------------------------------------------------------------------------------
DISEASE
PRODUCT INDICATION COLLABORATOR STATUS
- ------------------------------------------------------------------------------------------------------------
SELCIDS:
CC-10004 Inflammatory and Phase I trials completed.
Respiratory Diseases Phase II trials planned.
CC-11050 Inflammatory Diseases Preclinical studies ongoing.
BENZOPYRANS:
CC-8490 Cancer National Cancer Phase I/II trial ongoing.
Institute ("NCI")
CC-132889 Cancer Preclinical studies ongoing.
SERMS:
SERM(alpha) Osteoporosis Novartis Pharma AG Preclinical studies ongoing.
(CC-25493)
KINASE INHIBITORS:
JNK Cancer/Inflammatory Preclinical studies ongoing.
Diseases
CC-401 Cancer/Inflammatory Phase I trials completed.
Diseases Additional trials ongoing.
TUBULIN INHIBITORS:
CC-5079 Cancer Preclinical studies ongoing.
LIGASES: Cancer Preclinical studies ongoing.
- ------------------------------------------------------------------------------------------------------------
Clinical trials are typically conducted in three sequential phases, although the
phases may overlap.
PHASE I CLINICAL TRIALS
Phase I human clinical trials usually involve a small number of healthy
volunteers or patients. The tests study a drug's safety profile, and may include
the safe dosage range. The Phase I clinical studies also determine how a drug is
absorbed, distributed, metabolized and excreted by the body, and the duration of
its action.
PHASE II CLINICAL TRIALS
In Phase II clinical trials, controlled studies are conducted on a limited
number of patients with the targeted disease. An initial evaluation of the
drug's effectiveness on patients is performed and additional information on the
drug's safety is obtained.
PHASE III CLINICAL TRIALS
This phase typically includes multi-center trials and involves a larger patient
population. During the Phase III clinical trials, physicians monitor patients
to determine efficacy and to gather further information on safety.
Successful results in preclinical studies or Phase I or II studies may not be an
accurate predictor of the ultimate safety or effectiveness of the drug.
7
PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to our business. Thus, it is
our policy to seek patent protection for our inventions, and also to rely upon
trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
We own or have exclusively licensed more than 125 U.S. patents, and have over
110 additional U.S. patent applications pending. Our U.S. patents include
patents for a method of delivering a teratogenic drug to a patient while
preventing fetal exposure as well as patents for delivering drugs to patients
while restricting access to the drug to those for whom the drug is
contra-indicated. We also have patent applications pending which are directed to
these inventions, and are seeking worldwide protection. While we have a policy
to seek worldwide patent protection for our inventions, we have foreign patent
rights corresponding to most but not all of our U.S. patents. Although THALOMID
is approved for use associated with ENL, we do not have patent protection
relating to the use of THALOMID to treat ENL.
Our research in San Diego has led us to seek patent protection for molecular
targets and drug discovery technologies, as well as therapeutic and diagnostic
products and processes. More specifically, proprietary technology has been
developed for use in molecular target discovery, regulatory pathway
identification, assay design and pharmaceutical product candidates. As of 2004,
and included in those described above, our San Diego subsidiary owned, in whole
or in part, over 30 issued U.S. patents and had approximately 27 U.S. patent
applications pending. An increasing percentage of our San Diego subsidiary's
recent patent applications have been related to potential product candidates or
compounds. They also hold licenses to dozens of U.S. patents and pending U.S.
patent applications, some of which are licensed exclusively or sub-licensed to
third parties in connection with sponsored or collaborative research
relationships.
CCT, our cellular therapeutics subsidiary, seeks patent protection for the
collection, processing and uses of mammalian placenta tissue and the placental
stem cells, and other biomaterials uncovered from these placenta. CCT also has
sought additional patent protection for the use of placenta, their stem cells
and biomaterials. As of 2003, CCT owned, in whole or in part, more than 10
pending U.S. patent applications, and holds licenses to certain U.S. patents and
pending applications, including those related to cord blood collection and
storage.
In August 2001, we entered into a new agreement, or the New Thalidomide
Agreement, with EntreMed, Inc., Children's Medical Center Corporation and
Bioventure Investments, KFT relating to patents and applications owned by CMCC,
which agreement superceded several agreements already in place between CMCC,
EntreMed and us. Pursuant to the New Thalidomide Agreement, CMCC directly
granted to us an exclusive, worldwide, royalty-bearing license under the
relevant patents and patent applications relating to thalidomide. Several U.S.
patents have already issued to CMCC in this patent family; certain of these
patents expire in 2014. Corresponding foreign patent applications and additional
U.S. patent applications are still pending.
In addition to the New Thalidomide Agreement, we entered into an agreement with
CMCC and EntreMed in December 2002, pursuant to which we have been granted a
worldwide, exclusive, royalty-bearing license to certain CMCC patents and patent
applications relating to thalidomide analogs, or the New Analog Agreement. The
New Analog Agreement was executed in connection with the settlement of certain
pending litigation between and among us, EntreMed, and the U.S. Patent and
Trademark Office relating to the allowance of certain CMCC patent applications
covering thalidomide analogs. These patent applications had been licensed
exclusively to EntreMed in the field of thalidomide analogs. In conjunction with
the settlement of these suits, we acquired equity securities in EntreMed, and
EntreMed terminated its license agreements with CMCC relating to thalidomide
analogs. In turn, under the New
8
Analog Agreement, CMCC exclusively licensed to Celgene these patents and patent
applications, which relate to analogs, metabolites, precursors and hydrolysis
products of thalidomide, and stereoisomers thereof.
The New Analog Agreement grants us control over the prosecution and maintenance
of the licensed thalidomide analog patent rights. The New Analog Agreement also
grants us an option to inventions in the field of thalidomide analogs that may
be developed at CMCC in the laboratory of Dr. Robert D'Amato, pursuant to the
terms and conditions of a separate Sponsored Research Agreement negotiated
between CMCC and us.
Under an agreement with The Rockefeller University, pursuant to which we have
made a lump sum payment and issued stock options to The Rockefeller University
and the inventors, we have obtained certain exclusive rights and licenses to
manufacture, have manufactured, use, offer for sale and sell products that are
based on compounds, which were identified in research carried out by The
Rockefeller University and us, that have activity associated with TNFa. In
particular, The Rockefeller University identified a method of using thalidomide
and certain thalidomide-like compounds to treat certain symptoms associated with
abnormal concentrations of TNFa, including those manifested in septic shock,
cachexia and HIV infection. In 1995, The Rockefeller University was issued a
U.S. patent, which claims such methods. This U.S. patent expires in 2012 and is
included in the patent rights exclusively licensed to us under the agreement
with The Rockefeller University. However, The Rockefeller University did not
seek corresponding patents in any other country.
Our success will depend, in part, on our ability to obtain and enforce patents,
protect trade secrets, obtain licenses to technology owned by third parties
where necessary and conduct our business without infringing the proprietary
rights of others. The patent positions of pharmaceutical and biotechnology
firms, including ours, can be uncertain and involve complex legal and factual
questions. In addition, the coverage sought in a patent application can be
significantly reduced before the patent is issued. Consequently, we do not know
whether any of our owned or licensed pending patent applications will result in
the issuance of patents or, if any patents are issued, whether they will be
dominated by third-party patent rights, whether they will provide significant
proprietary protection or commercial advantage, or whether they will be
circumvented or infringed upon by others.
There can be no assurance that additional patents will issue to us from any of
our pending applications or that, if patents issue, such patents will provide us
with significant proprietary protection or commercial advantage. Moreover, there
can be no assurance that any of our existing patents will not be dominated by
third-party patent rights or provide us with proprietary protection or
commercial advantage. Nor can we guarantee that these patents will not be either
infringed, invalidated or circumvented by others. Finally, we cannot guarantee
that our patents or pending applications will not be involved in any
interference proceedings before the U.S. Patent and Trademark Office.
With respect to patents and patent applications we have licensed-in, there can
be no assurance that additional patents will issue to any of the third parties
from whom we have licensed patent rights, either with respect to thalidomide or
thalidomide analogs, or that, if any new patents issue, such patents will not be
dominated by third-party patent rights or provide us with significant
proprietary protection or commercial advantage. Moreover, there can be no
assurance that any of the existing licensed patents will provide us with
proprietary protection or commercial advantage. Nor can we guarantee that these
licensed patents will not be either infringed, invalidated or circumvented by
others, or that the relevant agreements will not be terminated. Any termination
of the licenses granted to Celgene by CMCC could have a material adverse effect
on our business, financial condition and results of operations.
9
Since patent applications filed in the United States on or before November 28,
2000 are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, we cannot be certain that we, or our licensors, were the first to
make the inventions covered by each of the issued patents or pending patent
applications or that we, or our licensors, were the first to file patent
applications for such inventions. In the event a third party has also filed a
patent for any of our inventions, we, or our licensors, may have to participate
in interference proceedings before the U.S. Patent and Trademark Office to
determine priority of invention, which could result in the loss of a U.S. patent
or loss of any opportunity to secure U.S. patent protection for the invention.
Even if the eventual outcome is favorable to us, such interference proceedings
could result in substantial cost to us.
We are aware of U.S. patents that have been issued to third parties claiming
subject matter relating to the NF-(kappa)(beta) pathway, which could overlap
with technology claimed in some of our pending NF-(kappa)(beta) patent
applications. We believe that one or more interference proceedings may be
initiated by the U.S. Patent and Trademark Office to determine priority of
invention for this subject matter. While we cannot predict the outcome of any
such proceedings, in the event we do not prevail, we believe that we can use
alternative methods for our NF-(kappa)(beta) drug discovery program for which we
have issued U.S. patents that are not claimed by the subject matter of the third
party patents. We are also aware of third party U.S patents that relate to the
use of certain PDE 4 inhibitors to treat inflammation.
We may in the future have to prove that we are not infringing patents or we may
be required to obtain licenses to such patents. However, we do not know whether
such licenses will be available on commercially reasonable terms, or at all.
Prosecution of patent applications and litigation to establish the validity and
scope of patents, to assert patent infringement claims against others and to
defend against patent infringement claims by others can be expensive and
time-consuming. There can be no assurance that, in the event that claims of any
of our owned or licensed patents are challenged by one or more third parties,
any court or patent authority ruling on such challenge will determine that such
patent claims are valid and enforceable. An adverse outcome in such litigation
could cause us to lose exclusivity relating to the subject matter delineated by
such patent claims and may have a material adverse effect on our business. If a
third party is found to have rights covering products or processes used by us,
we could be forced to cease using the products or processes covered by the
disputed rights, subject to significant liabilities to such third party and/or
required to license technologies from such third party. Also, different
countries have different procedures for obtaining patents, and patents issued by
different countries provide different degrees of protection against the use of a
patented invention by others. There can be no assurance, therefore, that the
issuance to us in one country of a patent covering an invention will be followed
by the issuance in other countries of patents covering the same invention or
that any judicial interpretation of the validity, enforceability or scope of the
claims in a patent issued in one country will be similar to the judicial
interpretation given to a corresponding patent issued in another country.
Competitors may choose to file oppositions to patent applications, which have
been deemed allowable by foreign patent examiners. Furthermore, even if our
owned or licensed patents are determined to be valid and enforceable, there can
be no assurance that competitors will not be able to design around such patents
and compete with us using the resulting alternative technology. Additionally,
for these same reasons, we cannot be sure that patents of a broader scope then
ours may be issued creating freedom to operate issues. If this occurs we may
need to reevaluate pursuing such technology, which is dominated by others patent
rights, or alternatively, seek a license to practice our own invention, whether
or not patented.
We also rely upon unpatented, proprietary and trade secret technology that we
seek to protect, in part, by confidentiality agreements with our collaborative
partners, employees, consultants, outside scientific collaborators, sponsored
researchers and other advisors. There can be no assurance that these agreements
provide meaningful protection or that they will not be breached, that we would
have adequate remedies for any such breach or that our trade secrets,
proprietary know-how and technological advances will not
10
otherwise become known to others. In addition, there can be no assurance that,
despite precautions taken by us, others have not and will not obtain access to
our proprietary technology or that such technology will not be found to be
non-proprietary or not a trade secret.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the manufacture and marketing of pharmaceuticals and
in our ongoing research and development activities. Many of our therapeutic
products will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic products are subject to
rigorous preclinical testing and clinical trials and other pre-marketing
approval requirements by the FDA and regulatory authorities in other countries.
In the United States, various federal and in some cases state statutes and
regulations also govern or impact upon the manufacturing, safety, labeling,
storage, record-keeping and marketing of such products. The lengthy process of
seeking required approvals, and the continuing need for compliance with
applicable statutes and regulations, require the expenditure of substantial
resources. Regulatory approval, when and if obtained, may be limited in scope
which may significantly limit the indicated uses for which a product may be
marketed. Further, approved drugs, as well as their manufacturers, are subject
to ongoing review and discovery of previously unknown problems with such
products may result in restrictions on their manufacture, sale or use or in
their withdrawal from the market. Any failure by us, our collaborators or
licensees to obtain or maintain, or any delay in obtaining, regulatory approvals
could adversely affect the marketing of our products, and our ability to receive
product revenue, royalty revenue or profit sharing payments.
The activities required before a pharmaceutical may be marketed in the United
States begin with preclinical testing not involving human subjects. Preclinical
tests include laboratory evaluation of product chemistry and animal studies to
assess the potential safety and efficacy of a product and its formulations. The
results of these studies must be submitted to the FDA as part of an IND, which
must be reviewed by the FDA primarily for safety considerations before proposed
clinical trials in humans can begin.
Typically, clinical trials involve a three-phase process. In Phase I, clinical
trials are generally conducted with a small number of individuals to determine
the early safety and tolerability profile and the pattern of drug distribution
and metabolism within the body. If the Phase I trials are satisfactory, Phase II
clinical trials are conducted with groups of patients in order to determine
preliminary efficacy, dosing regimes and expanded evidence of safety. In Phase
III, large-scale, multi-center, adequately powered and well-controlled
comparative clinical trials are conducted with patients in an effort to provide
enough data for the statistical proof of efficacy and safety required by the FDA
and others. However, in some limited circumstances, Phase III trials may be
modified to allow evaluation of safety and efficacy in a less regimented manner,
which may allow us to rely on historical data relating to the natural course of
disease in untreated patients. In some cases, as a condition of New Drug
Application ("NDA") approval, confirmatory trials are required to be conducted
after the FDA's approval of an NDA in order to resolve any open issues. The FDA
requires monitoring of all aspects of clinical trials, and reports of all
adverse events must be made to the agency, both before and after drug approval.
Additionally, we may have limited control over studies conducted with our
proprietary compounds, if such studies are performed by others, (e.g.,
cooperative groups and the like).
The results of the preclinical testing and clinical trials are submitted to the
FDA as part of an NDA for evaluation to determine if the product is safe and
effective for approval to commence commercial sales. In responding to an NDA,
the FDA may grant marketing approval, request additional information or deny the
application if it determines that the application does not satisfy its
regulatory approval criteria. When an NDA is approved, the manufacturer must
employ a system for obtaining reports of experience and side effects that are
associated with the drug and make appropriate submissions to the FDA.
11
Pursuant to the Orphan Drug Act, a sponsor may request that the FDA designate a
drug intended to treat a "rare disease or condition" as an "orphan drug." A rare
disease or condition is defined as one which affects less than 200,000 people in
the United States, or which affects more than 200,000 people, but for which the
cost of development and making available the drug is not expected to be
recovered from sales of the drug in the United States. Upon the approval of the
first NDA for a drug designated as an orphan drug for a specified indication,
the sponsor of the NDA is entitled to exclusive marketing rights in the United
States for such drug for that indication for seven years unless the sponsor
cannot assure the availability of sufficient quantities of the drug to meet the
needs of persons with the disease. Orphan drugs may also be eligible for federal
income tax credits for costs associated with the drug's development. Possible
amendment of the Orphan Drug Act by the U.S. Congress and possible
reinterpretation by the FDA are the subject of frequent discussion. FDA
regulations reflecting certain definitions, limitations and procedures initially
went into effect in January 1993 and were amended in certain respects in 1998.
Therefore, there is no assurance as to the precise scope of protection that may
be afforded by orphan drug status in the future or that the current level of
exclusivity and tax credits will remain in effect. Moreover, even if we have an
orphan drug designation for a particular use of a drug, there can be no
assurance that another company also holding orphan drug designation will not
receive approval prior to us for the same indication. If that were to happen,
our applications for that indication could not be approved until the competing
company's seven-year period of exclusivity expired. Even if we are the first to
obtain approval for the orphan drug indication, there are certain circumstances
under which a competing product may be approved for the same indication during
our seven-year period of exclusivity. First, particularly in the case of large
molecule drugs, a question can be raised whether the competing product is really
the "same drug" as that which was approved. In addition, even in cases in which
FDA initially concludes that two products are the same drug, the agency may
approve the second product based on a showing of clinical superiority compared
to the first product.
Among the conditions for NDA approval is the requirement that the prospective
manufacturer's quality control and manufacturing procedures continually conform
with the FDA's current Good Manufacturing Practice, or cGMP (cGMP are
regulations established by the FDA that govern the manufacture, processing,
packing, storage and testing of drugs intended for human use). In complying with
cGMP, manufacturers must devote extensive time, money and effort in the area of
production and quality control and quality assurance to maintain full technical
compliance. Manufacturing facilities and company records are subject to periodic
inspections by the FDA to ensure compliance. If a manufacturing facility is not
in substantial compliance with these requirements, regulatory enforcement action
may be taken by the FDA, which may include seeking an injunction against
shipment of products from the facility and recall of products previously shipped
from the facility.
Failure to comply with applicable FDA regulatory requirements can result in
informal administrative enforcement actions such as warning letters, recalls or
adverse publicity issued by the FDA or in legal actions such as seizures,
injunctions, fines based on the equitable remedy of disgorgement, restitution
and criminal prosecution.
Steps similar to those in the United States must be undertaken in virtually
every other country comprising the market for our products before any such
product can be commercialized in those countries. The approval procedure and the
time required for approval vary from country to country and may involve
additional testing. There can be no assurance that approvals will be granted on
a timely basis or at all. In addition, regulatory approval of prices is required
in most countries other than the United States. There can be no assurance that
the resulting prices would be sufficient to generate an acceptable return to us.
12
COMPETITION
The pharmaceutical and biotechnology industries in which we compete are each
highly competitive. Our competitors include major pharmaceutical and
biotechnology companies, many of which have considerably greater financial,
technical and marketing resources than us. We also experience competition in the
development of our products and processes from universities and other research
institutions and, in some instances, compete with others in acquiring technology
from such sources.
Competition in the pharmaceutical industry, and specifically in the oncology and
immunology areas being addressed by us, is particularly intense. Numerous
pharmaceutical and biotechnology companies have extensive anti-cancer discovery
and development activities. Bristol Myers Squibb Co., Amgen Inc., Genentech
Inc., Aventis Inc., Novartis AG, AstraZeneca p.l.c., Millenium Pharmaceuticals
Inc., Genta Co., Cell Therapeutics Inc., Vertex Pharmaceuticals Inc., Biogen
IDEC Inc. and Ilex Oncology Inc. are among some of the companies testing new
compounds in the oncology field.
The pharmaceutical and biotechnology industries have undergone, and are expected
to continue to undergo, rapid and significant technological change. Also,
consolidation and competition are expected to intensify as technical advances in
each field are achieved and become more widely known. In order to compete
effectively, we will be required to continually upgrade our scientific expertise
and technology, identify and retain capable management, and pursue
scientifically feasible and commercially viable opportunities.
Our competition will be determined in part by the indications for which our
products are developed and ultimately approved by regulatory authorities. An
important factor in competition will be the timing of market introduction of our
or our competitors' products. Accordingly, the relative speed with which we can
develop products, complete clinical trials and approval processes and supply
commercial quantities of products to the market are expected to be important
competitive factors. Competition among products approved for sale will be based,
among other things, on product efficacy, safety, convenience, reliability,
availability, price, third-party reimbursement and patent and nonpatent
exclusivity.
SIGNIFICANT ALLIANCES
From time to time we enter into collaborative research and/or license agreements
with other pharmaceutical companies by which, in exchange for the rights to
certain compounds, the partnering company will provide funding in the form of
upfront payments, milestone payments or direct research funding. The following
are our most significant collaborations.
NOVARTIS PHARMA AG: We entered into an agreement with Novartis in April 2000 in
which we granted to Novartis an exclusive license (excluding Canada) for the
development and marketing of Focalin (d-MPH). We received a $10 million upfront
payment in July 2000, a $5 million milestone payment upon the acceptance of the
NDA filing by the FDA in December 2000 and a $12.5 million milestone payment
upon approval by the FDA to market Focalin in November 2001. We are currently
selling Focalin to Novartis as well as receiving royalties on all of Novartis'
Ritalin family of ADD- and ADHD-related products. The research portion of the
agreement ended in June 2003. We expect to receive an additional milestone
payment in 2004 for filing an NDA for Focalin LA.
We entered into a second collaborative research and license agreement with
Novartis in December 2000 for joint research of SERMs for the treatment and
prevention of osteoporosis. We received a nonrefundable, upfront payment of $10
million, a $1 million milestone payment for the selection of the first compound
to be advanced into preclinical studies and may be entitled to receive
additional milestone payments for specific preclinical, clinical and regulatory
endpoints, as well as royalties upon commercialization of products receiving FDA
and other regulatory marketing approval.
13
MANUFACTURING
The bulk active pharmaceutical ingredient ("API") for THALOMID is manufactured
by ChemSyn Laboratories, a Division of Eagle-Picher Technologies, L.L.C. In late
2001, we entered into a contract with Sifavitor s.p.a., to also supply API for
THALOMID. Presently, new Italian regulations prevent Sifavitor from producing
thalidomide. Both manufacturers operate FDA cGMP-approved facilities. (cGMP, or
current Good Manufacturing Practice, are regulations established by the FDA that
govern the manufacturing, processing, packaging, storing and testing of drugs
intended for human use). The bulk drug substance is shipped to Penn
Pharmaceuticals Services Limited of Great Britain where it is formulated and
encapsulated for us in an FDA cGMP-approved facility. In October 2003, we signed
an agreement with Institute of Drug Technology Australia Limited ("IDT") for the
manufacture of finished dosage form of THALOMID capsules. The agreement is
scheduled to commence with the FDA's approval of IDT's facility. The agreement
provides us with additional capacity and reduces our dependency on one
manufacturer for the formulation and encapsulation of THALOMID. In certain
instances, we may be required to make substantial capital expenditures to access
additional manufacturing capacity.
The bulk API for Focalin is manufactured and supplied by Johnson Matthey Inc. A
Supply Agreement was executed in March 2003 with a second supplier, Seigfried
USA Inc. The product is manufactured into finished dosage forms of different
strengths and packaged as Focalin tablets by Mikart, Inc. for distribution.
INTERNATIONAL EXPANSION
In November 2001, we signed agreements with Pharmion Corporation and Penn
Pharmaceuticals Services Limited to expand the THALOMID franchise in all
countries outside North America, Japan, China, Taiwan and Korea. The strategic
partnership combines Penn's FDA-compliant manufacturing capability, Pharmion's
global development and marketing expertise and our extensive intellectual
property. The new alliance is designed to accelerate the establishment of
THALOMID as an important therapy in the international markets. To date, Pharmion
has received regulatory approval in Australia and New Zealand to market and
distribute Thalidomide for the treatment of multiple myeloma after the failure
of standard therapies, as well as for the treatment of complications of leprosy.
We have also acquired an exclusive option through 2004 to purchase the branch of
Penn Pharmaceutical that manufactures THALOMID. The option, if exercised, would
enable us to receive an imputed royalty of 36% less cost of goods on all
international sales of THALOMID and to manage the manufacturing of THALOMID. In
December 2003, we established a legal entity in Switzerland where we anticipate
developing a facility to perform formulation, encapsulation, packaging and
warehousing and distribution of future products.
SALES AND COMMERCIALIZATION
We have an approximate 190-persons established U.S. pharmaceutical commercial
organization. These individuals have considerable experience in the
pharmaceutical industry, and many have experience with oncological and
immunological products. We expect to expand our sales and commercialization
group to support products we develop to treat oncological and immunological
diseases. We intend to market and sell the products we develop for indications
with accessible patient populations. For drugs with indications with larger
patient populations, we may partner with other pharmaceutical companies. In
addition, we are positioned to accelerate the expansion of these sales resources
as appropriate to take advantage of product in-licensing and product acquisition
opportunities.
14
EMPLOYEES
As of March 1, 2004, we had 679 full-time employees, 368 of who were engaged
primarily in research and development activities, 206, including CCT, of who
were engaged in sales and commercialization activities and the remainder of who
were engaged in executive and administrative activities. Of these employees, 252
have advanced degrees, including 125 who have doctorate degrees. We also
maintain consulting arrangements with a number of scientists at various
universities and other research institutions in Europe and the United States.
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this annual report
are forward-looking statements concerning our business, financial condition,
results of operations, economic performance and financial condition.
Forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and within the meaning of Section 21E of the Securities Exchange Act
of 1934 are included, for example, in the discussions about:
- - our strategy;
- - new product development or product introduction;
- - product sales, royalties and contract revenues;
- - expenses and net income;
- - our credit risk management;
- - our liquidity;
- - our asset/liability risk management; and
- - our operational and legal risks.
These statements involve risks and uncertainties. Actual results may differ
materially from those expressed or implied in those statements. Factors that
could cause such differences include, but are not limited to, those discussed
under "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISK FACTORS
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT.
Until 2003, we had sustained losses in each year since our incorporation in
1986. For the year ended December 31, 2003, we posted net income of $13.5
million. However, we sustained a net loss of $100.0 million for the year ended
December 31, 2002. We had an accumulated deficit of $308.9 million at December
31, 2003. We expect to make substantial expenditures to further develop and
commercialize our products. We also expect that our rate of spending will
accelerate as the result of increased clinical trial costs and expenses
associated with regulatory approval and commercialization of products now in
development.
15
IF WE ARE UNSUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR PRODUCTS, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED WHICH COULD IMPACT NEGATIVELY ON THE VALUE OF OUR COMMON
STOCK.
Many of our products and processes are in the early or mid-stages of development
and will require the commitment of substantial resources, extensive research,
development, preclinical testing, clinical trials, manufacturing scale-up and
regulatory approval prior to being ready for sale. With the exception of
Focalin, ALKERAN, THALOMID and Ambio-Dry, all of our other products will require
further development, clinical testing and regulatory approvals. If it becomes
too expensive to sustain our present commitment of resources on a long-term
basis, we will be unable to continue our necessary development activities.
Furthermore, we cannot be certain that our clinical testing will render
satisfactory results, or that we will receive required regulatory approval for
our products. If any of our products, even if developed and approved, cannot be
successfully commercialized, our business, financial condition and results of
operations could be materially adversely affected which could impact negatively
on the value of our common stock.
DURING THE NEXT SEVERAL YEARS, WE WILL BE VERY DEPENDENT ON THE COMMERCIAL
SUCCESS OF THALOMID, FOCALIN, ALKERAN AND THE ENTIRE RITALIN PRODUCT LINE.
At our present level of operations, we may not be able to attain or maintain
profitability if physicians prescribe THALOMID only for patients who are
diagnosed with ENL. ENL, a complication of leprosy, is a chronic bacterial
disease. Under current FDA regulations, we are precluded from promoting THALOMID
outside this approved use. The market for the use of THALOMID in patients
suffering from ENL is relatively small. We have conducted clinical studies that
appear to show that THALOMID is active when used to treat disorders other than
ENL, such as multiple myeloma, but we do not know whether we will succeed in
receiving regulatory approval to market THALOMID for additional indications. FDA
regulations place restrictions on our ability to communicate the results of
additional clinical studies to patients and physicians without first obtaining
approval from the FDA to expand the authorized uses for this product. In
addition, if adverse experiences are reported in connection with the use of
THALOMID by patients, this could undermine physician and patient comfort with
the product, could limit the commercial success of the product and could even
impact the acceptance of THALOMID in the ENL market. We are dependent upon
royalties from Novartis Pharma AG's entire Ritalin product line, including
Focalin, although we cannot directly impact their ability to successfully
commercialize these products and we have annual minimum purchase requirements
relating to ALKERAN through March 31, 2006, which we license from
GlaxoSmithKline. Additionally, our revenues would be negatively impacted if a
generic version of any of these products were to be approved.
WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
SUFFICIENT INSURANCE ON COMMERCIALLY REASONABLE TERMS OR WITH ADEQUATE COVERAGE.
We may be subject to a variety of types of product liability or other claims
based on allegations that the use of our technology or products has resulted in
adverse effects, whether by participants in our clinical trials or by patients
using our products. Thalidomide, when used by pregnant women, has resulted in
serious birth defects. Therefore, necessary and strict precautions must be taken
by physicians prescribing the drug to women with childbearing potential. These
precautions may not be observed in all cases or, if observed, may not be
effective. Use of thalidomide has also been associated, in a limited number of
cases, with other side effects, including nerve damage. Although we have product
liability insurance that we believe is appropriate, we may be unable to obtain
additional coverage on commercially reasonable terms if required, or our
coverage may be inadequate to protect us in the event of a multitude of claims
16
being asserted against us. Our obligation to defend against or pay any product
liability or other claim may be expensive and divert the efforts of our
management and technical personnel.
IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, DEMAND FOR OUR PRODUCTS WILL
DETERIORATE OR NOT MATERIALIZE AT ALL.
It is necessary that our, and our distribution partner's products, including
THALOMID, ALKERAN and Focalin, achieve market acceptance once they receive
regulatory approval. A number of factors can render the degree of market
acceptance of our products uncertain, including the products' efficacy, safety
and advantages, if any, over competing products, as well as the reimbursement
policies of third-party payors, such as government and private insurance plans.
In particular, thalidomide, when used by pregnant women, has resulted in serious
birth defects, and the negative history associated with thalidomide and birth
defects may decrease the market acceptance of THALOMID. In addition, the
products that we are attempting to develop through our Celgene Cellular
Therapeutics division may represent substantial departures from established
treatment methods and will compete with a number of traditional drugs and
therapies which are now, or may be in the future, manufactured and marketed by
major pharmaceutical and biopharmaceutical companies. Furthermore, public
attitudes may be influenced by claims that stem cell therapy is unsafe, and stem
cell therapy may not gain the acceptance of the public or the medical community.
If our products are not accepted by the market, demand for our products will
deteriorate or not materialize at all.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.
We have historically experienced, and expect to continue for the foreseeable
future to experience, significant fluctuations in our quarterly operating
results. These fluctuations are due to a number of factors, many of which are
outside our control, and may result in volatility of our stock price. Future
operating results will depend on many factors, including:
o demand for our products;
o regulatory approvals for our products;
o the timing of the introduction and market acceptance of new products by us
or competing companies;
o the timing and recognition of certain research and development milestones
and license fees; and
o our ability to control our costs.
WE HAVE NO COMMERCIAL MANUFACTURING FACILITIES AND WE ARE DEPENDENT ON TWO
SUPPLIERS FOR THE RAW MATERIAL AND ONE MANUFACTURER FOR THE FORMULATION AND
ENCAPSULATION OF THALOMID AND ARE DEPENDENT ON TWO SUPPLIERS FOR THE RAW
MATERIAL AND ONE MANUFACTURER FOR THE TABLETING AND PACKAGING OF FOCALIN.
We currently have no facilities for manufacturing any products on a commercial
scale. The bulk drug material for THALOMID is manufactured by ChemSyn
Laboratories, a Division of Eagle-Picher Technologies, L.L.C. In late 2001, we
entered into a contract with Sifavitor s.p.a., to also supply bulk drug material
for THALOMID. Presently, new Italian regulations prevent Sifavitor from
producing thalidomide. We currently rely on a single manufacturer, Penn
Pharmaceutical Services Limited, to formulate and encapsulate THALOMID. In
addition, we currently can obtain all of our bulk active pharmaceutical
ingredient for Focalin from two suppliers, Johnson Matthey Inc. and Seigfried
USA, Inc.,
17
and we rely on a single manufacturer, Mikart, Inc., for the packaging and
tableting of Focalin. Presently, we are actively seeking alternative sources to
each of Penn and Mikart. The FDA requires that all suppliers of pharmaceutical
bulk material and all manufacturers of pharmaceuticals for sale in or from the
United States achieve and maintain compliance with the FDA's cGMP regulations
and guidelines. If the operations of either Penn or Mikart were to become
unavailable for any reason, any required FDA review and approval of the
operations of an alternative could cause a delay in the manufacture of THALOMID
or Focalin. Although we have an option to purchase the THALOMID manufacturing
operations of Penn, we intend to continue to utilize outside manufacturers if
and when needed to produce our other products on a commercial scale. If our
outside manufacturers do not meet our requirements for quality, quantity or
timeliness, or do not achieve and maintain compliance with all applicable
regulations, demand for our products or our ability to continue manufacturing
such products could substantially decline, to the extent we depend on these
outside manufacturers.
WE HAVE LIMITED MARKETING AND DISTRIBUTION CAPABILITIES.
Although we have an approximate 190-person U.S. pharmaceutical commercial
organization to support our products, we may be required to seek a corporate
partner to provide marketing services with respect to our other products. Any
delay in developing these resources could substantially delay or curtail the
marketing of these products. We have contracted with Ivers Lee Corporation,
d/b/a Sharp, a specialty distributor, to distribute THALOMID. If Sharp does not
perform its obligations, our ability to distribute THALOMID may be severely
restricted.
WE ARE DEPENDENT ON COLLABORATIONS AND LICENSES WITH THIRD PARTIES.
Our ability to fully commercialize our products, if developed, may depend to
some extent upon our entering into joint ventures or other arrangements with
established pharmaceutical and biopharmaceutical companies with the requisite
experience and financial and other resources to obtain regulatory approvals and
to manufacture and market such products. Our present joint ventures and licenses
include a collaborative research and license agreement with Novartis Pharma AG
with respect to the joint research of SERMs, of which the research portion of
the agreement ended in June 2003, and a separate agreement wherein we have
granted to Novartis an exclusive license (excluding Canada) for the development
and commercialization of Focalin ("d-MPH"); an agreement with Biovail
Corporation International, wherein we granted to Biovail exclusive Canadian
marketing rights for d-MPH; and agreements with Pharmion Corporation and Penn
Pharmaceuticals Services Limited to expand the THALOMID franchise
internationally; and an agreement with GlaxoSmithKline to distribute, promote
and sell ALKERAN. Our present and future arrangements may be jeopardized if any
or all of the following occur:
o we are not able to enter into additional joint ventures or other
arrangements on acceptable terms, if at all;
o our joint ventures or other arrangements do not result in a compatible work
environment;
o our joint ventures or other arrangements do not lead to the successful
development and commercialization of any products;
o we are unable to obtain or maintain proprietary rights or licenses to
technology or products developed in connection with our joint ventures or
other arrangements; or
o we are unable to preserve the confidentiality of any proprietary rights or
information developed in connection with our joint ventures or other
arrangements.
18
THE HAZARDOUS MATERIALS WE USE IN OUR RESEARCH AND DEVELOPMENT COULD RESULT IN
SIGNIFICANT LIABILITIES THAT COULD EXCEED OUR INSURANCE COVERAGE AND FINANCIAL
RESOURCES.
We use some hazardous materials in our research and development activities.
While we believe we are currently in substantial compliance with the federal,
state and local laws and regulations governing the use of these materials, we
cannot be certain that accidental injury or contamination will not occur. Any
such accident or contamination could result in substantial liabilities that
could exceed our insurance coverage and financial resources. Additionally, the
cost of compliance with environmental and safety laws and regulations may
increase in the future, requiring us to expend more financial resources either
in compliance or in purchasing supplemental insurance coverage.
THE PHARMACEUTICAL INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, WHICH
PRESENTS NUMEROUS RISKS TO US.
The preclinical development, clinical trials, manufacturing, marketing and
labeling of pharmaceuticals are all subject to extensive regulation by numerous
governmental authorities and agencies in the United States and other countries.
If we are delayed in receiving, or are unable to obtain at all, necessary
governmental approvals, we will be unable to effectively market our products.
The testing, marketing and manufacturing of our products require regulatory
approval, including approval from the FDA and, in some cases, from the U.S.
Environmental Protection Agency or governmental authorities outside of the
United States that perform roles similar to those of the FDA and EPA. Certain of
our pharmaceutical products, such as Focalin, fall under the Controlled
Substances Act of 1970 that requires authorization by the U.S. Drug Enforcement
Agency ("DEA") of the U.S. Department of Justice in order to handle and
distribute these products. The regulatory approval process presents several
risks to us:
o In general, preclinical tests and clinical trials can take many years, and
require the expenditure of substantial resources, and the data obtained
from these tests and trials can be susceptible to varying interpretation
that could delay, limit or prevent regulatory approval.
o Delays or rejections may be encountered during any stage of the regulatory
process based upon the failure of the clinical or other data to demonstrate
compliance with, or upon the failure of the product to meet, a regulatory
agency's requirements for safety, efficacy and quality or, in the case of a
product seeking an orphan drug indication, because another designee
received approval first.
o Requirements for approval may become more stringent due to changes in
regulatory agency policy, or the adoption of new regulations or
legislation.
o The scope of any regulatory approval, when obtained, may significantly
limit the indicated uses for which a product may be marketed and may impose
significant limitations in the nature of warnings, precautions and
contraindications that could materially affect the profitability of the
drug.
o Approved drugs, as well as their manufacturers, are subject to continuing
and ongoing review, and discovery of previously unknown problems with these
products or the failure to adhere to manufacturing or quality control
requirements may result in restrictions on their manufacture, sale or use
or in their withdrawal from the market.
o Regulatory authorities and agencies may promulgate additional regulations
restricting the sale of our existing and proposed products.
19
o Once a product receives marketing approval, the FDA may not permit us to
market that product for broader or different applications, or may not grant
us clearance with respect to separate product applications that represent
extensions of our basic technology. In addition, the FDA may withdraw or
modify existing clearances in a significant manner or promulgate additional
regulations restricting the sale of our present or proposed products.
o Our labeling and promotional activities relating to our products are
regulated by the FDA and state regulatory agencies and, in some
circumstances, by the DEA, and are subject to associated risks. If we fail
to comply with FDA regulations prohibiting promotion of off-label uses and
the promotion of products for which marketing clearance has not been
obtained, the FDA, or the Office of the Inspector General of the Department
of Health and Human Services, or the state Attorneys General could bring an
enforcement action against us that could inhibit our marketing capabilities
as well as result in significant penalties.
FDA's Center for Biologics Evaluation and Research ("CBER") currently regulates
under 21 CFR Parts 1270 and 1271 human tissue intended for transplantation that
is recovered, processed, stored, or distributed by methods that do not change
tissue function or characteristics and that is not currently regulated as a
human drug, biological product, or medical device. Stem cells fall within this
category. Part 1270 requires tissue establishments to screen and test donors, to
prepare and follow written procedures for the prevention of the spread of
communicable disease, and to maintain records. It also provides for inspection
by FDA of tissue establishments. Part 1271 requires human cells, tissue, and
cellular and tissue-based product establishments (HCT/Ps) to register with the
agency and list their HCT/Ps.
Currently, we are required to be, and are, licensed to operate in New York and
New Jersey, two of the states in which we currently collect placentas and
umbilical cord blood for our allogeneic and private stem cell banking
businesses. If other states adopt similar licensing requirements, we would need
to obtain such licenses to continue operating. If we are delayed in receiving,
or are unable to obtain at all, necessary licenses, we will be unable to provide
services in those states which would impact negatively on our revenues.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY.
Our success will depend, in part, on our ability to obtain and enforce patents,
protect trade secrets, obtain licenses to technology owned by third parties,
when necessary, and conduct our business without infringing upon the proprietary
rights of others. The patent positions of pharmaceutical and biopharmaceutical
firms, including ours, can be uncertain and involve complex legal and factual
questions.
Under the current U.S. patent laws, patent applications in the United States are
maintained in secrecy from six to 18 months, and publications of discoveries in
the scientific and patent literature often lag behind actual discoveries. Thus,
we may discover, sometime in the future, that we, or the third parties from whom
we have licensed patents or patent applications, were not the first to make the
inventions covered by the patents and patent applications in which we have
rights, or that such patents and patent applications were not the first to be
filed on such inventions. In the event that a third party has also filed a
patent application for any of the inventions described in our patents or patent
applications, or those we have licensed-in, we could become involved in an
interference proceeding declared by the U.S. Patent and Trademark Office to
determine priority of invention. Such an interference could result in the loss
of an issued U.S. patent or loss of any opportunity to secure U.S. patent
protection for that invention. Even if the eventual outcome is favorable to us,
such interference proceedings could result in substantial cost to us.
20
In addition, the coverage sought in a patent application may not be obtained or
may be significantly reduced before the patent is issued. Consequently, if our
pending applications, or a pending application that we have licensed-in from
third parties, do not result in the issuance of patents or, if any patents that
are issued do not provide significant proprietary protection or commercial
advantage, our ability to sustain the necessary level of intellectual property
upon which our success depends may be restricted.
Furthermore, even if our patents, or those we have licensed-in, are issued, our
competitors may still challenge the scope, validity or enforceability of our
patents in court, requiring us to engage in complex, lengthy and costly
litigation. Alternatively, our competitors may be able to design around such
patents and compete with us using the resulting alternative technology. If any
of our issued or licensed patents are infringed, we may not be successful in
enforcing our intellectual property rights or defending the validity or
enforceability of our issued patents.
Moreover, different countries have different procedures for obtaining patents,
and patents issued in different countries provide different degrees of
protection against the use of a patented invention by others. Therefore, if the
issuance to us or our licensor, in a given country, of a patent covering an
invention is not followed by the issuance, in other countries, of patents
covering the same invention, or if any judicial interpretation of the validity,
enforceability or scope of the claims in a patent issued in one country is not
similar to the interpretation given to the corresponding patent issued in
another country, our ability to protect our intellectual property in other
countries may be limited.
On January 15, 2004, an opposition proceeding was brought by Celltech R&D Ltd.
against granted European Patent 0728143 relating to JNK 1 and JNK 2
polypeptides. This procedure is directed to only the claims for JNK 2 and not
JNK 1. We intend to respond to this proceeding. Decisions on the merits to be
rendered in the various proceedings are not expected until late 2004 at the
earliest.
It is also possible that third-party patent applications and patents could issue
with claims that cover certain aspects of our business or of the subject matter
claimed in the patents owned or optioned by us or licensed to us, which may
limit our ability to conduct our business or to practice under our patents, and
may impede our efforts to obtain meaningful patent protection of our own. If
patents are issued to third parties that contain competitive or conflicting
claims, we may be legally prohibited from pursuing research, development or
commercialization of potential products or be required to obtain licenses to
these patents or to develop or obtain alternative technology. We may be legally
prohibited from using patented technology, may not be able to obtain any license
to the patents and technologies of third parties on acceptable terms, if at all,
or may not be able to obtain or develop alternative technologies. Consequently,
if we cannot successfully defend against any patent infringement suit that may
be brought against us by a third party, we may lose the ability to continue to
conduct our business as we presently do, or to practice certain subject matter
delineated by patent claims that we have exclusive rights to, whether by
ownership or by license, and that may have a material adverse effect on our
business.
We rely upon trademarks and service marks to protect our rights to the
intellectual property used in our business. On October 29, 2003, we filed a
lawsuit against Centocor, Inc. to prevent Centocor's use of the term "I.M.I.D.s"
in connection with Centocor's products, which use, we believe, is likely to
cause confusion with our IMiDs(TM) mark for compounds being developed by us to
treat cancer and inflammatory diseases. If we are not successful in this suit,
it may be necessary for us to adopt a different trademark for that class of
compounds and thereby lose the value we believe we have built in the IMiDs(TM)
mark.
Further, we rely upon unpatented proprietary and trade secret technology that we
try to protect, in part, by confidentiality agreements with our collaborative
partners, employees, consultants, outside scientific collaborators, sponsored
researchers and other advisors. If these agreements are breached, we may not
21
have adequate remedies for any such breach. Despite precautions taken by us,
others may obtain access to or independently develop our proprietary technology
or such technology may be found to be non-proprietary or not a trade secret.
In addition, our right to practice the inventions claimed in some patents that
relate to THALOMID arises under licenses granted to us by others, including The
Rockefeller University and Children's Medical Center Corporation ("CMCC"). In
addition to these patents, which relate to thalidomide, we have also licensed
from CMCC certain patents relating to thalidomide analogs. In December 2002, we
entered into an exclusive license agreement with CMCC and EntreMed. Inc.
Pursuant to which CMCC exclusively licensed to us certain patents and patent
applications that relate to analogs, metabolites, precursors and hydrolysis
products of thalidomide, and all stereoisomers thereof. Our license under the
December 2002 agreement is worldwide and royalty-bearing, and we have complete
control over the prosecution of the licensed thalidomide analog patent rights.
The December 2002 agreement also grants us an option to inventions in the field
of thalidomide analogs that may be developed at CMCC in the laboratory of Dr.
Robert D'Amato, pursuant to the terms and conditions of a separate Sponsored
Research Agreement negotiated between CMCC and us.
During the fourth quarter of 2003, Pharmion, our exclusive licensee for
thalidomide in all countries outside North America, Japan, China, Taiwan and
Korea, sued Lipomed A.G. and certain of its distributors, in the UK,
Switzerland, Germany and Italy for infringement of European Patent EP 0 688 211.
This suit was brought in connection with their sales of thalidomide for the
treatment of angiogenesis-mediated disorders, including multiple myeloma.
Celgene is a co-plaintiff to the proceedings in Switzerland, Italy and Germany.
Injunctive relief that prevents the defendants from making any further sales of
thalidomide for the treatment of angiogenesis-mediated disorders, including
multiple myeloma and damages are sought. Preliminary injunctions in Italy and
Switzerland pending a decision on the merits is also sought. Decisions on the
merits to be rendered in the various proceedings are not expected until late
2004 at the earliest.
Further, while we believe these confidentiality and license agreements to be
valid and enforceable, our rights under these agreements may not continue or
disputes concerning these agreements may arise. If any of the foregoing should
occur, we may be unable to rely upon our unpatented proprietary and trade secret
technology, or we may be unable to use the third party proprietary technology we
have licensed-in, either of which may prevent or hamper us from successfully
pursuing our business.
THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND
SIGNIFICANT TECHNOLOGICAL CHANGE.
The pharmaceutical industry in which we operate is highly competitive and
subject to rapid and significant technological change. Our present and potential
competitors include major pharmaceutical and biotechnology companies, as well as
specialty pharmaceutical firms, such as:
o Bristol Myers Squibb Co., which potentially competes in clinical trials
with our IMiDs and SelCIDs;
o Genentech Inc., which potentially competes in clinical trials with our
IMiDs and SelCIDs;
o AstraZeneca p.l.c., which potentially competes in clinical trials with our
IMiDs and SelCIDs;
o Millennium Pharmaceuticals, which potentially competes in clinical trials
with our IMiDs and SelCIDs as well as with THALOMID;
o Genta Co., which potentially competes with our IMiDs and SelCIDs as well as
with THALOMID;
o Cell Therapeutics Inc., which potentially competes in clinical trials with
our IMiDs and SelCIDs as well as with THALOMID;
o Vertex Pharmaceuticals Inc., which potentially competes in clinical trials
with our kinase inhibitors; and
o Biogen IDEC Inc. and Ilex Oncology, Inc., both of which are generally
developing drugs that address the oncology and immunology markets, although
we are not aware of specific competing products.
22
Many of these companies have considerably greater financial, technical and
marketing resources than us. We also experience competition from universities
and other research institutions and, in some instances, we compete with others
in acquiring technology from these sources. The pharmaceutical industry has
undergone, and is expected to continue to undergo, rapid and significant
technological change, and we expect competition to intensify as technical
advances in the field are made and become more widely known. The development of
products or processes by our competitors with significant advantages over those
that we are seeking to develop could cause the marketability of our products to
stagnate or decline.
SALES OF OUR PRODUCTS ARE DEPENDENT ON THIRD-PARTY REIMBURSEMENT.
Sales of our products will depend, in part, on the extent to which the costs of
our products will be paid by health maintenance, managed care, pharmacy benefit
and similar health care management organizations, or reimbursed by government
health administration authorities, private health coverage insurers and other
third-party payors. These health care management organizations and third-party
payors are increasingly challenging the prices charged for medical products and
services. Additionally, the containment of health care costs has become a
priority of federal and state governments, and the prices of drugs have been
targeted in this effort. If these organizations and third-party payors do not
consider our products to be cost-effective, they may not reimburse providers of
our products or, if they do, the level of reimbursement may not be sufficient to
allow us to sell our products on a profitable basis.
WE MAY NOT REALIZE THE BENEFITS OF THE COMBINED BUSINESSES AS A RESULT OF THE
ANTHROGENESIS ACQUISITION, WHICH COULD DIMINISH THE EXPECTED BENEFITS OF THE
ACQUISITION.
Achieving the expected benefits of the Anthrogenesis acquisition, which was
consummated on December 31, 2002, will depend in large part on the successful
integration and management of certain aspects of the combined businesses in a
timely and efficient manner and the scale-up and commercialization of
Anthrogenesis' technologies and products. We must integrate the information
systems, product development, administration and other operations of the
combined company. This may be difficult and unpredictable because of possible
cultural conflicts and different opinions on technical, operational and other
integration decisions. We must also integrate the employees of the combined
company. The operations, management and personnel of the combined company may
not be compatible, and we may experience the loss of key personnel for that
reason.
If we are not successful in these integration efforts, we may not realize the
full expected benefits of the Anthrogenesis acquisition.
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY MAKE IT
DIFFICULT FOR YOU TO SELL THE COMMON STOCK WHEN YOU WANT OR AT PRICES YOU FIND
ATTRACTIVE.
There has been significant volatility in the market prices for publicly traded
shares of biopharmaceutical companies, including ours. We expect that the market
price of our common stock will continue to fluctuate. In 2002, the intra-day
price of our common stock fluctuated from a high of $32.20 to a low of $11.32.
In 2003, the intra-day price of our common stock fluctuated from a high of
$48.88 to a low of $20.15. On March 12, 2004 our common stock closed at a price
of $44.40. The price of our common stock may not remain at or exceed current
levels. The following factors may have an adverse impact on the market price of
our common stock:
o results of our clinical trials;
o announcements of technical or product developments by our competitors;
23
o market conditions for pharmaceutical and biotechnology stocks;
o market conditions generally;
o governmental regulation;
o health care legislation;
o public announcements regarding medical advances in the treatment of the
disease states that we are targeting;
o patent or proprietary rights developments;
o changes in third-party reimbursement policies for our products; or
o fluctuations in our operating results.
In addition, the stock market in general has experienced extreme volatility that
has often been unrelated to the operating performance of a particular company.
These broad market fluctuations may adversely affect the market price of our
common stock.
THE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE WOULD DILUTE
THE OWNERSHIP INTEREST OF EXISTING STOCKHOLDERS AND COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.
Future sales of substantial amounts of our common stock could adversely affect
the market price of our common stock. As of March 1, 2004, there were
outstanding stock options and warrants for 12,305,566 shares of common stock, of
which 11,366,172 were currently exercisable at an exercise price range between
$0.15 and $70.00, with a weighted average exercise price of $24.27. These
amounts include outstanding options and warrants of Anthrogenesis that we
assumed as part of our acquisition of Anthrogenesis on December 31, 2002 and
that were converted into outstanding options and warrants of our common stock
pursuant to an exchange ratio. In addition, in June 2003, we issued $400.0
million of unsecured convertible notes that are convertible into 8,255,920
shares of our common stock at a conversion price of approximately $48.45 per
share. The conversion of some or all of these notes will dilute the ownership
interest of existing stockholders.
OUR SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BY-LAW PROVISIONS MAY DETER
A THIRD PARTY FROM ACQUIRING US AND MAY IMPEDE THE STOCKHOLDERS' ABILITY TO
REMOVE AND REPLACE OUR MANAGEMENT OR BOARD OF DIRECTORS.
Our board of directors has adopted a shareholder rights plan, the purpose of
which is to protect stockholders against unsolicited attempts to acquire control
of us that do not offer a fair price to all of our stockholders. The rights plan
may have the effect of dissuading a potential acquirer from making an offer for
our common stock at a price that represents a premium to the then current
trading price.
Our board of directors has the authority to issue, at any time, without further
stockholder approval, up to 5,000,000 shares of preferred stock, and to
determine the price, rights, privileges and preferences of those shares. An
issuance of preferred stock could discourage a third party from acquiring a
majority of our outstanding voting stock. Additionally, our board of directors
has adopted certain amendments to our by-laws intended to strengthen the board's
position in the event of a hostile takeover attempt. These provisions could
impede the stockholders' ability to remove and replace our management and/or
board of directors.
24
Furthermore, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law, which may also dissuade a
potential acquirer of our common stock.
AVAILABLE INFORMATION
Our current reports on Form 8-K, quarterly reports on Form 10-Q and annual
reports on Form 10-K are electronically filed with the Securities and Exchange
Commission ("SEC"), and all such reports and amendments to such reports filed
have been and will be made available, free of charge, through our website
(http://www.celgene.com) as soon as reasonably practicable after such filing.
Such reports will remain available on our website for at least twelve months.
The public may read and copy any materials filed by us with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, D.C.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC.
25
ITEM 2. PROPERTIES
We lease an aggregate of 92,100-square feet of laboratory and office space in
Warren, New Jersey, under various leases with unaffiliated parties, which have
lease terms ending between June 2005 and July 2010 with renewal options ranging
from either one or two additional five-year terms. Annual rent for these
facilities is approximately $1.0 million. We also are required to reimburse the
lessors for real estate taxes, insurance, utilities, maintenance and other
operating costs. 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 March 2009 with two five-year renewal options.
Annual rent for this facility is approximately $0.5 million.
In December 2001, we entered into a lease to consolidate our San Diego,
California, operations into one building. The 78,202-square foot laboratory and
office facility in San Diego, California was leased from an unaffiliated party
and has a term ending in August 2012 with one five-year renewal option. Annual
rent for this facility is approximately $1.8 million and is subject to specified
annual rental increases. Under the lease, we also are required to reimburse the
lessor for real estate taxes, insurance, utilities, maintenance and other
operating costs.
Upon completion of the acquisition of Anthrogenesis on December 31, 2002, we
assumed two separate leases in the same facility for office and laboratory space
in Cedar Knolls, New Jersey and have subsequently entered into one additional
lease for additional space in the same facility. The leases are for an aggregate
20,000-square feet with annual rent of approximately $0.2 million. We also are
required to reimburse the lessor for real estate taxes, insurance, utilities
maintenance and other operating costs. The leases have terms ending between
September 2007 and April 2009 with renewal options ranging from either one or
two additional five-year terms. 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 renewal option.
Annual rent for this facility is approximately $0.1 million.
ITEM 3. LEGAL PROCEEDINGS
We are not engaged in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"CELG." The following table sets forth, for the periods indicated, the intra-day
high and low bid prices per share of common stock on the Nasdaq National Market:
- --------------------------------------------------------------------------------
HIGH LOW
-------------------------------
2003
Fourth Quarter $48.15 $36.52
Third Quarter 48.88 28.52
Second Quarter 37.13 21.80
First Quarter 27.95 20.15
2002
Fourth Quarter $25.50 $15.06
Third Quarter 21.35 11.39
Second Quarter 25.20 11.32
First Quarter 32.20 21.52
- --------------------------------------------------------------------------------
The last reported sales price per share of common stock on the Nasdaq National
Market on March 12, 2004 was $44.40. As of March 1, 2004, there were
approximately 41,522 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate paying any cash dividends on our common stock in
the foreseeable future.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes the equity compensation plans under which our
common stock may be issued as of December 31, 2003:
- -------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF SECURITIES
SECURITIES TO BE WEIGHTED- REMAINING AVAILABLE
ISSUED UPON AVERAGE EXERCISE FOR FUTURE ISSUANCE
EXERCISE OF PRICE OF UNDER EQUITY
OUTSTANDING OUTSTANDING COMPENSATION PLANS,
OPTIONS, WARRANTS OPTIONS, WARRANTS EXCLUDING SECURITIES
AND RIGHTS AND RIGHTS REFLECTED IN COLUMN (A)
PLAN CATEGORY (A) (B) (C)
- --------------------------------------------------------- ---------------------------------------------
Equity compensation plans 11,245,004 $26.15 2,486,908
approved by security holders
Equity compensation plans not 911,052 $12.44 113,757
approved by security holders
--------------------------------------------------------------------
Total 12,156,056 $25.12 2,600,665
=======================================================================================================
27
The Anthrogenesis Corporation Qualified Employee Incentive Stock Option Plan has
not been approved by our stockholders. As a result of the acquisition of
Anthrogenesis on December 31, 2002, we acquired the Anthrogenesis Qualified
Employee Incentive Stock Option Plan (the "Qualified Plan") and the
Non-Qualified Recruiting and Retention Stock Option Plan (the "Non-Qualified
Plan"). No future awards will be granted under the Non-Qualified Plan. The
Qualified Plan authorizes the award of incentive stock options, which are stock
options that qualify for special federal income tax treatment. The exercise
price of any stock option granted under the Qualified Plan may not be less than
the fair market value of the common stock on the date of grant. In general,
options granted under the Anthrogenesis' Qualified Plan vest evenly over a four
year period and expire ten years from the date of grant, subject to earlier
expiration in case of termination of employment. The vesting period is subject
to certain acceleration provisions if a change in control occurs. No award will
be granted under the Qualified Plan on or after December 31, 2008.
28
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data should be read in conjunction
with our Consolidated Financial Statements and the related Notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information included elsewhere in this Annual
Report. The data set forth below with respect to our Consolidated Statements of
Operations for the years ended December 31, 2003, 2002 and 2001 and the
Consolidated Balance Sheet data as of December 31, 2003 and 2002 are derived
from our Consolidated Financial Statements which have been audited by KPMG LLP,
independent certified public accountants, and which are included elsewhere in
this Annual Report and are qualified by reference to such Consolidated Financial
Statements and related Notes thereto. The data set forth below with respect to
our Consolidated Statement of Operations for the years ended December 31, 2000
and 1999 and the Consolidated Balance Sheet data as of December 31, 2001, 2000
and 1999 are derived from our Consolidated Financial Statements, which have been
audited by KPMG LLP and which are not included elsewhere in this Annual Report.
Our historical results are not necessarily indicative of future results of
operations.
- --------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
In thousands, except per share data 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenue $ 271,475 $ 135,746 $ 114,243 $ 84,908 $ 38,192
Costs and operating expenses 274,124 259,875 139,186 119,217 68,857
Other income (expense), net 16,128 23,031 20,807 15,496 (1,990)
Income tax benefit (provision) (718) 98 1,232 1,810 3,018
-------------------------------------------------------------------------
Income (loss) from continuing
operations 12,761 (101,000) (2,904) (17,003) (29,637)
Preferred stock dividend (including accretion
and imputed dividends) -- -- -- -- 818
-------------------------------------------------------------------------
Income (loss) from continuing operations
applicable to common stockholders $ 12,761 $(101,000) $ (2,904) $ (17,003) $ (30,455)
=========================================================================
Income (loss) from continuing operations
applicable to common stockholders per share of
common stock(1):
Basic $ 0.16 $ (1.31) $ (0.04) $ (0.25) $ (0.59)
Diluted $ 0.15 $ (1.31) $ (0.04) $ (0.25) $ (0.59)
Weighted average number of shares of common
stock outstanding (1):
Basic 80,887 77,337 75,108 66,598 51,449
Diluted 85,398 77,337 75,108 66,598 51,449
- --------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents, and marketable
securities $ 666,967 $ 261,182 $ 310,041 $ 306,162 $ 28,947
Total assets 791,336 327,287 353,982 346,726 46,873
Long-term obligations under capital leases and
equipment notes payable 16 40 46 633 1,828
Convertible notes 400,000 -- 11,714 11,714 38,495
Accumulated deficit (308,856) (322,367) (222,367) (220,455) (204,170)
Stockholders' equity (deficit) 310,054 276,698 310,425 295,533 (9,727)
- --------------------------------------------------------------------------------------------------------------------------------
(1) Amounts have been adjusted for the three-for-one stock split effected in
April 2000
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
We are an integrated global pharmaceutical company primarily engaged in the
discovery, development and commercialization of novel therapies for the
treatment of cancer and immunological diseases. We currently market THALOMID,
our lead product, for the treatment of erythema nodosum leprosum ("ENL"), which
is more widely used off-label for treatment in multiple myeloma and other
cancers. Despite dosage decreases over the past several years, THALOMID sales
have grown rapidly as the number of patients using THALOMID has increased
steadily. The success of THALOMID has enabled us to invest heavily in research
and development spending, which has resulted in a broad portfolio of products in
the our discovery pipeline. Moreover, using years of clinical data generated
through the study of thalidomide, we have developed a promising pipeline of
THALOMID analogs (e.g., IMiDs(TM)). These compounds have been optimized to have
the beneficial attributes of thalidomide while having minimized its negative
attributes and side effects. REVLIMID(TM), one of our clinical stage IMiDs, is
now being tested in ongoing pivotal Phase III special protocol assessment trials
and Phase II trials that have the potential to result in FDA approval in 2005.
Given REVLIMID's potentially superior safety and efficacy profile, its higher
profitability projections and the leverage we can achieve from our established
oncology salesforce, we expect the launch of REVLIMID to result in a significant
growth to our bottom-line. We believe that the success of THALOMID, the growth
opportunities of REVLIMID and a broad portfolio of products coupled with our
solid cash position, places us in a good position within the biotechnology
industry.
INDUSTRY-WIDE FACTORS
Future operating results will depend on many factors, including demand for our
products, regulatory approvals of our products, the timing of the introduction
and market acceptance of new products by us or competing companies, the timing
of research and development milestones and our ability to control costs. For
further discussion about risks, refer to "Risk Factors" contained in Part I,
Item I of this document.
Industry-wide factors that we are focused on include, among others, near-term
competition for THALOMID, delays in the introduction of REVLIMID and, in the
longer-term, failure to commercialize our early stage drug candidates.
Near Term Competition for THALOMID: In June 2003, the FDA approved Millenium
Pharmaceuticals, Inc's. Velcade(R) for use in refractory multiple myeloma
patients. While it's possible that Velcade could reduce THALOMID sales in
multiple myeloma, we believe that THALOMID will continue to be used as a first
line treatment and that Velcade will likely be used in patients that have not
had success with THALOMID. Also, generic competition could reduce THALOMID
sales. However, we believe this is unlikely, at least in the near term, given
the fact that we have four patents that expire between the years 2018 and 2020
covering the "System for Thalidomide Education and Prescribing Safety," or
S.T.E.P.S., distribution system, which all patients receiving thalidomide must
follow and several issued patents covering THALOMID use in oncology. Even if
generic competition could manage to enter the market, it is unlikely they could
do so before 2006 given the time needed to commercialize a product, and by that
time, we expect to have at least partially replaced THALOMID with REVLIMID.
Delay In The Introduction of REVLIMID: While we have made excellent progress in
our efforts to accelerate the path to regulatory approval of REVLIMID now being
tested in ongoing pivotal Phase III special protocol assessment trials and Phase
II trials, all of which remain on or ahead of their planned patient accrual
timelines for potential approvals in 2005, a delay in the introduction of
REVLIMID or its
30
failure to demonstrate efficacy or an acceptable safety profile could adversely
affect our business, financial condition and results of operations.
Failure To Commercialize Early Stage Drug Candidates: Our long-term success and
sustainability is dependent on our ability to move our earlier stage drug
candidates through development and to realize the commercial potential of our
broad pipeline.
COMPANY BACKGROUND
Celgene was organized in 1980 as a unit of Celanese Corporation, a chemical
company. In 1986, we were spun-off as an independent chemical biotechnology
company and in July 1987, we completed an initial public offering of our common
stock. At first, our operations involved the research and development of
chemical and biotreatment processes for the chemical and pharmaceutical
industries. In 1994, we discontinued the biotreatment operations to focus on our
targeted small molecule cancer and immunology compound development programs and
our biocatalytic chiral chemistry program.
Between 1990 and 1998, our revenues were generated primarily through the
development and supply of chirally pure intermediates to pharmaceutical
companies for use in new drug development and, to a lesser degree, from
agrochemical research and development contracts. Sales of chirally pure
intermediates became a less integral part of our strategic focus and, in January
1998, we sold chiral intermediates business to Cambrex Corporation. Revenue from
THALOMID sales, license agreements and milestone payments related to our cancer
and immunology programs began to increase at this time.
In July 1998, we received approval from the FDA to market THALOMID (thalidomide)
for use in ENL, a side effect of leprosy, and, in September 1998, we commenced
sales of THALOMID in the United States. Sales of THALOMID, our lead product,
have grown significantly each year since the launch and, in 2001, 2002 and 2003
we recorded net THALOMID sales of $82.0 million, $119.1 million and $223.7
million, respectively.
In February 2000, we completed a follow-on public offering in which we raised
proceeds, net of offering expenses, of approximately $278.0 million. In April
2000, we signed a license and development agreement with Novartis Pharma AG in
which we granted to Novartis a license for d-MPH, our chirally pure version of
Ritalin. The agreement provides for significant upfront and milestone payments
based on achieving various regulatory approvals and royalties on the entire
family of Ritalin products upon approval of d-MPH by the FDA. We have retained
the rights for the use of d-MPH in oncology indications. We received approval
from the FDA to market d-MPH, or Focalin(TM), on November 14, 2001.
In August 2000, we acquired Signal Pharmaceuticals, Inc., a privately held
biopharmaceutical company focused on the discovery and development of drugs that
regulate genes associated with disease and, in December 2002, we acquired
Anthrogenesis Corp., a privately held biotherapeutics company pioneering the
recovery of stem cells from human placental tissue following the completion of a
full-term, successful pregnancy.
In March 2003, we entered into a three-year supply and distribution agreement
with GlaxoSmithKline ("GSK") to distribute, promote and sell ALKERAN
(melphalan), a therapy approved by the FDA for the palliative treatment of
multiple myeloma and for palliation of carcinoma of the ovary. Under the terms
of the agreement, we purchase ALKERAN tablets and ALKERAN for injection from
GlaxoSmithKline and distributes the products in the United States under the
Celgene label. The agreement, which provides us with an approved oncology
product, requires that we purchase certain minimum quantities each year for an
initial three-year term under a take-or-pay arrangement aggregating $56.6
million over such period. At
31
December 31, 2003, the remaining minimum purchase requirements under the
agreement were $43.5 million.
In June 2003, we raised an additional $387.8, net of expenses, through the
issuance of unsecured convertible notes to qualified institutional buyers. The
notes have a face value of $400.0 million, a term of five-years, a coupon rate
of 1.75% payable semi-annually and are convertible at any time into 8,255,920
shares of common stock at a conversion price of $48.45 per share, which
represents a 50% premium to our closing stock price on May 28, 2003.
Until 2003, we had sustained losses in each year since our incorporation in
1986. For the year ended December 31, 2003, we posted net income of $13.5
million. We had an accumulated deficit of $308.9 million at December 31, 2003
and have since our inception financed our working capital requirements primarily
through product sales, public and private sales of our equity securities and
debt, income earned on the investment of the proceeds from the sale of such
securities and revenues from research contracts and license payments. We expect
to make substantial expenditures to further develop and commercialize our
products. We expect that our rate of spending will accelerate as a result of
increased clinical trial costs and expenses associated with regulatory approval
and commercialization of products now in development. However, these
expenditures are expected to be more than offset by increasing product sales,
royalties, revenues from various research collaborations and license agreements
with other pharmaceutical and biopharmaceutical companies, and investment
income.
RESULTS OF OPERATIONS -
FISCAL YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Total Revenue: Total revenue and related percentages for the years ended
December 31, 2003, 2002 and 2001 were as follows:
- --------------------------------------------------------------------------------------------------------
% CHANGE
-------------------
2002 2001
TO TO
(In thousands) 2003 2002 2001 2003 2002
- --------------------------------------------------------------------------------------------------------
Net product sales:
THALOMID $223,686 $119,060 $ 82,003 87.9% 45.2%
Focalin 2,383 3,861 2,192 (38.3%) 76.1%
ALKERAN 17,827 -- -- N/A N/A
Stem Cell Therapies 557 -- -- N/A N/A
------------------------------------
Total net product sales $244,453 $122,921 $ 84,195 98.9% 46.0%
Collaborative agreements
and other revenue 15,174 8,115 28,149 87.0% (71.2%)
Royalty revenue 11,848 4,710 -- 151.5% N/A
Related-party collaborative
agreement revenue -- -- 1,899 N/A N/A
------------------------------------
Total revenue $271,475 $135,746 $114,243 100.0% 18.8%
========================================================================================================
THALOMID net sales increases in 2003 and 2002 were due to the combination of
price increases and increasing use by oncologists in the treatment of various
types of cancers, especially first line use in multiple myeloma. THALOMID net
sales in 2003 also benefited from the market introduction of two new higher
strength formulations during the first half of 2003, which had higher per unit
sales prices. Net sales of Focalin, which received FDA approval in November
2001, were lower in 2003 due to the timing of shipments to Novartis for their
32
commercial distribution. The ALKERAN supply and distribution agreement with
GlaxoSmithKline was executed in March 2003 and sales of ALKERAN began during the
second quarter of 2003. Consequently, sales for this product are reflected only
in the 2003 period.
Collaborative agreements and other revenue for the year ended December 31, 2003
included primarily $6.0 million related to the agreement to terminate the
Gelclair co-promotion agreement between OSI Pharmaceuticals Inc. and Celgene,
$4.3 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 $2.9 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
primarily $4.9 million of amortization of an up-front payment and a $1.0 million
milestone payment received from Novartis Pharma AG in connection with the SERM
license agreement, $1.2 million of license revenue from Pharmion and $0.5
million of certain other milestone payments. The 2001 period included primarily
$10.4 million of amortization of upfront payments related to two separate
agreements with Novartis and a milestone payment of $12.5 million from Novartis
for receiving FDA approval to market Focalin.
Royalty revenue reflects royalties received from Novartis on sales of their
entire family of Ritalin drugs. There was no related party revenue in 2003 and
2002 as the agreement with Axys Pharmaceuticals, which we treated as a related
party in 2001 and under which we recorded revenue of $1.9 million in 2001
expired in October 2001.
Cost of Goods Sold: Cost of goods sold and related percentages for the years
ended December 31, 2003, 2002 and 2001 were as follows:
---------------------------------------------------------------------
(In thousands $) 2003 2002 2001
---------------------------------------------------------------------
Cost of goods sold $ 49,085 $ 17,322 $ 13,571
Increase from prior year $ 31,763 $ 3,751 N/A
Percentage increase from prior year 183.4% 27.6% N/A
Percentage of net product sales 20.1% 14.1% 16.1%
=====================================================================
Cost of goods sold increased in 2003 compared to 2002, primarily due to a
significant increase in THALOMID sales volumes, higher royalties on THALOMID
product sales and the introduction of ALKERAN. The increase in cost of goods
sold as a percentage of net product sales in 2003 compared to 2002 was primarily
due to the introduction of ALKERAN, which has a significantly higher cost
structure than THALOMID, partially offset by higher gross profits on THALOMID
due to price increases initiated during the year and by higher 2002 sales of
Focalin, which also has a higher cost structure than THALOMID. Similar to 2003,
cost of goods sold increased in 2002 compared to 2001, due to a significant
increase in THALOMID sales volumes. Also contributing to the 2002 increase were
higher sales of Focalin, which as indicated above, has a higher cost structure
than THALOMID and higher THALOMID product royalties resulting from higher sales
and thereby triggering higher royalty percentages.
Focalin product costs incurred prior to its approval in November 2001 were
expensed as research and development expenses. Focalin actual costs will
continue to be lower than its standard costs until the product associated with
the previously expensed costs are completely sold.
33
Research and Development: 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 and related percentages for the years ended
December 31, 2003, 2002 and 2001 were as follows:
-----------------------------------------------------------------------
(In thousands $) 2003 2002 2001
-----------------------------------------------------------------------
Research and development
expenses $ 122,700 $ 84,924 $ 67,653
Increase from prior year $ 37,776 $ 17,271 N/A
Percentage increase from prior year 44.5% 25.5% N/A
Percentage of total revenue 45.2% 62.6% 59.2%
=======================================================================
Research and development expenses increased in 2003 compared to 2002, primarily
due to the initiation of several large studies related to our THALOMID and
REVLIMID clinical programs in the second half of 2002. In 2003, approximately
$82.0 million was spent on THALOMID and its follow on compounds (i.e., the IMiDs
and SelCIDs) and Focalin, primarily for preclinical toxicology, phase I/II and
phase III clinical trials and regulatory expenses, approximately $37.1 million
was spent in gene regulation, target and drug discovery and agro-chemical
programs, and approximately $3.7 million was spent on stem cell therapy
programs, primarily for internal headcount related expenses, laboratory supplies
and product development costs. In 2002, approximately $49.1 million was spent on
THALOMID and the IMiDs and SelCIDs compounds, primarily for preclinical
toxicology and phase I/II clinical trials, the initiation of our phase III
clinical trials in multiple myeloma and metastatic melanoma and legal expenses
related to patent filings and approximately $35.8 million was spent in gene
regulation, target discovery and agro-chemical programs, primarily for internal
headcount related expenses, laboratory supplies and product development costs.
In 2001, approximately $33.1 million was spent on THALOMID and the IMiDs and
SelCIDs compounds, primarily for preclinical toxicology and phase I/II clinical
trials, regulatory expenses for preparation of a supplementary New Drug
Application ("sNDA") for THALOMID in multiple myeloma and legal expenses related
to patent filings, approximately $2.8 million was spent for Focalin, primarily
for drug supply that was expensed prior to FDA approval and approximately $31.8
million was spent in gene regulation, target discovery and agro-chemical
programs, primarily for internal headcount related expenses, laboratory supplies
and product development costs. 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.
34
For information about the commercial status, target diseases and the development
of our drug compounds, refer to the product overview table contained in Part I,
Item I of this document. In general, the estimated times to completion within
the various stages of clinical development are as follows:
------------------------------------------------------------
CLINICAL PHASE ESTIMATED COMPLETION
TIME
------------------------------------------------------------
Phase I 1-2 years
Phase II 2-3 years
Phase III 2-3 years
------------------------------------------------------------
Due to the significant risks and uncertainties inherent in preclinical tests and
clinical trials associated with each of our research and development projects,
the cost to complete such projects is not reasonably estimable. The data
obtained from these tests and trials may be susceptible to varying
interpretation that could delay, limit or prevent a project's advancement
through the various stages of clinical development, which would significantly
impact the costs incurred in bringing a project to completion.
Selling, General and Administrative: 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. 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 and related percentages for the
years ended December 31, 2003, 2002 and 2001 were as follows:
-----------------------------------------------------------------------
(In thousands $) 2003 2002 2001
-----------------------------------------------------------------------
Selling, general and administrative
expenses $ 102,339 $ 69,717 $ 57,962
Increase from prior year $ 32,622 $ 11,755 N/A
Percentage increase from prior year 46.8% 20.3% N/A
Percentage of total revenue 37.7% 51.4% 50.7%
=======================================================================
Selling, general and administrative expenses increased in 2003 compared to 2002,
primarily due to $10.1 million of expenses incurred within the Stem Cell
Therapies segment, which became effective with the acquisition of Anthrogenesis
in December 2002, an increase of approximately $12.0 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 $10.0
million in general administrative and medical affairs expenses. Selling, general
and administrative expenses increased in 2002 compared to 2001, primarily due to
an increase in commercial expenses to support the commercialization of THALOMID,
with an increase of approximately $4.9 million in sales and marketing expenses
primarily related to our sales force expansion. As a percent of total revenue,
selling, general and administrative expenses decreased to approximately 38% in
2003 from approximately 51% in both the 2002 and 2001 periods.
35
Litigation Settlement and Related Agreements: In December 2002, we entered into
a series of agreements with EntreMed, Inc. and Children's Medical Center
Corporation ("CMCC") to effectively terminate ongoing litigation relating to
patents for thalidomide analogs and to grant an exclusive license to Celgene for
the rights to those patents. Under the terms of an Asset Purchase Agreement with
EntreMed, we paid to EntreMed $10.0 million for all thalidomide analog patents
and associated clinical data and records, and the termination of any litigation
surrounding those patents. Under the terms of a Securities Purchase Agreement
with EntreMed, we acquired from EntreMed 3,350,000 shares of Series A
Convertible Preferred Stock, and warrants for an additional 7,000,000 common
shares for approximately $16.8 million. We completed an assessment of the
estimated realizable value of the investment. Considering the level of the
Company's ownership interest in EntreMed, its history of operating losses and
the fact that EntreMed is a clinical-stage biopharmaceutical company engaged
primarily in research and development activities with proposed products and
research programs in the early stage of clinical development, and based on such
assessment, the entire amount of such Preferred Stock was written down.
We also signed an exclusive license agreement with CMCC that terminated any
existing thalidomide analog agreements between CMCC and EntreMed and directly
granted us an exclusive worldwide license for the analog patents. We paid to
CMCC $2.5 million under this agreement with another $2.5 million payable between
2004 and 2006, the present value of which totaled $2.2 million and was expensed
in 2002. Additionally, we entered into a five year sponsored research agreement
with CMCC whereby we have committed $0.3 million per year in funding. Additional
payments are possible under the agreement depending on the successful
development and commercialization of thalidomide analogs.
We recorded a charge to earnings for the cost of these agreements and related
expenses of $32.2 million in 2002 including the write down of the EntreMed
Series A Convertible Preferred Stock and certain legal expenses incurred in
connection with the settlement. For more information on the litigation
settlement and related agreements, refer to Note 4 of the Notes to the
Consolidated Financial Statements.
Acquired In-Process Research and Development: On December 31, 2002, we completed
the acquisition of Anthrogenesis Corp., which now operates as Celgene Cellular
Therapeutics, for an aggregate purchase price of $60.0 million. The acquisition
was accounted for using the purchase method of accounting for business
combinations, under which approximately $55.7 million was allocated to IPR&D and
charged to expense at the acquisition date. For more information on the
Anthrogenesis acquisition, refer to Notes 2 and 18 of the Notes to the
Consolidated Financial Statements.
Interest and other income: Interest and other income decreased approximately
5.5% to $21.8 million in 2003, from $23.1 in 2002. The decrease was primarily
due to lower interest income as a result of lower interest rates in 2003,
partially offset by an increase of $1.4 million in realized gains on marketable
securities. Interest and other income increased approximately 10.4% to $23.1
million in 2002, from $20.9 million in 2001. The increase was primarily related
to higher realized gains of approximately $5.0 million on sales of certain
marketable securities partially offset by lower interest income on lower average
cash balances and lower yields on our securities during 2002.
Interest expense: Interest expense was approximately $5.7 million in 2003 and
reflects interest on the $400 million unsecured convertible notes issued on June
3, 2003. Interest expense for the 2002 and 2001 periods was immaterial.
Income tax benefit (provision): In 2003 we recognized tax expense of $1.1
million for federal and state purposes and in 2002, we recognized $0.4 million
for state tax purposes. During 2003, 2002 and 2001, we also recognized a tax
benefit of $0.4 million, $0.7 million and $1.2 million, respectively, from the
sale of certain state net operating loss carryforwards.
36
Income (Loss) from continuing operations: Income (loss) from continuing
operations and per common share amounts for the years ended December 31, 2003,
2002 and 2001 were as follows:
-------------------------------------------------------------------------------------------
(In thousands, except per share amounts) 2003 2002 2001
-------------------------------------------------------------------------------------------
Income (loss) from continuing
operations $ 12,761 $ (101,000) $ (2,904)
Per common share amounts:
Basic $ 0.16 $ (1.31) $ (0.04)
Diluted $ 0.15 $ (1.31) $ (0.04)
Weighted average number of shares of
common stock utilized to calculate per
common share amounts
Basic 80,887,000 77,337,000 75,108,000
Diluted 85,398,000 77,337,000 75,108,000
===========================================================================================
In 2003, we recorded income from continuing operations for the first time since
our inception in 1986. Income (loss) from continuing operations increased in
2003 due to an increase in total revenues of approximately $135.8 million, lead
by an increase in THALOMID net sales of $104.6 million and first-time ALKERAN
sales of $17.8 million and one-time costs incurred in 2002 of $55.7 million from
the write-off of acquired in-process research and development related to the
Anthrogenesis acquisition and $32.2 million associated with litigation
settlement and related agreements with EntreMed, Inc. and CMCC. Offsetting these
increases were higher operating costs and expenses of approximately $102.2
million, a decrease in other income and expense of approximately $6.9 million
and, from a per share perspective, the higher number of shares of common stock
utilized to calculate the per common share amounts in 2003. The loss from
continuing operations increased significantly in 2002 compared to 2001 primarily
due to the aggregate one-time costs of $87.9 million described above, an
increase of $32.8 million in other operating costs and expenses and a decrease
of $1.1 million in the income tax benefit, partially offset by an increase in
total revenue of $21.5 million and an increase in net interest and other income
and expense of $2.2 million.
Gain on sale of chiral assets: In January 1998, we completed the sale of our
chiral intermediate business to Cambrex Corporation. Pursuant to the minimum
royalty provisions of the agreement, we received approximately $0.8 million,
$1.0 million and $1.0 million in 2003, 2002 and 2001, respectively. For more
information on the disposition of the chiral intermediates business, refer to
Notes 2 of the Notes to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since our 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 our initial product launch
in the third quarter of 1998, we have recorded net product sales totaling
approximately $541.2 million through December 31, 2003. On June 3, 2003, we
issued convertible notes to institutional investors in the amount of $400.0
million. Proceeds from the transaction, net of debt issuance costs, were
approximately $387.8 million.
Net working capital, (i.e., current assets minus current liabilities) at
December 31, 2003 increased approximately 161% to $658.3 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
37
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.
Cash and cash equivalents increased to $267.5 million at December 31, 2003 from
$85.5 million at December 31, 2002 and investments in marketable securities
available for sale increased to $399.5 million at December 31, 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.
We expect 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 following table sets forth our contractual obligations as of December 31,
2003:
- ------------------------------------------------------------------------------------------
PAYMENT DUE BY PERIOD
---------------------
LESS THAN MORE THAN
(millions of dollars) 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS TOTAL
- ------------------------------------------------------------------------------------------
Convertible Note Obligations $ -- $ -- $ 400.0 $ -- $ 400.0
Operating leases 3.7 7.0 6.2 8.9 25.8
ALKERAN supply and distribution
agreement 18.5 25.0 -- -- 43.5
Employment agreements 2.7 5.5 -- -- 8.2
Other contract commitments 0.7 7.2 -- -- 7.9
---------------------------------------------------
$ 25.6 $ 44.7 $ 406.2 $ 8.9 $ 485.5
==========================================================================================
Convertible Note Obligations: In June 2003, we issued $400.0 million of
unsecured convertible notes to qualified 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 our closing stock price 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 us to
redeem the notes prior to maturity in the event of a "fundamental change", as
defined within the Agreement. We are 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 the registration statement effective for
the defined period.
38
Operating (facilities) leases: We lease an aggregate of 92,100-square feet of
laboratory and office space in Warren, New Jersey, under various leases with
unaffiliated parties, which have lease terms ending between June 2005 and July
2010 with renewal options ranging from either one or two additional five-year
terms. Annual rent for these facilities is approximately $1.0 million. We also
are required to reimburse the lessors for real estate taxes, insurance,
utilities, maintenance and other operating costs. 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 March 2009 with two
five-year renewal options. Annual rent for this facility is approximately $0.5
million.
In December 2001, we entered into a lease to consolidate our San Diego,
California, operations into one building. The 78,202-square foot laboratory and
office facility in San Diego, California was leased from an unaffiliated party
and has a term ending in August 2012 with one five-year renewal option. Annual
rent for this facility is approximately $1.8 million and is subject to specified
annual rental increases. Under the lease, we also are required to reimburse the
lessor for real estate taxes, insurance, utilities, maintenance and other
operating costs.
Upon completion of the acquisition of Anthrogenesis on December 31, 2002, we
assumed two separate leases in the same facility for office and laboratory space
in Cedar Knolls, New Jersey and have subsequently entered into one additional
lease for additional space in the same facility. The leases are for an aggregate
20,000-square feet with annual rent of approximately $0.2 million. We also are
required to reimburse the lessors for real estate taxes, insurance, utilities,
maintenance and other operating costs. The leases have terms ending between
September 2007 and April 2009 with renewal options ranging from either one or
two additional five-year terms. 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 renewal option.
Annual rent for this facility is approximately $0.1 million.
For a schedule of payments related to operating leases, refer to Note 17 of the
Notes to the Consolidated Financial Statements.
ALKERAN Purchase Commitments: On March 31, 2003, we entered into a supply and
distribution agreement with GSK to distribute, promote, sell and distribute
ALKERAN (melphalan), a therapy approved by the FDA for the palliative treatment
of multiple myeloma and for palliation of carcinoma of the ovary. Under the
terms of the agreement, we purchase ALKERAN tablets and ALKERAN for injection
from GlaxoSmithKline and distributes the products in the United States under the
Celgene label The agreement, which provides us with an approved oncology
product, requires that we purchase certain minimum quantities each year for an
initial three-year term under a take-or-pay arrangement aggregating $56.6
million over such period. At December 31, 2003, the remaining minimum purchase
requirements under the agreement were $43.5 million.
Employment Agreements: We have employment agreements with certain officers and
employees. Employment contracts provide for base compensation and an annual
target bonus based upon achievement of Company performance measures and annual
increases in base compensation reflecting annual reviews and related salary
adjustment. The outstanding commitment for base compensation related to
employment contracts as of December 31, 2003 is approximately $2.6 million per
year in each of the next three consecutive years (excluding any change in
control provisions).
Other Contract Commitments: We signed an exclusive license agreement with CMCC,
which terminated any existing thalidomide analog agreements between CMCC and
EntreMed and directly granted to Celgene an exclusive worldwide license for the
analog patents. Under the agreement, we are required to pay CMCC $2.5 million
between 2004 and 2006, the present value of which totaled $2.2 million and was
39
expensed in 2002. Additional payments are possible under the agreement depending
on the successful development and commercialization of thalidomide analogs.
We have an agreement with Penn Pharmaceutical, Ltd. of Great Britain for the
production of Thalomid. Penn manufactures Thalomid and sells it exclusively to
us. The agreement has been extended through 2004 for Dedicated Containment
Facilities ("DCF") payments totaling approximately $0.7 million. In November
2001, concurrent with the Pharmion License agreement (see Note 15 of the Notes
to the Consolidated Financial Statements), we entered into an agreement with
Penn Pharmaceuticals, Ltd. and its shareholders in which Penn granted us an
option to purchase their thalidomide DCF and related thalidomide assets. We have
three years in which to exercise the option. The purchase price will be
determined in the future based on a formula defined in the agreement.
In October 2003, we signed an agreement with Institute of Drug Technology
Australia Limited ("IDT") for the manufacture of finished dosage form of
THALOMID capsules. The agreement requires minimum payments for THALOMID capsules
of $4.7 million for the three-year term commencing with the FDA's approval of
IDT as an alternate supplier. This agreement provides us with additional
capacity and reduces our dependency on one manufacturer for the production of
THALOMID.
2004 FINANCIAL OUTLOOK
In its January 29, 2004 earnings release, we set forth management's earnings
estimate for full year 2004. Although management believes that the January 29,
2004 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.
Revenues: We anticipate revenues for 2004 to be in the range of $360 to $380
million, a projected increase of approximately 33% to 40% over total 2003
revenues of $271.5 million. THALOMID net sales are targeted to be in the range
of $280 to $290 million, representing a projected increase of approximately 25%
to 30% over THALOMID net sales of $223.5 million in 2003. Additionally, we are
maintaining our target revenues for the Ritalin family of drugs of approximately
$40 million in 2004, which includes a milestone payment for filing an NDA for
Focalin LA.
R&D Spending: Research and development expenses in 2004 are expected to be in
the range of $160 to $170 million, a projected increase of approximately 34%
compared to 2003, as we continue to accelerate spending to support multiple
pivotal Phase III and other accelerated regulatory programs. Important
components of our 2004 R&D spending include (1) expanded investment in our
hematological and malignant blood disorder disease programs, (2) investment in
the investigation of our agents in combination use in solid tumor clinical
trials, and (3) advancement of multiple high potential pre-clinical
40
and clinical compounds, including; SelCIDs(TM), kinase inhibitors, ligase
inhibitors, tubulin inhibitors and benzopyrans.
SG&A Expenses: Selling, general and administrative expenses in 2004 are expected
to be in the range of $115 to $125 million, a projected increase of
approximately 17% compared to 2003.
Earnings Per Share: Diluted earnings per share are expected to be in the range
of $0.40 to $0.50 per share in 2004, representing an increase of approximately
180 % over our 2003 results.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one which is both important to the portrayal of
the Company's financial condition and results of operation and requires
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. While our significant accounting policies are more fully described in
Note 1 of the Notes to the Consolidated Financial Statements included in this
annual report, we believe the following accounting policies to be critical:
Revenue Recognition on Collaboration Agreements: We have formed collaborative
research and development agreements and alliances with several pharmaceutical
companies. These agreements are in the form of research and development and
license agreements. The agreements are for both early and late stage compounds
and are focused on specific disease areas. For the early stage compounds, the
agreements are relatively short-term agreements that are renewable depending on
the success of the compounds as they move through preclinical development. The
agreements call for nonrefundable upfront payments, milestone payments on
achieving significant milestone events, and in some cases ongoing research
funding. The agreements also contemplate royalty payments on sales if and when
the compound receives FDA marketing approval.
In accordance with Staff Accounting Bulletin No. 104 ("SAB 104") "Revenue
Recognition in Financial Statements," upfront payments are recorded as deferred
revenue and recognized over the estimated service period. If the estimated
service period is subsequently modified, the period over which the upfront fee
is recognized is modified accordingly on a prospective basis. Continuation of
certain contracts is dependent upon our achieving specific contractual
milestones; however, none of the payments received to date are refundable
regardless of the outcome of the project. Research funding is recorded in the
period during which the expenses covered by the funding occurred.
SAB No. 104 updates the guidance in SAB No. 101 and requires companies to
identify separate units of accounting based on the consensus reached on Emerging
Issues Task Force ("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. EITF
00-21 is effective for revenue arrangements entered into in quarters beginning
after June 15, 2003. If the deliverables in a revenue arrangement constitute
separate units of accounting according to the EITF's separation criteria, the
revenue-recognition policy must be determined for each identified unit. If the
arrangement is a single unit of accounting under the separation criteria, the
revenue-recognition policy must be determined for the entire arrangement. 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.
Prior to the adoption of EITF 00-21, revenues from the achievement of research
and development milestones, which
41
represent the achievement of a significant step in the research and development
process, were recognized when and if the milestones were achieved.
Gross to Net Sales Accruals For Sales Returns, Medicaid Rebates and Chargebacks:
We record an allowance for sales returns based on the actual returns history for
consumed lots and the trend experience for lots where product is still being
returned. We record Medicaid rebate accruals based on historical payment data
and estimates of Medicaid beneficiary utilization. We record chargeback accruals
based on actual sales to customers who are covered under federally qualified
programs.
Deferred Tax Asset Valuation Allowance: We utilize the asset and liability
method of accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates in effect for years in which the temporary differences are expected to
reverse. We recognized a 100% valuation allowance on net deferred tax assets
based on a cumulative three-year history of losses (including operating losses
in each of the last three years).
Accounting for Long-Term Incentive Plans: We recorded a liability for the 2003 -
2005 plan based on achieving an estimated award of 75% of the target. The plan
provides payout in the range of 0% to 200%.
Acquired in-process research and development ("IPR&D"): The value assigned to
acquired in-process research and development is determined by identifying those
acquired specific in-process research and development projects that would be
continued and for which (a) technological feasibility has not been established
at the acquisition date, (b) there is no alternative future use, and (c) the
fair value is estimable with reasonable reliability. Amounts assigned to IPR&D
are charged to expense at the acquisition date. The estimated fair value of
these projects is determined by employment of a discounted cash flow model. The
discount rates used takes into account the stage of completion and the risks
surrounding the successful development and commercialization of each of the
purchased in-process technology projects that are valued. The analysis includes
forecasted future cash flows that are expected to result from the progress made
on the in-process project prior to the purchase dates. Appropriate operating
expenses are deducted from the total forecasted net revenues to establish a
forecast of net returns on the completed portion of the in-process technology.
Finally, these net returns are discounted to a present value using discount
rates that incorporate the weighted average cost of capital relative to the
biotech industry and the Company as well as product specific risks associated
with the purchased in-process research and development products. The product
specific risk factors include the product's phase of development, likelihood of
success, manufacturing process capability, scientific rationale, preclinical
safety and efficacy data, target product profile, and development plan and takes
into consideration an overall discount rate, which represents a risk premium to
the Company's weighted average cost of capital for purchase valuation purposes.
The forecast data in the analysis is based on internal product level forecast
information maintained by management in the ordinary course of managing the
business. The inputs used by management in analyzing IPR&D is based on
assumptions, which management believes to be reasonable but which are inherently
uncertain and unpredictable. These assumptions may be incomplete or inaccurate,
and no assurance can be given that unanticipated events and circumstances will
not occur. The valuations used to estimate IPR&D require us to use significant
estimates and assumptions, that if changed, may result in a different valuation
for IPR&D. Valuations for the Anthrogenesis acquisition were completed by an
independent third-party consulting firm in accordance with SEC guidelines.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion provides forward-looking quantitative and qualitative
information about the Company's potential exposure to market risk. Market risk
represents the potential loss arising from
42
adverse changes in the value of financial instruments. The risk of loss is
assessed based on the likelihood of adverse changes in fair values, cash flows
or future earnings.
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. The Company does not use
derivative instruments for investment or trading purposes. At December 31, 2003,
the Company's market risk sensitive instruments consisted of marketable
securities available for sale, a senior convertible promissory note due from
Pharmion Corporation and unsecured convertible notes issued by the Company.
Marketable Securities Available for Sale: At December 31, 2003 the Company's
marketable securities available for sale 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 table below presents the principal amounts and related weighted average
interest rates by maturities for the marketable securities portfolio at December
31, 2003:
--------------------------------------------------------------------------------------
FIXED RATE SECURITIES
--------------------------------------
0 TO 1 1 TO 3 3 TO 5 5 TO 7 VARIABLE TOTAL
YEAR YEAR YEAR YEAR RATE
--------------------------------------------------------------------------------------
(In Thousands $)
Principal amount $77,662 $176,765 $14,422 $73,275 $37,150 $379,274
Fair value $65,831 $207,496 $15,064 $74,884 $36,239 $399,514
Average Interest Rate 3.49% 5.62% 3.32% 5.10% 6.71% 5.10%
Pharmion Note: At December 31, 2003, the Company held a $12.0 million, five
year, 6% payable semi-annual Senior Convertible Promissory Note due from
Pharmion Corporation. The Note has a conversion price of $11.00 per share of
common stock adjusted for Pharmion's four-for-one reverse stock split (for more
information see Note 15 of the Notes to the Consolidated Financial Statements).
The Pharmion Note is classified under "Other Assets" on the balance sheet and
measured at cost. At December 31, 2003, the estimated fair value of the Pharmion
Note exceeded the carrying value by approximately $5.2 million, which reflects
the increase in the market price of Pharmion Corporation's common stock price to
$15.25 per share as of December 31, 2003 (effective March 1, 2004, the note was
converted into 1,150,511 shares of Pharmion common stock).
43
Convertible Debt: At December 31, 2003, the Company had $400.0 million of
unsecured convertible notes outstanding. The notes have a five-year term and a
coupon rate of 1.75% payable semi-annually. The notes can be converted at
any time into 8,255,920 shares of common stock at a conversion price of $48.45
per share (for more information see Note 9 of the Notes to the Consolidated
Financial Statements). At December 31, 2003, the fair value of the Company's
convertible notes exceeded the carrying value of $400.0 million by approximately
$78.1 million, which the Company believes reflects the increase in the market
price of the Company's common stock to $44.88 per share as of December 31, 2003.
Assuming other factors are held constant, an increase in interest rates
generally results in a decrease in the fair value of fixed-rate convertible
debt, but does not impact the carrying value, and an increase in the Company's
stock price generally results in an increase in the fair value of convertible
debt, but does not impact the carrying value.
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 15 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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 December 31, 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 year to which this report relates that have materially affected, or
are reasonably likely to materially affect, our internal control over
financial reporting.
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information required by Part III (Items 10, 11, 12 , 13 and 14) is being
incorporated by reference herein from our definitive proxy statement (or an
amendment to Form 10-K) to be filed with the Securities and Exchange Commission
within 120 days of the end of the fiscal year ended December 31, 2003 in
connection with our 2004 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
See Item 10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 10.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
See Item 10.
46
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1),(a)(2) See Index to Consolidated Financial Statements and
Consolidated Financial Statement Schedule immediately following Exhibit Index.
(a)(3) See Item 15(c) below.
(b) None
(c) Exhibits
The following exhibits are filed with this report or incorporated by
reference:
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------------
2.1 Purchase Option Agreement and Plan of Merger, dated April 26, 2002,
among the Company, Celgene Acquisition Corp. and Anthrogenesis Corp.
(incorporated by reference to Exhibit 2.1 of the Company's
Registration Statement on Form S-4 dated November 13, 2002 (No.
333-101196).
2.2 Amendment to the Purchase Option Agreement and Plan of Merger, dated
September 6, 2002, among the Company, Celgene Acquisition Corp. and
Anthrogenesis Corp. (incorporated by reference to Exhibit 2.2 of the
Company's Registration Statement on Form S-4 dated November 13, 2002
(No. 333-101196).
2.3 Asset Purchase Agreement by and between the Company and EntreMed,
Inc., dated as of December 31, 2002 (incorporated by reference to
Exhibit 99.6 of the Company's Schedule 13D filed on January 3, 2003).
2.4 Securities Purchase Agreement by and between EntreMed, Inc. and the
Company, dated as of December 31, 2002 (incorporated by reference to
Exhibit 99.2 of the Company's Schedule 13D filed on January 3, 2003).
3.1 Certificate of Incorporation of the Company, as amended (incorporated
by reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1, dated July 24, 1987).
3.2 Bylaws of the Company (incorporated by reference to the Company's
Current Report on Form 8-K, dated September 16, 1996).
10.1 Lease Agreement, dated January 16, 1987, between the Company and
Powder Horn Associates (incorporated by reference to Exhibit 10.17 to
the Company's Registration Statement on Form S-1, dated July 24,
1987).
10.2 1986 Stock Option Plan (incorporated by reference to Exhibit A to the
Company's Proxy Statement dated April 13, 1990).
47
10.3 1992 Long-Term Incentive Plan (incorporated by reference to Exhibit A
to the Company's Proxy Statement, dated May 30, 1997).
10.4 1995 Non-Employee Directors' Incentive Plan (incorporated by reference
to Exhibit A to the Company's Proxy Statement, dated May 24, 1999).
10.5 Rights Agreement, dated as of September 16, 1996, between the Company
and American Stock Transfer & Trust Company (incorporated by reference
to the Company's Registration Statement on Form 8A, filed on September
16, 1996), as amended on February 18, 2000 (incorporated by reference
to the Company's Current Report on Form 8-K filed on February 22,
2000), as amended on August 13, 2003 (incorporated by reference to
Exhibit 4.1 on the Company's Current Report on Form 8-K filed on
August 14, 2003).
10.6 Form of indemnification agreement between the Company and each officer
and director of the Company (incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.7 Employment Agreement dated as of May 1, 2003 between the Company and
John W. Jackson.
10.8 Employment Agreement dated as of May 1, 2003 between the Company and
Sol J. Barer.
10.9 Employment Agreement dated as of May 1, 2003 between the Company and
Robert J. Hugin.
10.10 Manufacturing Agreement between Penn Pharmaceuticals Limited and the
Company (incorporated by reference to the Company's Registration
Statement on Form S-3 dated November 25, 1997 (No. 333-38891)).
10.11 Celgene Corporation Replacement Stock Option Plan (incorporated by
reference to Exhibit 99.1 of the Company's Registration Statement on
Form S-3 dated May 18, 1998 (No. 333-52963)).
10.12 Form of Stock Option Agreement to be issued in connection with the
Celgene Corporation Replacement Stock Option Plan (incorporated by
reference to Exhibit 99.2 of the Company's Registration Statement on
Form S-3 dated May 18, 1998 (No. 333-52963)).
10.13 1998 Stock Incentive Plan (Amended and Restated as of April 23, 2003)
(incorporated by reference to Exhibit A to the Company's Proxy
Statement, filed April 30, 2003).
10.14 Stock Purchase Agreement dated June 23, 1998 between the Company and
Biovail Laboratories Incorporated (incorporated by reference to the
Company's Current Report on Form 8-K filed on July 17, 1998).
10.15 Registration Rights Agreement dated as of July 6, 1999 between the
Company and the Purchasers in connection with the issuance of the
Company's 9.00% Senior Convertible Note Due June 30, 2004
(incorporated by reference to Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999).
48
10.16 Development and License Agreement between the Company and Novartis
Pharma AG, dated April 19, 2000 (incorporated by reference to Exhibit
10.21 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000).
10.17 Collaborative Research and License Agreement between the Company and
Novartis Pharma AG, dated December 20, 2000 (incorporated by reference
to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000).
10.18 Custom Manufacturing Agreement between the Company and Johnson Matthey
Inc., dated March 5, 2001 (incorporated by reference to Exhibit 10.24
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.19 Manufacturing and Supply Agreement between the Company and Mikart,
Inc., dated as of April 11, 2001 (incorporated by reference to Exhibit
10.25 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.20 Distribution Services Agreement between the Company and Ivers Lee
Corporation, d/b/a Sharp, dated as of June 1, 2000 (incorporated by
reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001).
10.21 Amendment No. 1 to 1992 Long-Term Incentive Plan, effective as of June
22, 1999 (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002).
10.22 Amendment No. 1 to 1995 Non-Employee Directors' Incentive Plan,
effective as of June 22, 1999 (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002).
10.23 Amendment No. 2 to 1995 Non-Employee Directors' Incentive Plan,
effective as of April 18, 2000 (incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002).
10.24 Agreement dated August 2001 by and among the Company, Children's
Medical Center Corporation, Bioventure Investments KFT and EntreMed
Inc. (certain portions of the agreement have been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment, which request has been granted)
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002).
10.25 Exclusive License Agreement among the Company, Children's Medical
Center Corporation and, solely for purposes of certain sections
thereof, EntreMed, Inc., effective December 31, 2002 (incorporated by
reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2002).
10.26 Supply Agreement between the Company and Sifavitor s.p.a, dated as of
September 28, 1999 (incorporated by reference to Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2002).
10.27 Supply Agreement between the Company and Seigfried (USA), Inc., dated
as of January 1, 2003 (incorporated by reference to Exhibit 10.33 to
the Company's Annual Report on Form 10-K for the year ended December
31, 2002).
49
10.28 Anthrogenesis Corporation Qualified Employee Incentive Stock Option
Plan (incorporated by reference to Exhibit 10.35 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2002).
10.29 Distribution and Supply Agreement by and between SmithKline Beecham
Corporation, d/b/a GlaxoSmithKline and Celgene Corporation, entered
into as of March 31, 2003 (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003).
10.30 Securities Purchase Agreement dated as of April 8, 2003 between the
Company and Pharmion Corporation in connection with the purchase by
the Company of Pharmion's Senior Convertible Promissory Note in the
principal amount of $12,000,000 (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003).
10.31 Pharmion Corporation Senior Convertible Promissory Note (incorporated
by reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003).
10.32 Warrant to Purchase an aggregate of 1,454,545 shares of common stock
of Pharmion Corporation (incorporated by reference to Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2003).
10.33 Purchase Agreement dated May 28, 2003 between the Company and Morgan
Stanley & Co. Incorporated, as Initial Purchaser, in connection with
the purchase of $400,000,000 principal amount of the Company's 1 3/4%
Convertible Note Due 2008 (incorporated by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003).
10.34 Indenture dated as of June 3, 2003 between the Company and The Bank of
New York, Trustee (incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-3 dated August 14, 2003)
(incorporated by reference to Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003).
10.35 Registration Rights Agreement dated as of June 3, 2003 between the
Company, as Issuer, and Morgan Stanley & Co. Incorporated, as Initial
Purchaser (incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-3 dated August 14, 2003)
(incorporated by reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003).
10.36 Form of 1 3/4% Convertible Note Due 2008 (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement of Form S-3 dated
August 14, 2003) (incorporated by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).
14.1 Code of Ethics.
21.1 List of Subsidiaries.
23.1 Consent of KPMG LLP.
50
24.1 Power of Attorney (included in Signature Page).
31.1 Certification by the Company's Chief Executive Officer dated March 12,
2004.
31.2 Certification by the Company's Chief Financial Officer dated March 12,
2004.
32.1 Certification by the Company's Chief Executive Officer pursuant to 18
U.S.C. Section 1350 dated March 12, 2004.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350 dated March 12, 2004.
51
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person or entity whose
signature appears below constitutes and appoints John W. Jackson, Sol J. Barer
and Robert J. Hugin, and each of them, its true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for it and in its
name, place and stead, in any and all capacities, to sign any and all amendments
to this Form 10-K and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all contents and purposes as it might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CELGENE CORPORATION
By: /s/ John W. Jackson
-------------------------
John W. Jackson
Chairman of the Board and
Chief Executive Officer
Date: March 12, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John W. Jackson Chairman of the Board and Chief March 12, 2004
- -------------------------- Executive Officer
John W. Jackson
/s/ Sol J. Barer Director, Chief Operating Officer March 12, 2004
- --------------------------
Sol J. Barer
/s/ Robert J. Hugin Director, Chief Financial Officer March 12, 2004
- --------------------------
Robert J. Hugin
/s/ Jack L. Bowman Director March 12, 2004
- --------------------------
Jack L. Bowman
52
Signature Title Date
- --------- ----- ----
/s/ Frank T. Cary Director March 12, 2004
- --------------------------
Frank T. Cary
/s/ Michael D. Casey Director March 12, 2004
- --------------------------
Michael D. Casey
/s/ Arthur Hull Hayes, Jr. Director March 12, 2004
- --------------------------
Arthur Hull Hayes, Jr.
/s/ Gilla Kaplan Director March 12, 2004
- --------------------------
Gilla Kaplan
/s/ Richard C. E. Morgan Director March 12, 2004
- --------------------------
Richard C. E. Morgan
/s/ Walter L. Robb Director March 12, 2004
- --------------------------
Walter L. Robb
/s/ James R. Swenson Controller (Chief Accounting March 12, 2004
- -------------------------- Officer)
James R. Swenson
The foregoing constitutes a majority of the directors.
53
CELGENE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Consolidated Financial Statements
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-3
Consolidated Statements of Operations - Years Ended
December 31, 2003, 2002, and 2001 F-4
Consolidated Statements of Cash Flows - Years Ended
December 31, 2003, 2002, and 2001 F-5
Consolidated Statements of Stockholders' Equity - Years
Ended December 31, 2003, 2002, and 2001 F-7
Notes to Consolidated Financial Statements F-8
Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts F-34
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Celgene Corporation:
We have audited the consolidated financial statements of Celgene Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the consolidated
financial statement schedule as listed on the accompanying index. These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Celgene Corporation
and subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As discussed in Note 1 to the Consolidated Financial Statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 141,
"Business Combinations" effective July 1, 2001.
/s/ KPMG LLP
Short Hills, New Jersey
January 28, 2004
F-2
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
December 31, 2003 2002
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $267,453 $ 85,475
Marketable securities available for sale 399,514 175,707
Accounts receivable, net of allowance of
$1,530 and $1,020 at December 31, 2003
and December 31, 2002, respectively 35,495 17,659
Inventory 9,696 4,806
Other current assets 17,941 12,449
- --------------------------------------------------------------------------------
Total current assets 730,099 296,096
- --------------------------------------------------------------------------------
Plant and equipment, net 22,546 19,600
Intangible assets, net 2,695 3,010
Goodwill 3,490 2,973
Other assets 32,506 5,608
- --------------------------------------------------------------------------------
Total assets $791,336 $327,287
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,340 $ 16,516
Accrued expenses 55,276 26,976
Current portion of deferred revenue 589 109
Current portion of capital leases and
note obligation 30 86
Other current liabilities 559 599
- --------------------------------------------------------------------------------
Total current liabilities 71,794 44,286
- --------------------------------------------------------------------------------
Long term convertible notes 400,000 --
Deferred revenue, net of current portion 1,122 1,390
Capitalized leases and note obligation,
net of current portion 16 40
Other non-current liabilities 8,350 4,873
- --------------------------------------------------------------------------------
Total liabilities 481,282 50,589
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share,
5,000,000 shares authorized; none
outstanding at December 31, 2003
and 2002 -- --
Common stock, $.01 par value per share,
120,000,000 shares authorized;
issued and outstanding 81,411,055
and 80,176,713 shares at December 31,
2003 and December 31, 2002, respectively. 814 802
Additional paid-in capital 607,484 591,277
Accumulated deficit (308,856) (322,367)
Notes receivable from stockholders - (42)
Accumulated other comprehensive income 10,612 7,028
- --------------------------------------------------------------------------------
Total stockholders' equity 310,054 276,698
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $791,336 $327,287
================================================================================
See accompanying Notes to Consolidated Financial Statements
F-3
CELGENE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------------------
Years ended December 31, 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Revenue:
Net product sales $ 244,453 $ 122,921 $ 84,195
Collaborative agreements and other revenue 15,174 8,115 28,149
Royalty revenue 11,848 4,710 --
Related-party collaborative agreement revenue -- -- 1,899
- ------------------------------------------------------------------------------------------------------------
Total revenue 271,475 135,746 114,243
- ------------------------------------------------------------------------------------------------------------
Expenses:
Cost of goods sold 49,085 17,322 13,571
Research and development 122,700 84,924 67,653
Selling, general and administrative 102,339 69,717 57,962
Litigation settlement and related agreements -- 32,212 --
Acquired in-process research and development -- 55,700 --
- ------------------------------------------------------------------------------------------------------------
Total expenses 274,124 259,875 139,186
- ------------------------------------------------------------------------------------------------------------
Operating loss (2,649) (124,129) (24,943)
Other income and expense:
Interest and other income 21,795 23,058 20,890
Interest expense 5,667 27 83
- ------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 13,479 (101,098) (4,136)
- ------------------------------------------------------------------------------------------------------------
Income tax benefit (provision) (718) 98 1,232
- ------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 12,761 (101,000) (2,904)
- ------------------------------------------------------------------------------------------------------------
Discontinued operations:
Gain on sale of chiral assets 750 1,000 992
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ 13,511 $ (100,000) $ (1,912)
============================================================================================================
Income (loss) from continuing operations
per common share:
Basic $ 0.16 $ (1.31) $ (0.04)
Diluted $ 0.15 $ (1.31) $ (0.04)
Discontinued operations per common share:
Basic $ 0.01 $ 0.01 $ 0.01
Diluted $ 0.01 $ 0.01 $ 0.01
Net income (loss) per common share:
Basic $ 0.17 $ (1.29) $ (0.03)
Diluted $ 0.16 $ (1.29) $ (0.03)
Weighted average number of shares of common
stock utilized to calculate per share amounts:
Basic 80,887,000 77,337,000 75,108,000
========== ========== ==========
Diluted 85,398,000 77,337,000 75,108,000
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements
F-4
CELGENE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income (loss) from continuing operations $ 12,761 $ (101,000) $ (2,904)
Adjustments to reconcile income (loss) from
continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization of long-term assets 8,027 5,182 5,086
Provision for accounts receivable allowances 448 295 553
Realized gain on marketable securities available for sale (7,355) (5,946) (1,019)
Non-cash write-off of acquired in-process research and
development -- 55,700 --
Non-cash stock-based compensation expense 704 467 3,529
Amortization of premium/discount on marketable
securities available for sale, net 1,238 367 212
Loss on sale of equipment 84 -- --
Amortization of debt issuance cost 1,422 -- 28
Amortization of discount on note obligation 137 -- --
Shares issued for employee benefit plans 2,775 966 741
Change in current assets and liabilities,
excluding the effect of acquisition:
Increase in accounts receivable (18,273) (4,166) (4,122)
(Increase) decrease in inventory (4,891) (1,198) 663
(Increase) decrease in other operating assets (9,253) (2,917) 2,285
Increase in accounts payable and accrued expenses 30,403 19,298 5,750
Increase (decrease) in deferred revenue 498 (4,866) (12,457)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 18,725 (37,818) (1,655)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (11,227) (11,077) (7,870)
Acquisition of Anthrogenesis, net of cash received -- (10,299) --
Proceeds from the sale of equipment 138 -- --
Proceeds from sales and maturities of marketable securities
available for sale 186,370 133,265 119,790
Purchases of marketable securities available for sale (400,477) (40,116) (231,374)
Investment in convertible notes (12,000) -- --
Proceeds from the sale of chiral intermediate assets 750 1,000 992
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (236,446) 72,773 (118,462)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of common stock options
and warrants 11,970 3,968 6,776
Proceeds from convertible notes 400,000 -- --
Debt issuance cost (12,212) -- --
Proceeds from notes receivable from stockholders 42 -- 20
Purchase of treasury stock - (2) (3)
Repayment of capital lease and note obligations (101) (587) (929)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 399,699 3,379 5,864
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 181,978 38,334 (114,253)
Cash and cash equivalents at beginning of period 85,475 47,141 161,394
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 267,453 $ 85,475 $ 47,141
==========================================================================================================================
See accompanying Notes to Consolidated Financial Statements
F-5
CELGENE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and
financing activity:
Change in net unrealized gain (loss) on marketable
securities available for sale (3,584) (377) 5,741
---------------------------------------------
Issuance of common stock upon the conversion of
convertible notes and accrued interest thereon, net -- 11,714 --
---------------------------------------------
Equipment acquisition on capital leases 110 -- --
---------------------------------------------
Deferred compensation relating to stock options -- (328) (833)
---------------------------------------------
Issuance of common stock, options and warrants in
connection with acquisition of Anthrogenesis -- 47,441 --
---------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid 3,584 27 83
---------------------------------------------
Cash received related to tax benefit 653 -- 1,232
---------------------------------------------
See accompanying Notes to Consolidated Financial Statements
F-6
CELGENE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Accumulated
Notes Other
Additional Receivable Comprehensive
Years Ended Common Treasury Paid-in Accumulated Deferred from Income
December 31, 2003, 2002 and 2001 Stock Stock Capital Deficit Compensation Stockholders (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 $ 740 $ -- $ 519,290 $(220,455) $ (4,891) $ (62) $ 910 $295,532
==============================================================================================================================
Net loss (1,912) (1,912)
Other comprehensive income:
Net change in unrealized gain
(loss) on available for sale
securities 6,760 6,760
Less: reclassification
adjustment for gain included
in net loss (1,019) (1,019)
----------
Comprehensive income $ 3,829
Exercise of stock options and
warrants 15 6,761 6,776
Issuance of common stock for
employee benefit plans and
non-employee services 1 779 780
Purchase of treasury stock (3) (3)
Reduction of deferred
compensation for terminations (833) 833 --
Amortization of deferred
compensation and restricted 2,465 2,465
stock granted to employees 1,026 1,026
Collection of notes receivable
from stockholders 20 20
- ------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001 $ 756 $ (3) $ 527,023 $(222,367) $ (1,593) $ (42) $ 6,651 $ 310,425
==============================================================================================================================
Net loss (100,000) (100,000)
Other comprehensive income:
Net change in unrealized gain
(loss) on available for sale
securities 6,323 6,323
Less: reclassification adjustment
for gain included in net loss (5,946) (5,946)
----------
Comprehensive loss $ (99,623)
Exercise of stock options and
warrants 12 3,956 3,968
Issuance of common stock for
employee benefit plans -- 5 961 966
Purchase of treasury stock (2) (2)
Conversion of long-term
convertible notes 19 11,695 11,714
Shares issued pursuant to
Anthrogenesis acquisition 15 47,426 47,441
Reduction of deferred compensation
for terminations (328) 328 --
Amortization of deferred
compensation 1,265 1,265
Expense related to non-employee
stock options and restricted
stock granted to employees 467 467
Income tax benefit upon exercise
of stock options 77 77
- ------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 $ 802 $ -- $ 591,277 $(322,367) $ -- $ (42) $ 7,028 $ 276,698
==============================================================================================================================
Net income 13,511 13,511
Other comprehensive income:
Net change in unrealized gain
(loss) on available for sale
securities 10,939 10,939
Less: reclassification adjustment
for gain included in net income (7,355) (7,355)
----------
Comprehensive income $ 17,095
Exercise of stock options and
warrants 11 11,959 11,970
Issuance of common stock for
employee benefit plans 1 2,774 2,775
Expense related to non-employee
stock options and restricted
stock granted to employees 704 704
Income tax benefit upon exercise
of stock options 770 770
Collection of notes receivable
from stockholders 42 42
- ------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2003 $ 814 $ -- $ 607,484 $(308,856) $ -- $ -- $ 10,612 $ 310,054
==============================================================================================================================
See accompanying Notes to Consolidated Financial Statements
F-7
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION: Celgene Corporation and its
subsidiaries (collectively "Celgene" or the "Company") is an integrated
biopharmaceutical company primarily engaged in the discovery, development and
commercialization of innovative therapies designed to treat cancer and
immunological diseases through regulation of cellular, genomic and proteomic
targets. The Company's commercial stage programs include pharmaceutical sales of
THALOMID(R) and ALKERAN(R), a licensing agreement with Novartis for Focalin(R)
and the entire Ritalin(R) family of drugs, as well as, biotherapeutic products
through Celgene Cellular Therapeutics ("CCT"), a wholly owned subsidiary.
THALOMID (thalidomide), the Company's lead product, was approved in July 1998
for the treatment of erythema nodosum leprosum ("ENL") by the U.S. Food and Drug
Administration ("FDA"). Net THALOMID product sales accounted for approximately
82%, 88% and 72% of total revenues in 2003, 2002 and 2001, respectively. In
March 2003, the Company entered into a three-year supply and distribution
agreement with GlaxoSmithKline ("GSK") to distribute, promote and sell ALKERAN
(melphalan) in all dosage forms in the United States under Celgene's label. In
November 2001, the Company received FDA approval for Focalin, its refined
version of Ritalin, for the treatment of attention deficit disorder/attention
deficit hyperactivity disorder. Focalin is marketed by Novartis Pharma AG. Under
the agreement with Novartis, the Company receives royalty payments on the entire
Ritalin family line of products. In December 2002, the Company acquired
Anthrogenesis Corporation, which now operates as CCT. CCT is a biotherapeutics
company pioneering the development of stem cell therapies and biomaterials
derived from human placental tissue. The portfolio of products in the Company's
preclinical and clinical-stage pipeline includes Immunomodulatory Drugs
("IMiDs(TM)") and Selective Cytokine Inhibitory Drugs ("SelCIDs(TM)"). The
Company hopes to use its extensive knowledge on THALOMID as a blueprint to
advance these next generation compounds. Through a "bottom up" approach (target
screening, bioinformatics, assay development, libraries and cellular disease
models) at its Signal San Diego, California subsidiary, the Company has also
produced such compounds as Benzopyrans and Selective Estrogen Receptor
Modulators ("SERMs"), Kinases Inhibitors, Tubulin Inhibitors, and Ligase
Modulators.
The consolidated financial statements include the accounts of Celgene
Corporation and its subsidiaries. All inter-company transactions and balances
have been eliminated. Certain reclassifications have been made to prior years'
financial statements in order to conform to the current year's presentation.
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect reported amounts and disclosures.
Actual results could differ from those estimates. The Company is subject to
certain risks and uncertainties such as uncertainty of product development,
uncertainties regarding regulatory approval, no assurance of market acceptance
of products, risk of product liability, uncertain scope of patent and
proprietary rights, intense competition, and rapid technological change.
CASH EQUIVALENTS: At December 31, 2003 and 2002, cash equivalents consisted
principally of highly liquid funds invested in commercial paper, money market
funds, and United States government securities such as treasury bills and notes.
These instruments have maturities of three months or less when purchased and are
stated at cost, which approximates market value because of the short maturity of
these investments.
FINANCIAL INSTRUMENTS: Certain financial instruments reflected in the
Consolidated Balance Sheets are recorded at cost, which approximates fair value
for cash and cash equivalents, accounts receivable, certain other assets,
accounts payable and certain other liabilities. The fair value of marketable
securities available
F-8
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
for sale is based on quoted market prices. Fair values are determined through a
combination of management estimates and information obtained from third parties
using the latest market data.
MARKETABLE SECURITIES: The Company's marketable securities are all classified as
securities available for sale in current assets and are carried at fair value.
Such securities are held for an indefinite period of time and are intended to be
used to meet the ongoing liquidity needs of the Company. Unrealized gains and
losses (which are deemed to be temporary), if any, are reported in a separate
component of stockholders' equity. The cost of investments in debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
The amortization, along with realized gains and losses, is included in interest
income. The cost of securities is based on the specific identification method.
A decline in the market value of any available-for-sale security below cost that
is deemed to be other than temporary results in a reduction in carrying amount
to fair value. The impairment is charged to earnings and a new cost basis for
the security is established.
Premiums and discounts are amortized or accreted over the life of the related
available-for-sale security as an adjustment to yield using the
effective-interest method. Dividend and interest income are recognized when
earned.
CONCENTRATION OF CREDIT RISK: Cash, cash equivalents, and marketable securities
are financial instruments that potentially subject the Company to concentration
of credit risk. The Company invests its excess cash primarily in U.S. government
agency securities and mortgage obligations and marketable debt securities of
financial institutions and corporations with strong credit ratings. The Company
also has established guidelines relative to diversification and maturities to
maintain safety and liquidity. These guidelines are reviewed periodically and
may be modified to take advantage of trends in yields and interest rates. The
Company has for a majority of its investments held them to maturity. However,
the Company has the ability to sell these investments before maturity and has
therefore classified the investments as available for sale. The Company has not
experienced any significant losses on its investments.
As is typical in the pharmaceutical industry, the Company sells its products
primarily through wholesale distributors and therefore, wholesale distributors
account for a large portion the Company's trade receivables and net product
revenues. In light of this concentration, the Company continuously monitors the
creditworthiness of its customers and has internal policies regarding customer
credit limits. The Company estimates an allowance for doubtful accounts based on
the creditworthiness of its customers as well as general economic conditions. An
adverse change in those factors could affect the Company's estimate of its bad
debts.
INVENTORY: Inventories are carried at the lower of cost or market using the
first-in, first-out (FIFO) method.
PLANT AND EQUIPMENT: Plant and equipment are stated at cost. Depreciation of
plant and equipment is provided using the straight-line method. The estimated
useful lives of fixed assets are as follows:
Leasehold improvements 10 years
Laboratory equipment and machinery 5 years
Furniture and fixtures 5 years
Computer Equipment 3 years
Maintenance and repairs are charged to operations as incurred, while renewals
and improvements are capitalized.
F-9
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of costs
over the fair value of identifiable net assets of businesses acquired. The
Company adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), as of
January 1, 2002. Goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead are tested for impairment at least annually in accordance with the
provisions of SFAS 142. SFAS 142 also requires that intangible assets with
estimable useful lives be amortized to their estimated residual values over
their respective estimated useful lives, and reviewed for impairment in
accordance with SFAS No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets" ("SFAS 144").
IMPAIRMENT OF LONG-LIVED ASSETS: The Company adopted SFAS 144 as of January 1,
2002. SFAS 144 provides a single accounting model for long-lived assets to be
disposed of. It also changes the criteria for classifying an asset as held for
sale and broadens the scope of businesses to be disposed of that qualify for
reporting as discontinued operations and changes the timing of recognizing
losses on such operations. The adoption of SFAS 144 did not affect the Company's
financial statements.
In accordance with SFAS No. 144, long-lived assets, such as property, plant, and
equipment, software costs and purchased intangibles subject to amortization are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to the estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to be
disposed of would be separately presented in the consolidated balance sheet and
reported at the lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the appropriate
asset and liability sections of the consolidated balance sheet.
BUSINESS COMBINATIONS: SFAS No. 141, "Business Combinations" ("SFAS 141")
requires that all business combinations consummated after June 30, 2001 be
accounted for using the purchase method of accounting. Under SFAS 141, the
pooling-of-interests method of accounting for business combinations is no longer
permitted. The Company's acquisition of Anthrogensis Corporation, which was
completed on December 31, 2002, was accounted for using the purchase method and
its acquisition of Signal Pharmaceuticals, Inc., which was completed on August
31, 2000, was accounted for using the pooling-of-interests method.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT ("IPR&D"): The value assigned to
acquired in-process research and development is determined by identifying those
acquired specific in-process research and development projects that would be
continued and for which (a) technological feasibility has not been established
at the acquisition date, (b) there is no alternative future use, and (c) the
fair value is estimable with reasonable reliability. Amounts assigned to IPR&D
are charged to expense at the acquisition date.
RESEARCH AND DEVELOPMENT COSTS: All research and development costs are expensed
as incurred. These include all internal costs, external costs related to
services contracted by the Company and research services conducted for others.
Research and development costs consist primarily of salaries and benefits,
contractor fees, clinical drug supplies for preclinical and clinical development
programs, consumable research supplies and allocated facility and administrative
costs.
INCOME TAXES: The Company utilizes the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect for years in which the temporary differences are expected to reverse. A
valuation allowance is provided when it is more
F-10
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
likely than not that some portion or all of the deferred tax asset will not be
realized. Research and development tax credits will be recognized as a reduction
of the provision for income taxes when realized.
REVENUE RECOGNITION: Revenue from the sale of products is recognized upon
product shipment. Provisions for discounts for early payments, rebates and sales
returns under terms customary in the industry are provided for in the same
period the related sales are recorded. Revenue under research contracts is
recorded as earned under the contracts, as services are provided. In accordance
with SEC Staff Accounting Bulletin ("SAB") No. 104 upfront nonrefundable fees
associated with license and development agreements where the Company has
continuing involvement in the agreement, are recorded as deferred revenue and
recognized over the estimated service period. If the estimated service period is
subsequently modified, the period over which the up-front fee is recognized is
modified accordingly on a prospective basis.
SAB No. 104 updates the guidance in SAB No. 101 and requires companies to
identify separate units of accounting based on the consensus reached on Emerging
Issues Task Force ("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. EITF
00-21 is effective for revenue arrangements entered into in quarters beginning
after June 15, 2003. If the deliverables in a revenue arrangement constitute
separate units of accounting according to the EITF's separation criteria, the
revenue-recognition policy must be determined for each identified unit. If the
arrangement is a single unit of accounting under the separation criteria, the
revenue-recognition policy must be determined for the entire arrangement. The
adoption of EITF 00-21 did not impact the Company's historical 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. Prior to the adoption of EITF 00-21, revenues from the achievement
of research and development milestones, which represent the achievement of a
significant step in the research and development process, were recognized when
and if the milestones were achieved.
Continuation of certain contracts and grants are dependent upon the Company
achieving specific contractual milestones; however, none of the payments
received to date are refundable regardless of the outcome of the project. Grant
revenue is recognized in accordance with the terms of the grant and as services
are performed, and generally equals the related research and development
expense.
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 stock option plans. As such, compensation expense for
grants to employees or members of the Board of Directors would be recorded on
the date of grant only if the current market price of the Company's stock
exceeded the exercise price. 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 to apply the intrinsic value-based method of accounting
described above, and has adopted the disclosure requirements of SFAS No. 123, as
amended.
If 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 amortizes such
differences 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 No. 96-18, "Accounting for
Equity Instruments That Are Issued to
F-11
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
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 No. 123 had been
applied.
- --------------------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------------------
Net income (loss) applicable to common stockholders:
As reported $ 13,511 $ (100,000) $ (1,912)
Add stock-based employee compensation expense
included in reported net income (loss) 250 1,515 2,675
Deduct total stock-based employee compensation
expense determined under the fair value-based
method for all awards (21,226) (19,616) (25,665)
---------------------------------------
Pro forma $ (7,465) $ (118,101) $ (24,902)
---------------------------------------
Net income (loss) per common share:
Basic, as reported $ 0.17 $ (1.29) (0.03)
Basic, pro forma (0.09) (1.53) (0.33)
Diluted, as reported 0.16 (1.29) (0.03)
Diluted, pro forma (0.09) (1.53) (0.33)
- --------------------------------------------------------------------------------------------
The pro forma effects on net income (loss) applicable to common stockholders and
net income (loss) per common share for 2003, 2002 and 2001 may not be
representative of the pro forma effects in future years.
The weighted-average fair value per share was $14.53, $8.13 and $9.83 for stock
options granted in 2003, 2002 and 2001, respectively. The company estimated the
fair values using the Black-Scholes option-pricing model based on the following
assumptions:
------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------
Risk-free interest rate 2.39% 2.02% 3.52%
Expected stock price volatility 52.5% 58% 57%
Expected term until exercise (years) 3.50 2.89 2.81
Expected dividend yield 0% 0% 0%
EARNINGS PER SHARE: Basic earnings (loss) per common share is computed by
dividing net income (loss) 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 (loss) 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.
F-12
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss), which represents the
change in equity from non-owner sources, consists of net income (losses) and the
change in net unrealized gains (losses) on marketable securities classified as
available for sale. Comprehensive income (loss) is presented in the Consolidated
Statements of Stockholders' Equity.
CAPITALIZED SOFTWARE COSTS: Capitalized software costs are capitalized in
accordance with Statement of Position No. 98-1, Accounting for the Costs of
Computer Software Developed and Obtained for Internal Use, and are amortized
over their estimated useful life of three years from the date the systems are
ready for their intended use.
ASSET RETIREMENT OBLIGATIONS: On January 1, 2003, the Company adopted SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
addresses the financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS 143 applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal use of an asset. SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred. The fair value of the liability is added to the carrying
amount of the associated asset and is depreciated over the life of the asset.
The liability is accreted at the end of each period through charges to operating
expense. If the obligation is ultimately settled for an amount other than the
carrying amount of the liability, a gain or loss is recognized on settlement. In
connection with its adoption of SFAS 143, the Company recorded an asset
retirement liability of approximately $0.2 million relating to the Company's
obligation to remove certain leasehold improvements at its Warren, New Jersey
facility at the end of the lease-term. The Company did not recognize a
cumulative effect adjustment for this accounting change because the amount was
immaterial.
(2) ACQUISITIONS AND DISPOSITIONS
ANTHROGENESIS ACQUISITION: On December 31, 2002, the Company completed its
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. In the transaction, the Company issued 1,455,381 shares of
common stock valued at $31.2 million and 1,247,203 stock options and warrants
valued at $16.7 million in exchange for all the outstanding shares, options and
warrants of Anthrogenesis. The share conversion equated to an exchange ratio of
0.4545 of a share of Celgene common stock for each share of Anthrogenesis common
stock outstanding. The Anthrogenesis stock options and warrants were converted
at the same exchange ratio. The fair value of the options and warrants was
determined using a Black-Scholes option-pricing model using the following
assumptions:
Fair market value of the underlying shares was based on the average
closing price of Celgene's common stock on December 31, 2002.
Risk free interest rate of 2%.
Expected stock price volatility of 65%.
Expected term until exercise 2.5 to 3 years.
Expected dividend yield 0%.
Also included in the purchase price was an outstanding convertible loan of $8.5
million due to the Company from Anthrogenesis, bearing interest at prime plus
2%, and $3.6 million of acquisition related costs, which consisted of
transaction fees for financial advisors, attorneys, accountants and other
related charges.
F-13
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The acquisition of Anthrogenesis was structured as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code and was accounted for using
the purchase method of accounting for business combinations. The Company's
Consolidated Financial Statements as of December 31, 2002 includes the net
assets and liabilities of Anthrogenesis. The purchase price allocation was
completed as of December 31, 2003, which resulted in the following amounts being
allocated to the assets received and liabilities assumed at the acquisition date
based upon their respective fair values:
Current assets $ 2,720
Property and equipment 537
Non current assets 9
IPR&D 55,700
Intangible assets 3,010
Goodwill 3,490
--------
Total assets acquired 65,466
--------
Current liabilities (4,220)
Non current liabilities (1,211)
--------
Total liabilities assumed (5,431)
--------
--------
Net assets acquired $ 60,035
========
IPR&D represents that portion of the purchase price of an acquisition related to
the research and development activities, which have not demonstrated their
technological feasibility and have no alternative future use. Accordingly, the
IPR&D of $55.7 million was charged to operations upon the acquisition date. The
estimated fair value of these projects was determined by employment of a
discounted cash flow model. The discount rates used take into account the stage
of completion and the risks surrounding the successful development and
commercialization of each of the purchased in-process technology projects that
were valued. The analysis included forecasted future cash flows that were
expected to result from the progress made on the in-process project prior to the
purchase dates. Appropriate operating expenses were deducted from the total
forecasted net revenues to establish a forecast of net returns on the completed
portion of the in-process technology. Finally, these net returns were discounted
to a present value using discount rates that incorporate the weighted average
cost of capital relative to the biotech industry and the Company as well as
product specific risks associated with the purchased in-process research and
development products. The product specific risk factors included the product's
phase of development, likelihood of success, manufacturing process capability,
scientific rationale, pre-clinical safety and efficacy data, target product
profile, and development plan. In addition to the product specific risk factors,
an overall discount rate of 36% was used for the purchase valuation, which
represents a risk premium to the Company's weighted average cost of capital.
The forecast data in the analysis was based on internal product level forecast
information maintained by management in the ordinary course of managing the
business. The inputs used by management in analyzing IPR&D was based on
assumptions, which management believed to be reasonable but which are inherently
uncertain and unpredictable. These assumptions may be incomplete or inaccurate,
and no assurance can be given that unanticipated events and circumstances will
not occur.
The following unaudited pro forma information presents a summary of consolidated
results of operations for the years ended December 31, 2002 and 2001 as if the
acquisition of Anthrogenesis had occurred on January 1, 2002 and January 1,
2001, respectively. The unaudited pro forma net loss and net loss per share
amounts for both years includes a charge for in-process research and development
of approximately $55.7
F-14
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
million, which was expensed at the acquisition date and
also includes 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 year ended
December 31, 2002 and their audited financial statements for the year ended
December 31, 2001.
-----------------------------------------------------------------------
Pro forma 2002 2001
-----------------------------------------------------------------------
Total revenues $ 138,000 $115,521
Net (loss) (112,897) (63,930)
Net (loss) per share $ (1.43) $ (0.83)
DISPOSITION OF CHIRAL INTERMEDIATES BUSINESS: In January 1998, the Company
completed the sale of its chiral intermediate business to Cambrex Corporation.
The Company received $7.5 million upon the closing of the transaction and is
entitled to future royalties, with a present value not exceeding $7.5 million
and certain minimum royalty payments due in 2000 through 2003. Included in the
transaction were the rights to Celgene's enzymatic technology for the production
of chirally pure intermediates for the pharmaceutical industry, including the
pipeline of third party products and the equipment and personnel associated with
the business. Pursuant to the minimum royalty provision of the agreement, the
Company received approximately $0.8 million, $1.0 million and $1.0 million
during 2003, 2002 and 2001, respectively.
F-15
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(3) EARNINGS PER SHARE (EPS)
- ----------------------------------------------------------------------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
INCOME (NUMERATOR):
Income (loss) from continuing operations $ 12,761 $ (101,000) $ (2,904)
Discontinued Operations - gain on sale of chiral assets 750 1,000 992
----------------------------------------------
Net income (loss) $ 13,511 $ (100,000) $ (1,912)
==============================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (DENOMINATOR):
Basic: 80,887,000 77,337,000 75,108,000
Effect of dilutive securities:
Options 4,370,000 -- --
Warrants 93,000 -- --
Restricted shares and other long-term incentives 48,000 -- --
----------------------------------------------
Diluted: 85,398,000 77,337,000 75,108,000
==============================================
EARNINGS PER SHARE:
Income (loss) from continuing operations
Basic $ 0.16 $ (1.31) $ (0.04)
Diluted $ 0.15 $ (1.31) $ (0.04)
Discontinued Operations - gain on sale of chiral assets
Basic $ 0.01 $ 0.01 $ 0.01
Diluted $ 0.01 $ 0.01 $ 0.01
Net income (loss)
Basic $ 0.17 $ (1.29) $ (0.03)
Diluted $ 0.16 $ (1.29) $ (0.03)
- ----------------------------------------------------------------------------------------------------------
The assumed conversion or exercise of all potentially dilutive common shares is
not included in the diluted loss per share computation for 2002 and 2001, 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 9)
were anti-dilutive and were excluded from the diluted earnings per share
computation for the year ended December 31, 2003. The total number of potential
common shares excluded from the diluted earnings per share computation because
their inclusion would have been anti-dilutive was 10,564,360, 11,046,271 and
10,128,670 in 2003, 2002 and 2001, respectively.
(4) LITIGATION SETTLEMENT AND RELATED AGREEMENTS
On December 31, 2002, the Company entered into a series of agreements with
EntreMed, Inc. and Children's Medical Center Corporation ("CMCC") to effectively
terminate ongoing litigation relating to patents for thalidomide analogs and to
grant an exclusive license to Celgene for the rights to those patents. Under the
terms of an Asset Purchase Agreement, the Company paid EntreMed $10.0 million
for all thalidomide analog patents and associated clinical data and records and
the termination of any litigation surrounding those patents. Under the terms of
a Securities Purchase Agreement, the Company acquired from EntreMed 3,350,000
shares of Series A Convertible Preferred Stock and warrants exercisable into an
additional 7,000,000 common shares for an aggregate cash consideration of
approximately $16.8 million. The Series A Convertible Preferred Stock is
convertible, at the option of the Company, into an aggregate of 16,750,000
F-16
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
shares of common stock at an initial conversion price of $1.00 per share
provided, however, that the conversion price in effect from time to time shall
be subject to certain adjustments. Dividends are payable prior and in preference
to the declaration or payment of any dividend or distribution to the holders of
common stock. The Company shall have the right to one vote for each share of
Common Stock into which such share of Series A Convertible Preferred Stock could
then be converted and with respect to such vote the Company shall have full
voting rights and powers equal to the voting rights and powers of the holders of
shares of Common Stock. The warrants have an exercise price of $1.50 per share,
vest after six months from the date of grant and expire after seven years from
the date of grant. The Company completed an assessment of the estimated
realizable value of the investment. Considering the level of the Company's
ownership interest in EntreMed, its history of operating losses and the fact
that EntreMed is a clinical-stage biopharmaceutical company engaged primarily in
research and development activities with proposed products and research programs
in the early stage of clinical development, and based on such assessment, the
entire amount of such Preferred Stock was written down.
The Company signed an exclusive license agreement with CMCC, which terminated
any existing thalidomide analog agreements between CMCC and EntreMed and
directly granted to Celgene an exclusive worldwide license for the analog
patents. The Company paid to CMCC $2.5 million under the agreement with another
$2.5 million payable between 2004 and 2006, the present value of which totaled
$2.2 million and was expensed in 2002. Additional payments are possible under
the agreement depending on the successful development and commercialization of
thalidomide analogs.
Celgene recorded a charge to earnings for the cost of these agreements and
related expenses of $32.2 million in 2002 including the write-down of the
EntreMed Convertible Preferred Stock and certain legal expenses incurred in
connection with the settlement.
(5) MARKETABLE SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value of available-for-sale securities by major security type
and class of security at December 31, 2003 and 2002, was as follows:
- ----------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2003 COST GAIN LOSS VALUE
- ----------------------------------------------------------------------------------------------
Government agencies mortgage obligations $ 188,319 $ 1,053 $ (186) $ 189,186
Government agency bonds and notes 650 1 (5) 646
Corporate debt securities 199,933 9,977 (228) 209,682
-------------------------------------------------
$ 388,902 $ 11,031 $ (419) $ 399,514
=================================================
- ----------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2002 COST GAIN LOSS VALUE
- ----------------------------------------------------------------------------------------------
Government agencies $ 150 $ 2 $ -- $ 152
Government bonds and notes 554 5 -- 559
Corporate debt securities 167,975 9,429 (2,408) 174,996
-------------------------------------------------
$ 168,679 $ 9,436 $ (2,408) $ 175,707
=================================================
F-17
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The fair value of available-for-sale securities with unrealized losses at
December 31, 2003 was as follows
-----------------------------------------------------------------------
GROSS
AMORTIZED UNREALIZED
DECEMBER 31, 2003 COST LOSS
-----------------------------------------------------------------------
Government agencies mortgage obligations $ 48,784 $ (186)
Government agency bonds and notes 345 (5)
Corporate debt securities 47,837 (228)
-------------------------
$ 96,966 $ (419)
=========================
Unrealized losses were due to changes in interest rates and are deemed to be
temporary. The duration that these securities have been in an unrealized loss
position is less than 12 months.
Maturities of debt securities classified as available-for-sale were as follows
at December 31, 2003:
-----------------------------------------------------------------------
AMORTIZED FAIR
COST VALUE
-----------------------------------------------------------------------
Due within one year $ 65,659 $ 65,831
Due after one year through three years 200,822 207,496
Due after three years through five years 14,667 15,064
Due after five years through seven years 73,628 74,884
Due after seven years 34,126 36,239
-------------------------
$388,902 $399,514
=========================
(6) INVENTORY
Inventory at December 31, 2003 and 2002 consisted of the following:
-----------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------
Raw materials $ 3,009 $ 2,681
Work in process 2,537 555
Finished goods 4,150 1,570
-------------------------
$ 9,696 $ 4,806
=========================
F-18
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(7) PLANT AND EQUIPMENT
Plant and equipment at December 31, 2003 and 2002 consisted of the following:
-----------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------
Laboratory equipment and machinery $ 18,977 $ 16,307
Leasehold improvements 11,688 10,915
Computer equipment 4,986 3,945
Furniture and fixtures 3,124 3,457
Leased equipment 696 1,090
Construction in progress 1,017 388
-------------------------
40,488 36,102
Less: accumulated depreciation and
Amortization 17,942 16,502
-------------------------
$ 22,546 $ 19,600
=========================
(8) OTHER FINANCIAL INFORMATION
Accrued expenses at December 31, 2003 and 2002 consisted of the following:
-----------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------
Professional and consulting fees $ 2,451 $ 2,950
Accrued compensation 18,383 11,579
Accrued interest, royalties and license fees 9,470 3,852
Accrued sales returns 8,368 2,783
Accrued rebates and chargebacks 5,089 1,946
Accrued facility costs -- 2,445
Accrued clinical trial costs 9,182 525
Accrued insurance and taxes 1,227 --
Other 1,106 896
-------------------------
$ 55,276 $ 26,976
=========================
Other assets at December 31, 2003 and 2002 consisted of the following:
-----------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------
Pharmion convertible note $ 12,000 $ --
Debt issuance costs 10,790 --
Capitalized project costs, net 4,490 4,234
Long-term deposits 2,293 132
Patent rights and licensed technology, net 765 860
Other 2,168 382
-------------------------
$ 32,506 $ 5,608
=========================
F-19
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
Warehousing and distribution expenses are included in selling, general and
administrative expenses and totaled $3.9 million, $3.5 million and $5.4 million
in 2003, 2002 and 2001, respectively.
(9) CONVERTIBLE DEBT
In June 2003, the Company issued $400.0 million of unsecured convertible notes
to qualified 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 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, assuming no conversion. Under the terms
of the Purchase Agreement, the note holders can convert the notes at any time
into 8,255,920 shares of common stock 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 the related registration statement effective for the defined period. The
Company may not merge or transfer substantially all assets, as defined, unless
certain conditions are met.
At December 31, 2003, the fair value of the Company's convertible notes exceeded
the carrying value of $400.0 million by approximately $78.1 million.
During 2002, the remaining notes outstanding related to the Company's January
1999 and July 1999 convertible debt issuances, which had an aggregate carrying
value of $11.7 million were converted into 1,864,549 shares of the Company's
common stock.
On September 26, 2000, the Company entered into an agreement with the note
holders of the January 1999 and the July 1999 notes that allows the note holders
to take a "short position" in the common stock (as defined in the respective
Note Purchase Agreements) of the Company with certain limitations on
transactions resulting in a "short position" based upon the level of the stock
price. In exchange for the Company consenting to waive the provisions that
prohibit short sales, the note holders waived the right to the receipt of any
interest after the effective date of August 24, 2000.
(10) GOODWILL AND INTANGIBLE ASSETS
GOODWILL: The amount of goodwill originally recorded in connection with the
December 31, 2002 acquisition of Anthrogenesis was $3.0 million. Subsequently,
certain purchase price allocation adjustments were made based on the fair value
of the assets received and liabilities assumed. The purchase price allocation
process was completed as of December 31, 2003, which has resulted in goodwill
being adjusted to $3.5 million. The goodwill from the Anthrogenesis acquisition
has been allocated to the Company's Stem Cell Therapy segment and is reviewed at
least annually for impairment.
F-20
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
INTANGIBLE ASSETS: The Company's intangible assets, which relate to its December
31, 2002 acquisition of Anthrogenesis Corporation, are being amortized over
their estimated useful lives. The gross carrying amount and accumulated
amortization, by major intangible asset class at December 31, 2003 was as
follows:
----------------------------------------------------------------
Gross Intangible
carrying Accumulated assets,
value amortization net
----------------------------------------------------------------
Supplier relationships $ 710 $ 142 $ 568
Customer lists 1,700 113 1,587
Technology 600 60 540
------------------------------------
Total $ 3,010 $ 315 $ 2,695
====================================
Amortization of intangible assets for the year ended December 31, 2003 was $0.3
million. 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 $0.3 million for the years 2004 through 2007 and
$0.2 million for 2008.
(11) RELATED PARTY TRANSACTIONS
Axys Pharmaceutical was treated as a related party though October 2001, as its
previous Chief Executive Officer also served on Signal Pharmaceutical's Board of
Directors during which time Signal and Axys entered into a collaboration
agreement, which was executed prior to the Company's acquisition of Signal. The
initial term of that agreement expired in October 2001. Therefore revenue
recognized subsequent to October 2001 is no longer classified as related party
revenue. Related party revenue of $1.9 million related to this agreement was
recorded in 2001. No revenues were received from Axys Pharmaceuticals in 2003 or
2002.
Prior to the Company's acquisition of Anthrogenesis, two senior executives of
the Company served on the Board of Directors of Anthrogenesis, during which time
the Company entered into the following transactions with Anthrogenesis:
In April 2001, the Company entered into a license and development agreement with
Anthrogenesis for the development of a human angiogenesis assay system for
screening the effect of certain molecules on the process of neovascularization.
The Company paid approximately $0.3 million for a one-year exclusive,
royalty-free license to all assay system technology. This payment was expensed
upon the signing of the agreement.
In December 2001, the Company entered into a second development agreement with
Anthrogenesis for a period of one year which required Anthrogenesis to perform
certain development work on several of the Company's compounds. The Company
recorded a development fee of $0.3 million, which was amortized over the term of
the agreement.
(12) STOCKHOLDERS' EQUITY
PREFERRED STOCK: The Board of Directors is authorized to issue, at any time,
without further stockholder approval, up to 5,000,000 shares of preferred stock,
and to determine the price, rights, privileges, and preferences of such shares.
F-21
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
COMMON STOCK: The Company has 120,000,000 authorized shares of common stock with
a par value of $.01 per share, of which 81,411,055 shares were outstanding at
December 31, 2003. A summary of changes in common stock issued and treasury
stock is presented below:
- --------------------------------------------------------------------------------
Common Stock
Balance December 31, Common Stock in Treasury
- --------------------------------------------------------------------------------
2000 73,999,889 --
- --------------------------------------------------------------------------------
Exercise of stock options and warrants 1,544,625
Issuance of common stock for employee
benefit plans and non-employee services 30,271
Purchase of treasury stock (282)
- --------------------------------------------------------------------------------
2001 75,574,785 (282)
- --------------------------------------------------------------------------------
Exercise of stock options and warrants 1,246,600
Issuance of common stock for employee
benefit plans 35,398 1,160
Purchase of treasury stock (878)
Conversion of long-term convertible notes 1,864,549
Shares issued pursuant to Anthrogenesis
Acquisition 1,455,381
- --------------------------------------------------------------------------------
2002 80,176,713 --
- --------------------------------------------------------------------------------
Exercise of stock options and warrants 1,105,074
Issuance of common stock for employee
benefit plans 129,268
- --------------------------------------------------------------------------------
2003 81,411,055 --
================================================================================
RIGHTS PLAN: During 1996, the Company adopted a shareholder rights plan ("Rights
Plan"). The Rights Plan involves the distribution of one Right as a dividend on
each outstanding share of the Company's common stock to each holder of record on
September 26, 1996. Each Right shall entitle the holder to purchase one-tenth of
a share of common stock. The Rights trade in tandem with the common stock until,
and are exercisable upon, certain triggering events, and the exercise price is
based on the estimated long-term value of the Company's common stock. In certain
circumstances, the Rights Plan permits the holders to purchase shares of the
Company's common stock at a discounted rate. The Company's Board of Directors
retains the right at all times prior to acquisition of 15% of the Company's
voting common stock by an acquiror, to discontinue the Rights Plan through the
redemption of all rights or to amend the Rights Plan in any respect. On February
17, 2000, the Company's Board of Directors approved an amendment to the Rights
Plan changing the initial exercise price thereunder from $100.00 per Right (as
defined in the original Rights Plan agreement) to $700.00 per Right and
extending the final expiration date of the Rights Plan to February 17, 2010. On
August 13, 2003, the Rights Plan was 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.
(13) STOCK BASED COMPENSATION
STOCK OPTIONS AND RESTRICTED STOCK AWARDS: The Company has two equity incentive
plans (the "Incentive Plans") that provide for the granting of options,
restricted stock awards, stock appreciation rights,
F-22
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
performance awards and other stock-based awards to employees and officers of the
Company to purchase not more than an aggregate of 4,200,000 shares of common
stock under the 1992 plan and 12,500,000 shares of common stock under the 1998
plan, as amended, subject to adjustment under certain circumstances. The
Management Compensation and Development Committee of the Board of Directors (the
"Compensation Committee") determines the type, amount and terms, including
vesting, of any awards made under the Incentive Plans. The 1992 Plan terminated
in 2002 and the 1998 Plan will terminate in 2008.
With respect to options granted under the Incentive Plans, the exercise price
may not be less than the market price of the common stock on the date of grant.
In general, options granted under the Incentive Plans vest over periods ranging
from immediate vesting to four year vesting and expire ten years from the date
of grant, subject to earlier expiration in case of termination of employment.
The vesting period for options and restricted stock awards granted under the
Plans is subject to certain acceleration provisions if a change in control, as
defined in the Plans, occurs.
As a result of the Signal acquisition, the Company assumed the former Signal
stock option plans. The options issued pursuant to the former Signal plans
converted into Celgene options upon consummation of the transaction at a
..1257-for-1 exchange ratio. No additional options will be granted from the
former Signal plans.
As a result of the acquisition of Anthrogenesis, the Company assumed the former
Anthrogenesis Qualified Employee Incentive Stock Option Plan and the
Anthrogenesis Non-Qualified Recruiting and Retention Stock Option Plan. Options
granted under the Anthrogenesis plans prior to Celgene's acquisition of
Anthrogenesis generally vested immediately and have a life of ten years from the
date of grant. The Anthrogenesis options converted into Celgene options at an
exchange ratio of .4545. No future awards will be granted under the
Non-Qualified Plan. The Qualified Plan authorizes the award of incentive stock
options, which are stock options that qualify for special federal income tax
treatment. The exercise price of any stock options granted under the Qualified
Plan may not be less than the fair market value of the common stock on the date
of grant. In general, options granted under the Qualified Plan vest evenly over
a four-year period and expire ten years from the date of grant, subject to
earlier expiration in case of termination of employment. The vesting period is
subject to certain acceleration provisions if a change in control occurs. No
award will be granted under the Qualified Plan on or after December 31, 2008.
Stock options granted to executives at the vice-president level and above, after
September 18, 2000, contain a reload feature which provides that if (1) the
optionee exercises all or any portion of the stock option (a) at least six
months prior to the expiration of the stock option, (b) while employed by the
Company and (c) prior to the expiration date of the 1998 Incentive Plan and (2)
the optionee pays the exercise price for the portion of the stock option
exercised or pays applicable withholding taxes by using common stock owned by
the optionee for at least six months prior to the date of exercise, the optionee
shall be granted a new stock option under the 1998 Incentive Plan on the date
all or any portion of the stock option is exercised to purchase the number of
shares of common stock equal to the number of shares of common stock exchanged
by the optionee to exercise the stock option or to pay withholding taxes
thereon. The reload stock option will be exercisable on the same terms and
conditions as apply to the original stock option except that (x) the reload
stock option will become exercisable in full on the day which is six months
after the date the original stock option is exercised, (y) the exercise price
shall be the fair market value (as defined in the 1998 Incentive Plan) of the
common stock on the date the reload stock option is granted and (z) the
expiration of the reload stock option will be the date of expiration of the
original stock option. An optionee may not reload the reload stock option unless
otherwise permitted by the Company's Compensation Committee. As of December 31,
2003, the Company has issued 2,192,075 stock options to executives that contain
the reload features noted above, of which 2,153,375 are still outstanding.
F-23
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
In June 1995, the stockholders of the Company approved the 1995 Non-Employee
Directors' Incentive Plan, which, as amended, provides for the granting of
non-qualified stock options to purchase an aggregate of not more than 1,800,000
shares of common stock (subject to adjustment under certain circumstances) to
directors of the Company who are not officers or employees of the Company
("Non-Employee Directors"). Each new Non-Employee Director, upon the date of
election or appointment, receives an option to purchase 20,000 shares of common
stock, which vest in four equal annual installments commencing on the first
anniversary of the date of grant. Additionally, upon the date of each annual
meeting of stockholders, each continuing Non-Employee Director receives an
option to purchase 10,000 shares of common stock (or a pro rata portion thereof
for service less than one year), which vest in full on the date of the first
annual meeting of stockholders held following the date of grant. As amended in
2003, continuing Non-Employee Director receive quarterly grants of 2,500 options
aggregating 10,000 options annually, instead of receiving one annual grant of
10,000 options and vesting occurs one-year from the date of grant instead of on
the date of the first annual meeting of stockholders held following the date of
grant. The 1995 Non-Employee Directors' Incentive Plan also provides for a
discretionary grant upon the date of each annual meeting of an additional option
to purchase up to 5,000 shares to a non-employee director who serves as a member
(but not a chairman) of a committee of the Board of Directors and up to 10,000
shares to a non-employee director who serves as the chairman of a committee of
the Board of Directors. All options are granted at an exercise price that equals
the fair market value of the Company's common stock at the grant date and expire
10 years after the date of grant. This plan terminates in 2005.
The following table summarizes the stock option activity for the aforementioned
Plans:
- -------------------------------------------------------------------------------
OPTIONS OUTSTANDING
--------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE EXERCISE
Balance December 31, FOR GRANT SHARES PRICE PER SHARE
- --------------------------------------------------------------------------------
2000 2,531,945 7,947,687 $20.05
- --------------------------------------------------------------------------------
Authorized 2,000,000 -- --
Expired -- -- --
Granted (1,111,450) 1,111,450 26.04
Exercised -- (1,304,960) 4.74
Cancelled 457,249 (457,249) 34.49
Repurchases 190 -- --
- --------------------------------------------------------------------------------
2001 3,877,934 7,296,928 $22.80
- --------------------------------------------------------------------------------
Authorized -- -- --
Expired (73,706) -- --
Granted (3,204,884) 3,204,884 21.13
Exercised -- (279,117) 5.58
Cancelled 423,627 (423,627) 30.19
Repurchases 721 -- --
Assumed on acquisition 137,031 1,030,364 11.37
- --------------------------------------------------------------------------------
2002 1,160,723 10,829,432 $21.37
- --------------------------------------------------------------------------------
Authorized 4,000,000 -- --
Expired (308,857) -- --
Granted (2,424,027) 2,424,027 36.60
Exercised -- (1,041,118) 10.69
Cancelled 172,826 (200,092) 26.78
- --------------------------------------------------------------------------------
2003 2,600,665 12,011,749 $25.28
================================================================================
F-24
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The following table summarizes information concerning options outstanding under
the Incentive Plans at December 31, 2003:
- --------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER EXERCISE REMAINING NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING PRICE TERM (YRS.) EXERCISABLE PRICE
- --------------------------------------------------------------------------------
$ 0.15 - 3.50 620,134 $ 2.25 3.8 620,134 $ 2.25
3.51 - 6.00 2,025,517 5.17 4.6 2,025,517 5.17
6.01 - 24.00 2,844,467 17.39 8.1 2,710,456 17.17
24.01 - 30.00 2,998,939 25.98 7.2 2,549,391 26.05
30.01 - 50.00 2,397,392 38.38 9.2 2,127,242 38.47
50.01 - 70.00 1,125,300 64.33 6.6 914,599 64.23
---------------------------------------------------------------
12,011,749 $25.28 7.1 10,947,339 $24.25
================================================================================
The Company recorded compensation expense of $1.3 million and $2.5 million in
2002 and 2001, respectively, related to options granted under the former Signal
plans at exercise prices below the market price of the underlying stock at the
date of grant. During 2002 and 2001, the Company reversed deferred compensation
by $0.8 million and $0.3 million, respectively, as a result of option holder
terminations. At December 31, 2002 deferred compensation was zero.
During 2001, the Company issued to certain employees an aggregate of 52,500
restricted stock awards. Such restricted stock awards will vest on September 19,
2006, unless certain conditions are met prior to such date. The fair value of
these restricted stock awards at the grant date was $1.4 million and is being
amortized as compensation expense over the contractual vesting period. During
2003, 2002 and 2001, the Company recorded compensation expense relating to these
restricted stock awards of $0.3 million, $0.3 million and $0.2 million,
respectively, which was classified as selling, general and administrative
expenses.
Former non-employee directors of Signal, who entered into consulting agreements
with Celgene effective August 31, 2000, held unvested stock options to purchase
an aggregate of 36,457 shares of the Company's common stock. As a result, the
Company recorded compensation expense based on the fair value of such options,
which is being recognized over the remaining vesting period for such options.
During 2003, 2002 and 2001 the Company recorded compensation expense relating to
stock, stock options or warrants issued to consultants, advisors or financial
institutions of $0.5 million, $0.2 million and $0.9 million, respectively.
WARRANTS: In connection with its acquisition of Anthrogenesis, the Company
assumed the Anthrogenesis warrants outstanding, which converted into 216,839
Celgene warrants. Anthrogenesis had issued warrants to investors at exercise
prices equivalent to the per share price of their investment. As of December 31,
2003, Celgene had 144,307 warrants outstanding to acquire an equivalent number
of shares of Celgene common stock at an average exercise price of $11.90 per
warrant.
In connection with the placement of the Series B Convertible Preferred Stock in
June 1997, the Company issued warrants to purchase 1,557,690 shares of common
stock at an exercise price of $2.50 per share with a term of four years from the
issuance date, which ended on June 1, 2002. In May 2002, the remaining
F-25
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
967,693 warrants were exercised and the equivalent number of common shares were
issued. As of December 31, 2002, there were no warrants outstanding.
(14) EMPLOYEE BENEFIT PLANS
The Company sponsors an investment savings plan, which qualifies under Section
401(k) of the Internal Revenue Code. The Company's contributions to the savings
plan are discretionary and have historically been made in the form of the
Company's common stock. Such contributions are based on specified percentages of
employee contributions and aggregated a total expense charged to operations of
$4.2 million in 2003, $2.9 million in 2002 and $1.4 million in 2001.
During 2000, the Company's Board of Directors approved a deferred compensation
plan effective September 1, 2000. Eligible participants, which include certain
top-level executives of the Company as specified by the plan, can elect to defer
up to 25% of the participant's base salary, 100% of cash bonuses and restricted
stock and stock options gains (both subject to a minimum deferral of 50% of each
award of restricted stock or stock option gain approved by the Committee for
deferral). Company contributions to the deferred compensation plan represent a
100% match of the participant's deferral up to a specified percentage (ranging
from 10% to 25%, depending on the employee's position as specified in the plan)
of the participant's base salary. The Company recorded expense of $0.7 million,
$0.4 million and $0.4 million associated with the matching of the deferral of
compensation in 2003, 2002 and 2001, respectively. All amounts are 100% vested
at all times, except with respect to restricted stock, which will not be vested
until the date the applicable restrictions lapse. At December 31, 2003 and 2002,
the Company had a deferred compensation liability included in other non-current
liabilities in the consolidated balance sheets of approximately $4.9 million and
$2.7 million, respectively, which included the participant's elected deferral of
salaries and bonuses, the Company's matching contribution and earnings on
deferred amounts as of that date. The plan provides participants eight
investment options for amounts they elect to defer. Such options include a
combination of funds that offer the investor the option to spread their risk
across a diverse group of investments. These investment choices include an
equity and equity index fund, a bond fund, a fund that is balanced between
equities and bonds, a fund that invests worldwide, a growth fund and a fund that
invests in mid to large cap companies and seeks capital appreciation.
In 2003, the Company adopted a Long Term Incentive Plan ("LTIP"). The LTIP is a
long-term performance plan that provides for payouts in cash or stock, at the
election of the Company. Under the plan, eligible employees may receive a payout
based on a percentage of their base salary, which the Company may then elect to
convert into shares of the Company's common stock based on the fair market value
of the Company's stock on the date of payout. The LTIP is administered through
the Compensation Committee of the Board of Directors, who establishes the
performance measures at the beginning of each plan year for eligible senior
executives. The actual payout is contingent on meeting stated performance
targets over three-year overlapping performance periods. Moreover, participation
in the LTIP is not guaranteed in each plan cycle and, if minimum performance
targets are not met, no payouts are made. Through December 31, 2003, the
Company recognized expense of $0.5 million in LTIP accruals for the 2003 to 2005
incentive plan period based on an estimated achievement of 75% of the target
measures. Payouts may be in the range of 0% to 200% and the maximum potential
payout is $6.1 million for the 2003 to 2005 period. After performance results
are determined the earned award, if any, will be calculated for each participant
and converted into shares of the Company's common stock based on the then
current market price of the Company's stock or paid in cash, at the Company's
election. Upon a change in control, participants will be entitled to an
immediate payment equal to their target award, or, if higher, an award based on
actual performance through the date of the change in control.
(15) SPONSORED RESEARCH, LICENSE AND OTHER AGREEMENTS
GELCLAIR(TM) CO-PROMOTION AGREEMENT: In October 2002, the Company entered into
an agreement with Cell Pathways, Inc. for the co-promotion of Gelclair(TM),
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 is entitled to receive
an additional $3.0 million on the first anniversary of the effective date based
on the Company's successful completion of certain transitional services through
December 31, 2003, as defined in the agreement. The aggregate revenue of $6.0
million was recognized as collaborative agreement revenue on a straight-line
basis over the six-month service period ended 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.
PHARMION: In November 2001, the Company entered into a license agreement with
Pharmion Corporation and Pharmion GmbH ("Pharmion") in which the Company granted
an exclusive royalty-bearing license for its intellectual property covering
thalidomide and S.T.E.P.S.(R) in all countries outside of North America, Japan,
China, Taiwan and Korea in exchange for licensing payments and upon regulatory
approvals royalties based on commercial sales. The
F-26
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
agreement terminates upon the tenth anniversary of the initial European
regulatory approval of thalidomide, and pursuant to the agreement, the Company
is entitled to receive $0.3 million on a quarterly basis beginning in December
2001, until the initial European regulatory approval is received. In April 2003,
the Company entered into an amendment to the aforementioned agreement whereby
Pharmion has agreed to provide the Company an aggregate of $8.0 million in
research funding for the further clinical development of THALOMID during the
period commencing on the date of the amendment and ending December 31, 2005. The
research funding consists of three installments of $1.0 million each, payable
upon execution of the agreement, September 30, 2003 and December 31, 2003, four
quarterly installments of approximately $0.8 million each payable in 2004 and
four quarterly installments of $0.5 million each payable in 2005. The Company
received the first three installments totaling $3.0 million, which was
recognized as collaborative agreement revenue in 2003.
In April 2003, the Company entered into a Securities Purchase Agreement with
Pharmion whereby Celgene purchased for $12.0 million a Senior Convertible
Promissory Note (the "Note") with a principal amount of $12.0 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
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. Pharmion's closing stock price as of
December 31, 2003 was $15.25
NOVARTIS PHARMA AG: In April 2000, the Company granted Novartis Pharma AG an
exclusive worldwide license to develop and market d-methylphenidate (d-MPH), a
chirally pure version of Ritalin. The Company also granted Novartis rights to
all its related intellectual property and patents, including new formulations of
the currently marketed Ritalin. The Company received a $10.0 million,
nonrefundable, upfront license fee payment in July 2000, which was recognized as
revenue over a period of 17 months commencing in June 2000, (i.e., the period of
time management estimated it would take to fulfill its obligations related to
obtaining FDA approval of the immediate release form of d-MPH). Accordingly, the
Company recognized approximately $5.4 million and $4.6 million of the upfront
license fee as research contract revenue in 2001 and 2000, respectively. In
December 2000, the Company received acceptance of the New Drug Application
("NDA") by the FDA for d-MPH and received a milestone payment of $5.0 million,
which was recognized as research contract revenue in 2000. In November 2001, the
Company received FDA approval to market d-MPH and received a milestone payment
of $12.5 million, which was recognized as research contract revenue in 2001. The
agreement also entitles the Company to receive royalties on the entire family of
Ritalin drugs. Costs incurred related to the agreement were approximately $2.8
million in 2001.
In December 2000, the Company signed a collaborative research and license
agreement with Novartis for joint research of selective estrogen receptor
modulator compounds ("SERMs") for the treatment and prevention of osteoporosis.
The Company received a nonrefundable, upfront payment of $10.0 million and may
be entitled to receive additional milestone payments for specific preclinical,
clinical and regulatory endpoints, as well as royalties upon commercialization
of products receiving FDA marketing approval. The upfront payment was amortized
over the two-year research period. The Company incurred costs of approximately
$0.4 million, $1.8 million and $2.1 million in 2003, 2002 and 2001,
respectively, related to this agreement and extension. The research portion of
the agreement ended in June 2003.
AXYS: In October 1999, the Company entered into a two-year collaborative
research and license agreement with Axys to develop and commercialize certain
compounds. The Company received an initial non-refundable license fee of $2.0
million, which was amortized over the term of the agreement. In addition, Axys
agreed to pay the Company certain amounts for the full-time equivalent personnel
working on the research. During 2001, Axys paid $1.1 million to the Company in
research funding, which represented the
F-27
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
approximate cost of the full-time equivalent personnel working on the related
research. This agreement was terminated in June 2001 and has not been renewed.
SERONO: In November 1997, the Company entered into a three-year collaborative
research, development and license agreement with Serono to perform research
within the field of the modulation of NF-(kappa)(beta). Under the terms of the
agreement, Serono made quarterly payments to the Company to fund research
efforts. During 2001, Serono paid $2.8 million to the Company, which represented
the approximate cost of the full-time equivalent personnel working on the
related research. Serono purchased shares of Signal's Series F Preferred Stock
(which were ultimately exchanged into Celgene shares pursuant to the Signal
merger) in conjunction with the license agreement. The research term of the
agreement was extended for one year and expired in November 2001. The agreement
has not been renewed and the selected compounds have been transferred to Serono
for further development, for which the Company will receive royalties upon
commercial sales of such products, if any.
(16) INCOME TAXES
At December 31, 2003 and 2002, the tax effects of temporary differences that
give rise to deferred tax assets were as follows:
- ----------------------------------------------------------------------------------------------------
2003 2002
- ----------------------------------------------------------------------------------------------------
Deferred assets:
Federal and state net operating loss carryforwards $ 141,379 $ 143,720
Capitalized research expenses 16,774 7,011
Research and experimentation tax credit carryforwards 9,154 7,686
Plant and equipment, principally due to differences in depreciation 1,524 1,880
Patents, principally due to differences in amortization 5,615 5,615
Accrued and other expenses 6,686 4,802
Unrealized losses on securities 4,188 6,686
--------------------------
Total deferred tax assets 185,320 177,401
Valuation allowance (185,320) (177,401)
--------------------------
Net deferred tax assets $ -- $ --
==========================
During 2003, 2002 and 2001, the Company recognized a tax benefit of $0.4
million, $0.7 million and $1.2 million, respectively, from the sale of certain
state net operating loss carryforwards. In 2003, the Company also recognized tax
expense of $1.1 million for federal and state purposes and in 2002, the Company
recognized $0.6 million for state tax purposes. Recent legislation in California
and New Jersey has placed a temporary suspension on the usage of state net
operating losses to offset state income.
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. At December 31,
2003, the Company had Federal net operating loss carryforwards of approximately
$359.7 million and combined State net operating loss carryforwards of
approximately $258.2 million that will expire in the years 2004 through 2023.
State net operating loss carryforwards differ from Federal net operating loss
carryforwards primarily due to the fact that the Company sold approximately
$91.2 million of its State net operating loss carryforwards through December 31,
2003, and approximately $10.3 million has expired. The Company also has research
and experimentation credit carryforwards of approximately $9.2 million that
expire in the years 2004 through 2023. Ultimate utilization/availability of such
net operating losses and credits may be curtailed if a significant change in
ownership occurs. Signal experienced an ownership change, as that term is
defined in section 382 of the Internal Revenue Code, when it was acquired by
Celgene. As such, there is an annual limitation on the use of this Net Operating
Loss in the amount of approximately $11.6 million. Anthrogenesis also
experienced an ownership change when acquired at December 31, 2002.
Approximately $8.5 million of deferred tax assets acquired in the Anthrogenesis
F-28
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
acquisition at December 31, 2002 consisted primarily of net operating losses: as
such there may be an annual limitation on the Company's ability to utilize the
acquired net operating losses in the future. Upon realization of the
Anthrogenesis acquired tax assets, the Company will credit the benefit to the
related acquired goodwill and other intangibles.
Of the deferred tax asset related to the Federal and State net operating loss
carryforwards, approximately $71.7 million relates to a tax deduction
attributable to stock options. The Company will increase paid in capital when
these benefits are realized for tax purposes. The Company realized stock option
deduction benefits in 2003 and 2002 for New Jersey state income tax purposes and
has increased paid in capital in the amount of approximately $0.8 million and
$0.1 million, respectively.
(17) COMMITMENTS AND CONTINGENCIES
LEASES: The Company leases office and research facilities under several
operating lease agreements. The minimum annual rents may be subject to specified
annual rental increases. At December 31, 2003, the non-cancelable lease terms
for the operating leases expire at various dates between 2005 and 2012 and each
agreement includes renewal options ranging from one or two additional three or
five-year terms. In general, the Company is also required to reimburse the
lessors for real estate taxes, insurance, utilities, maintenance and other
operating costs associated with the leases. In December 2001, the Company
entered into a new lease arrangement to consolidate the Signal San Diego,
California operations into one building. Signal completed the occupation of the
new facility during the fourth quarter of 2002. The lease obligation relating to
the remaining term of the old lease arrangements, which expired on December 31,
2003, aggregating approximately $1.0 million, was recognized as an expense in
2002 and the net book value with respect to related leasehold improvements and
other unamortized assets aggregating $1.1 million was written off during the
same period.
The Company leases certain laboratory equipment and machinery under capital
lease arrangements. Assets held under capital leases are included in plant and
equipment and the amortization of these assets is included in depreciation
expense.
F-29
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
Future minimum lease payments under noncancelable operating leases (with initial
or remaining lease terms in excess of one year) and future minimum capital lease
payments as of December 31, 2003 are:
- --------------------------------------------------------------------------------
OPERATING CAPITAL
LEASES LEASES
- --------------------------------------------------------------------------------
2004 $ 3,688 $ 32
2005 3,574 13
2006 3,463 2
2007 3,256 2
2008 2,979 --
Thereafter 8,945
----------------------
Total minimum lease payments $ 25,905 $ 49
========
Less amount representing interest 3
--------
Present value of net minimum
capital lease payments 46
Less current installments of obligations
under capital leases 30
--------
Obligations under capital leases,
excluding current installments $ 16
========
Total facilities rental expense under operating leases was approximately $3.9
million in 2003, $3.0 million in 2002, excluding the write-off of the lease
obligation for the old Signal facilities, and $2.3 million in 2001.
EMPLOYMENT AGREEMENTS: The Company has employment agreements with certain
officers and employees. Employment contracts provide for base compensation and
an annual target bonus based upon achievement of Company performance measures
and annual increases in base compensation reflecting annual reviews and related
salary adjustments. Base compensation expense subject to employment agreements
aggregated $2.5 million and $1.7 million in 2003 and 2002, respectively. The
outstanding commitment for base compensation related to employment contracts as
of December 31, 2003 is approximately $2.6 million per year in each of the next
three consecutive years (excluding any change in control provisions). Employees
covered under employment contracts who are terminated upon the occurrence of a
change in control may among other things be entitled to receive from the Company
a lump sum equal to three times such employee's base salary and bonus, payment
by the Company of such employee's benefit premiums for three years and full and
immediate vesting of all stock options and equity awards held by such employee.
CONTRACTS: On March 31, 2003, the Company entered into a three-year supply and
distribution agreement with GlaxoSmithKline ("GSK") to distribute, promote and
sell ALKERAN (melphalan), a therapy approved by the FDA for the palliative
treatment of multiple myeloma and for palliation of carcinoma of the ovary.
Under the terms of the agreement, Celgene purchases ALKERAN tablets and ALKERAN
for injection from GlaxoSmithKline and distributes the products in the United
States under the Celgene label. The agreement requires the Company to purchase
certain minimum quantities each year for an initial three-year term under a
take-or-pay arrangement aggregating $56.6 million over such period. The
remaining minimum purchase requirements at December 31, 2003 were $43.5 million.
As discussed in Note 4, the Company signed an exclusive license agreement with
CMCC, which terminated any existing thalidomide analog agreements between CMCC
and EntreMed and directly granted to Celgene
F-30
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
an exclusive worldwide license for the analog patents. Under the agreement, the
Company is required to pay CMCC $2.5 million between 2004 and 2006, the present
value of which totaled $2.2 million and was expensed in 2002. Additional
payments are possible under the agreement depending on the successful
development and commercialization of thalidomide analogs.
The Company has an agreement with Penn Pharmaceutical, Ltd. of Great Britain for
the production of Thalomid. Penn manufactures Thalomid and sells it exclusively
to the Company. The agreement has been extended through 2004 for Dedicated
Containment Facilities ("DCF") payments totaling approximately $0.7 million. In
November 2001, concurrent with the Pharmion License agreement (see Note 15), the
Company entered into an agreement with Penn Pharmaceuticals, Ltd. and its
shareholders in which Penn granted the Company an option to purchase their
thalidomide DCF and related thalidomide assets. The Company has three years in
which to exercise the option. The purchase price will be determined in the
future based on a formula defined in the agreement.
In October 2003, the Company signed an agreement with Institute of Drug
Technology Australia Limited ("IDT") for the manufacture of finished dosage form
of THALOMID capsules. The agreement requires minimum payments for THALOMID
capsules of $4.7 million for the three-year term commencing with the FDA's
approval of IDT as an alternate supplier. This agreement provides the Company
with additional capacity and reduces its dependency on one manufacturer for the
production of THALOMID.
The Company has entered into various service agreements with Contract Research
Organizations ("CROs") to provide services in the management of certain pivotal
clinical trials. Management services provided by CROs typically include but are
not limited to; assistance with clinical monitoring activities, assistance with
study enrollment and other management oversight activities. Pivotal clinical
trials are currently being conducted with the following CROs; PharmaNet, Inc.,
Icon Clinical Research, PPD Development, LLC and Research Pharmaceuticals
Services, Inc. Service agreements with these CROs provide that either party may
early terminate such agreement by written notice to the other party. Payments
made related to services provided by the above CROs were $22.5 million in 2003
and $3.8 million in 2002 and are included in research and development expenses.
The Company's pivotal clinical trials for THALOMID and REVLIMID began in 2002
and accordingly, no costs were incurred for services provided by the above CROs
in 2001.
CONTINGENCIES: The Company believes it maintains insurance coverage adequate for
its current needs. The Company's operations are subject to environmental laws
and regulations, which impose limitations on the discharge of pollutants into
the air and water and establish standards for the treatment, storage and
disposal of solid and hazardous wastes. The Company reviews the effects of such
laws and regulations on its operations and modifies its operations as
appropriate. The Company believes it is in substantial compliance with all
applicable environmental laws and regulations.
(18) SEGMENTS AND RELATED INFORMATION
Effective with its December 31, 2002 acquisition of Anthrogenesis, the Company
operates in two business segments - Human Pharmaceuticals and Stem Cell
Therapies. The accounting policies of the segments are the same as described in
the summary of significant accounting policies.
HUMAN PHARMACEUTICALS: The Human Pharmaceutical segment is engaged in the
discovery, development and commercialization of pharmaceutical therapies
designed to treat cancer and immunological diseases.
STEM CELL THERAPIES: The Stem Cell Therapies segment delivers stem cell
therapies that are produced from renewable human placental sources and initially
directed toward major, unmet medical needs in the cancer field, with a primary
focus on blood cancers such as leukemia, lymphomas and myelomas. The segment
also engages in the private client banking of autologous stem cells and the
development of an allogeneic bank for stem cell transplants.
F-31
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
Summarized segment information is as follows:
- -----------------------------------------------------------------------------------------
Human Stem Cell
Pharmaceuticals Therapies Unallocated(2) Total
- -----------------------------------------------------------------------------------------
2003
Total assets $ 113,433 $ 10,936 $ 666,967 $ 791,336
Total revenues 267,980 3,495 271,475
Income before income taxes(1) 30,097 (16,618) 13,479
- -----------------------------------------------------------------------------------------
2002
Total assets $ 56,793 $ 9,312 $ 261,182 $ 327,287
- -----------------------------------------------------------------------------------------
(1) Expenses incurred at the consolidated level are included in the results of
the Human Pharmaceuticals segment.
(2) Unallocated corporate assets consist of cash and cash equivalents and
marketable securities available for sale.
OPERATIONS BY GEOGRAPHIC AREA: The Company markets and sells its products in the
United States and Canada. All of the Company's customers are located in North
America. In November 2001, the Company entered into a license agreement with
Pharmion Corporation, under which Pharmion markets and sells THALOMID in all
countries outside of North America, Japan, China, Taiwan and Korea. In addition,
the Company receives royalties from Novartis on their international sales of
Ritalin and Ritalin(R) LA.
MAJOR CUSTOMERS: As is typical in the pharmaceutical industry, the Company sells
its products primarily through wholesale distributors and therefore, wholesale
distributors account for a large portion of the Company's net product revenues.
In 2003, 2002 and 2001, there were 3 customers that each accounted for more than
10% of the Company's total revenue. Sales to each such customer were
approximately 32.5%, 23.7% and 17.4% of consolidated total revenues in 2003,
30.9%, 16.2% and 17.1% of consolidated total revenues in 2002 and 20.2%, 13.2%
and 13.9% of consolidated total revenues in 2001. Sales to such customers were
included in the results of the Human Pharmaceuticals segment.
F-32
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
1Q 2Q 3Q 4Q YEAR
- --------------------------------------------------------------------------------------------------------------------------
2003(1)
Total revenue $ 49,089 $ 67,286 $ 74,332 $ 80,768 $ 271,475
Gross profit(2) 40,189 49,416 50,323 55,440 195,368
Income tax benefit (provision) (135) (210) (378) 5 (718)
Net income 952 2,894 4,293 5,372 13,511
Net earnings per common share -
basic(3) $ 0.01 $ 0.04 $ 0.05 $ 0.07 $ 0.17
Net earnings per common share -
diluted(3) $ 0.01 $ 0.03 $ 0.05 $ 0.06 $ 0.16
Weighted average number of shares of
common stock outstanding - basic 80,384,000 80,839,000 81,047,000 81,262,000 80,887,000
Weighted average number of shares of
common stock outstanding - diluted 83,940,000 85,134,000 86,329,000 87,122,000 85,398,000
- --------------------------------------------------------------------------------------------------------------------------
2002
Total revenue $ 30,694 $ 33,621 $ 34,258 $ 37,173 $ 135,746
Gross profit (2) 23,974 26,249 26,467 28,909 105,599
Litigation settlement and related
agreements -- -- -- 32,212 32,212
Acquired in-process research and
development -- -- -- 55,700 55,700
Income tax benefit (provision) -- -- -- 98 98
Net loss (823) (1,715) (1,037) (96,425) (100,000)
Net earnings per common share -
basic(3) $ (0.01) $ (0.02) $ (0.01) $ (1.22) $ (1.31)
Net earnings per common share -
diluted(3) $ (0.01) $ (0.02) $ (0.01) $ (1.22) $ (1.31)
Weighted average number of shares of
common stock outstanding - basic 75,625,000 76,377,000 78,583,000 78,715,000 77,337,000
Weighted average number of shares of
common stock outstanding - diluted 75,625,000 76,377,000 78,583,000 78,715,000 77,337,000
- --------------------------------------------------------------------------------------------------------------------------
(1) Certain reclassifications have been made to the January 1, 2003 through
September 30, 2003 interim periods in order to conform to the fourth
quarter and full year's presentation.
(2) Gross profit is computed by subtracting cost of goods sold from net product
sales.
(3) The sum of the quarters may not equal the full year basic and diluted
earnings per share since each period is calculated separately.
F-33
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CELGENE CORPORATION
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------
Additions
Balance at charged to Balance
beginning of expense or at end of
Year ended December 31, year sales Deductions year
- -------------------------------------------------------------------------------------------
2003
Allowance for doubtful accounts $ 729 $ 448 $ 304 $ 873
Allowance for sales returns 2,783 12,592(1) 7,007 8,368
Allowance for customer discounts 291 5,503(1) 5,137 657
---------------------------------------------------
$ 3,803 $18,543 $12,448 $ 9,898
===================================================
- -------------------------------------------------------------------------------------------
2002
Allowance for doubtful accounts $ 708 $ 295 $ 274 $ 729
Allowance for sales returns 857 4,777(1) 2,851 2,783
Allowance for customer discounts 291 2,412(1) 2,412 291
---------------------------------------------------
$ 1,856 $ 7,484 $ 5,537 $ 3,803
===================================================
- -------------------------------------------------------------------------------------------
2001
Allowance for doubtful accounts $ 232 $ 553 $ 77 $ 708
Allowance for sales returns 381 2,440(1) 1,964 857
Allowance for customer discounts 151 1,785(1) 1,645 291
---------------------------------------------------
$ 764 $ 4,778 $ 3,686 $ 1,856
===================================================
- -------------------------------------------------------------------------------------------
(1) Amounts are a reduction from gross sales.
F-34