FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark one)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2005March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to _____________
Commission File Number 0-16132
CELGENE CORPORATION
--------------------------------------------------------------------------------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2711928
- -------------------------------------------------------------------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
86 Morris Avenue, Summit, NJ 07901
- -------------------------------------------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 673-9000.
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__X No
___------- ------
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer (as
definedor a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act).
Yes _X__ No ___Act. (check
one):
Large accelerated X Accelerated Non-accelerated
------- ------ -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ____ No _X__X
----- ---------
At November 7, 2005, 169,609,031May 5, 2006, 347,408,258 shares of Common Stock par value $.01 per share,
were outstanding.
CELGENE CORPORATION
INDEX TO FORM 10-Q
TABLE OF CONTENTS
-----------------
Page No.
PART I FINANCIAL INFORMATION --------
Item 1 Unaudited Consolidated Financial Statements
Consolidated Statements of Operations -
Three
PAGE NO.
PART I FINANCIAL INFORMATION --------
Item 1 Unaudited Consolidated Financial Statements
Consolidated Statements of Operations -
Three-Month Periods Ended March 31, 2006 and 2005 3
Consolidated Balance Sheets -
As of March 31, 2006 and December 31, 2005 4
Consolidated Statements of Cash Flows -
Three-Month Periods Ended March 31, 2006 and Nine-Month Periods Ended September 30, 2005 and 2004 3
Consolidated Balance Sheets -
As of September 30, 2005 and December 31, 2004 4
Consolidated Statements of Cash Flows -
Nine-Month Periods Ended September 30, 2005 and 2004 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3 Quantitative and Qualitative Disclosures About Market Risk 29
Item 4 Controls and Procedures 32
PART II OTHER INFORMATION 33
Item 1 Legal Proceedings 33
Item 1A Risk Factors 33
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3 Defaults Upon Senior Securities 33
Item 4 Submission of Matters to a Vote of Security Holders 33
Item 5 Other Information 33
Item 6 Exhibits 33
Signatures 34
Item 4 Controls and Procedures 37
PART II OTHER INFORMATION 38
Item 1 Legal Proceedings 38
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 3 Defaults Upon Senior Securities 38
Item 4 Submission of Matters to a Vote of Security Holders 38
Item 5 Other Information 38
Item 6 Exhibits 38
Signatures 39
2
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In(Dollars in thousands, except per share amounts)
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
As Restated As Restated
(See Note 2) (See Note 2)
Revenue:
Net product sales $ 113,900 $ 83,803 $ 316,928 $ 238,933
Collaborative agreements and other revenue 4,879 10,392 35,829 15,420
Royalty revenue 10,727 7,273 34,846 17,741
----------- ----------- ----------- -----------
Total revenue 129,506 101,468 387,603 272,094
----------- ----------- ----------- -----------
Expenses:
Cost of goods sold 23,199 15,166 53,999 43,655
Research and development 49,348 40,154 138,413 116,520
Selling, general and administrative 46,941 27,750 126,114 79,408
----------- ----------- ----------- -----------
Total expenses 119,488 83,070 318,526 239,583
----------- ----------- ----------- -----------
Operating income 10,018 18,398 69,077 32,511
Other income and expense:
Interest and other income, net 6,979 4,972 12,517 9,101
Equity in losses of affiliated company 980 -- 5,975 --
Interest expense 2,374 2,388 7,121 7,164
----------- ----------- ----------- -----------
Income before income taxes 13,643 20,982 68,498 34,448
Income tax provision 12,975 1,974 8,770 3,931
----------- ----------- ----------- -----------
Net income $ 668 $ 19,008 $ 59,728 $ 30,517
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.00 $ 0.12 $ 0.36 $ 0.19
=========== =========== =========== ===========
Diluted $ 0.00 $ 0.11 $ 0.33 $ 0.17
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.THREE-MONTH PERIOD ENDED
MARCH 31,
-------------------------
2006 2005
----------- -----------
Revenue:
Net product sales $ 160,243 $ 97,645
Collaborative agreements and other revenue 3,893 5,229
Royalty revenue 17,705 9,522
- --------------------------------------------------------------------------
Total revenue 181,841 112,396
- --------------------------------------------------------------------------
Expenses:
Cost of goods sold 30,144 12,604
Research and development 54,524 40,037
Selling, general and administrative 66,897 37,806
- --------------------------------------------------------------------------
Total expenses 151,565 90,447
- --------------------------------------------------------------------------
Operating income 30,276 21,949
Other income and expense:
Interest and other income (expense), net 6,246 (1,178)
Equity in losses of affiliated company 3,091 4,355
Interest expense 2,365 2,374
- --------------------------------------------------------------------------
Income before income taxes 31,066 14,042
- --------------------------------------------------------------------------
Income tax provision (benefit) 15,042 (34,172)
- --------------------------------------------------------------------------
Net income $ 16,024 $ 48,214
==========================================================================
Net income per common share:
Basic $ 0.05 $ 0.15
Diluted $ 0.04 $ 0.13
See accompanying Notes to Consolidated Financial Statements
3
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
September 30, December 31,
2005 2004
------------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 62,305 $ 135,227
Marketable securities available for sale 683,685 613,310
Accounts receivable, net of allowance of
$3,068 and $2,208 at September 30, 2005
and December 31, 2004, respectively 61,571 46,074
Inventory 31,689 24,404
Deferred income taxes 81,075 4,082
Other current assets 34,390 26,783
----------- -----------
Total current assets 954,715 849,880
Property, plant and equipment, net 67,838 52,039
Investment in affiliated company 17,454 --
Intangible assets, net 97,066 108,955
Goodwill 34,633 41,258
Deferred income taxes 24,059 14,613
Other assets 17,690 40,548
----------- -----------
Total assets $ 1,213,455 $ 1,107,293
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 26,995 $ 18,650
Accrued expenses 74,799 68,534
Income taxes payable 11,225 41,188
Current portion of deferred revenue 6,876 6,926
Deferred income taxes -- 5,447
Other current liabilities 30,602 670
----------- -----------
Total current liabilities 150,497 141,415
Long-term convertible notes 399,992 400,000
Deferred revenue, net of current portion 61,101 73,992
Other non-current liabilities 18,633 14,442
----------- -----------
Total liabilities 630,223 629,849
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value per share,
5,000,000 authorized; none outstanding at
September 30, 2005 and December 31, 2004 -- --
Common stock, $.01 par value per share,
275,000,000 shares authorized;
issued 170,421,714 and 165,079,198 shares
at September 30, 2005 and December 31,
2004, respectively 1,704 1,651
Common stock in treasury, at cost; 928,844
and 10,564 shares at September 30, 2005
and December 31, 2004, respectively (47,669) (306)
Additional paid-in capital 798,365 641,907
Accumulated deficit (174,682) (234,410)
Accumulated other comprehensive income 5,514 68,602
----------- -----------
Total stockholders' equity 583,232 477,444
----------- -----------
Total liabilities and stockholders' equity $ 1,213,455 $ 1,107,293
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
MARCH 31, 2006 DECEMBER 31, 2005
-------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 194,468 $ 123,316
Marketable securities available for sale 578,109 600,944
Accounts receivable, net of allowance of $4,458 and $3,739
at March 31, 2006 and December 31, 2005, respectively 90,310 77,913
Inventory 16,214 20,242
Deferred income taxes 117,588 113,059
Other current assets 43,535 37,363
- -------------------------------------------------------------------------------------------------
Total current assets 1,040,224 972,837
- -------------------------------------------------------------------------------------------------
Property, plant and equipment, net 83,276 77,477
Investment in affiliated company 15,288 17,017
Intangible assets, net 95,874 96,988
Goodwill 34,189 33,815
Deferred income taxes 33,460 31,260
Other assets 17,475 17,243
- -------------------------------------------------------------------------------------------------
Total assets $ 1,319,786 $ 1,246,637
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,718 $ 16,414
Accrued expenses 74,688 92,908
Income taxes payable 14,884 14,715
Current portion of deferred revenue 6,549 6,473
Other current liabilities 2,723 5,127
- -------------------------------------------------------------------------------------------------
Total current liabilities 123,562 135,637
- -------------------------------------------------------------------------------------------------
Long-term convertible notes 399,975 399,984
Deferred revenue, net of current portion 58,266 59,067
Other non-current liabilities 19,399 16,174
- -------------------------------------------------------------------------------------------------
Total liabilities 601,202 610,862
- -------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share, 5,000,000 shares
authorized; none outstanding at March 31, 2006 and December 31, 2005 -- --
Common stock, $.01 par value per share, 575,000,000 shares
authorized; issued 348,125,432 and 344,125,158 shares
at March 31, 2006 and December 31, 2005, respectively 3,481 3,441
Common stock in treasury, at cost; 1,761,719 and 1,953,282 shares
at March 31, 2006 and December 31, 2005, respectively (45,765) (50,601)
Additional paid-in capital 917,212 853,601
Accumulated deficit (154,730) (170,754)
Accumulated other comprehensive income (loss) (1,614) 88
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 718,584 635,775
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,319,786 $ 1,246,637
=================================================================================================
See accompanying Notes to Consolidated Financial Statements
4
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine-Month Period Ended
September 30,
----------- -----------THREE-MONTH PERIOD ENDED
MARCH 31,
-------------------------
2006 2005 2004
----------- -----------
As Restated
(See Note 2)
Cash flows from operating activities:
Net income $ 59,72816,024 $ 30,51748,214
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of long-term assets 9,771 6,2605,592 3,191
Provision for accounts receivable allowances 578 3964,276 622
Realized gainloss (gain) on marketable securities available for sale (341) (1,599)3,346 (209)
Unrealized loss on marketable securities available for sale classified as cash equivalents 16 --
Unrealized loss (gain) on value of EntreMed warrants (107) 6,875
11,801
Equity in losses of affiliated company 5,975 --3,091 4,355
Non-cash share-based compensation expense 14,889 62
Excess tax benefit from stock-based compensation expense 32 296arrangements (21,586) --
Amortization of premium/discount on marketable securities available for sale, net 1,395 1,521(337) 505
Loss on asset disposals 147 --
Amortization of debt issuance cost 1,832 1,832
Loss611 611
Amortization of discount on asset disposal 218note obligation 13 --
Deferred income taxes (8,501) (42,664)
Shares issued for employee benefit plans 3,506 4,267
Deferred income taxes (57,544) (1,998)6,518 --
Other (35)408 --
Change in current assets and liabilities, excluding the effect of acquisition:liabilities:
Increase in accounts receivable (16,219) (9,377)
Increase(16,795) (3,798)
Decrease (increase) in inventory (7,438) (11,869)3,770 (9,140)
(Increase) decrease in other operating assets (10,796) 253
Increase(2,956) 75
Decrease in accounts payable and accrued expenses 29,542 11,556
Increase in income taxes payable 31,293 2,047(14,568) (5,159)
Increase (decrease) in income tax payable 23,233 (7,954)
Decrease in deferred revenue (3,749) 278
----------- -----------(1,381) (688)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 54,623 46,181
----------- -----------15,703 (5,102)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (22,637) (6,702)(9,447) (4,151)
Business acquisition -- (8,429) --
Proceeds from sales and maturities of marketable securities available for sale 356,135 346,938235,067 39,827
Purchases of marketable securities available for sale (476,968) (387,953)
Purchase of investment securities -- (7,000)
Purchase of intangible assets (122) --(214,821) (86,806)
Investment in affiliated company (2,000) (10,500)
--
----------- ------------ -----------------------------------------------------------------------------------------------------------------------
Net cash used inprovided by (used in) investing activities (162,521) (54,717)
----------- -----------8,799 (70,059)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from exercise of common stock options and warrants 37,921 10,68723,101 13,883
Excess tax benefit from share-based compensation arrangements 21,586 --
Repayment of capital lease and note obligations (6) (32)
----------- ------------- (3)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 37,915 10,655
----------- -----------44,687 13,880
- -----------------------------------------------------------------------------------------------------------------------
Effect of currency rate changes on cash and cash equivalents (2,939) --1,963 (1,601)
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (72,922) 2,11971,152 (62,882)
Cash and cash equivalents at beginning of period 123,316 135,227
60,328
----------- ------------ -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 62,305194,468 $ 62,447
=========== ===========72,345
=======================================================================================================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.See accompanying Notes to Consolidated Financial Statements
5
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(Dollars in thousands)
Nine-Month Period Ended
September 30,- (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE-MONTH PERIOD ENDED
MARCH 31,
------------------------
2006 2005
----------- -----------
2005 2004
----------- -----------
As Restated
(See Note 2)----------
Supplemental schedule of non-cash investing and
financing activity:
Change in net unrealized gain (loss)loss on marketable
securities available for sale $ (49,062) $ 77,595
=========== ===========(2,911) $(30,845)
-------- --------
Matured shares tendered for stock option exercises
and employee tax withholdings $ (47,363) $(376) --
=========== ===========-------- --------
Conversion of convertible notes and accrued
interest thereon $ 8 $9 --
=========== ===========-------- --------
Supplemental disclosure of cash flow information:
Interest paid $ 5,2501,750 $ 5,250
=========== ===========1,750
-------- --------
Income taxes paid $ 36,168 $ 2,190
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.296 17,532
-------- --------
See accompanying Notes to Consolidated Financial Statements
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005MARCH 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
1. ORGANIZATION 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 immune-inflammatory diseases through regulation of cellular,
genomic and proteomic targets. The Company's commercial stage programs include
pharmaceutical sales of REVLIMID(R), THALOMID(R), and ALKERAN(R) and sales of
Focalin(TM) to Novartis Pharma AG, or Novartis; a licensing agreement with
Novartis which entitles the Company to royalties on FOCALIN XR(TM) and the
entire RITALIN(R) family of drugs; a licensing and product supply agreement with
Pharmion for its sales of thalidomide; and sales of bio-therapeutic products and
services through its Cellular Therapeutics subsidiary.
The unaudited consolidated financial statements included herein have been
prepared from the books and records of the Company pursuant to the rules and
regulations of the Securities and Exchange Commission for reporting on Form
10-Q. Certain information and footnote disclosures normally included in complete
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. Certain
reclassifications have been made to the prior period's consolidated financial
statements in order to conform to the current period's presentation. The interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
latest annual report on Form 10-K for the year ended December 31, 2004, as
amended.2005.
Interim results may not be indicative of the results that may be expected for
the full year. In the opinion of management, these financial statements include
all normal and recurring adjustments considered necessary for a fair
presentation of these interim statements.
The Company previously followedIn December 2005, the common practiceCompany's Board of classifying its
investmentsDirectors approved a two-for-one stock
split payable in auction rate notesthe form of a 100 percent stock dividend. Stockholders received
one additional share for every share they owned as cash and cash equivalents on the
Consolidated Balance Sheet. It was determined that these instruments are not
cash equivalents and, therefore, the Company has made a reclassification to its
Consolidated Statement of Cash Flows for the nine-month period ended September
30, 2004 in order to conform to the current year's presentation. The
reclassification resulted in an increase of $115.6 million in proceeds from the
sale of marketable securities and an increase of $115.0 million in purchases of
marketable securities (both of which are included in investing activities) for
the nine-month period ended September 30, 2004.
2. RESTATEMENT OF FINANCIAL STATEMENTS
Following a review in December 2004 of the Company's accounting treatment forclose of business on
February 17, 2006. The additional shares were distributed on February 24, 2006.
As a result, the convertible preferredtotal number of authorized shares of capital stock increased
from 280,000,000 to 580,000,000 and warrants the Company received in connection
with the December 31, 2002 litigation settlement and related agreements with
EntreMed, Inc. and the Children's Medical Center Corporation, or CMCC, it was
determined that an adjustmentshares of common stock outstanding increased
from 172,057,726 to the Company's consolidated financial statements
was required. The Company restated its financial statements for the years ended
December 31, 2003 and 2002 in its Annual Report on Form 10-K for the year ended
December 31, 2004,344,115,452 as amended. For more information on the restatement see Note
2 of the Notes to the Consolidated Financial Statements included in the
Company's Annual Reportclose of business on Form 10-K for the year ended December 31, 2004, as
amended. The Company has now restated its Consolidated Statements of OperationsFebruary 24,
2006. All share and Cash Flows for the three- and nine-month periods ended September 30, 2004
and, as a result, interest and other income, net, income before income taxes and
net income decreased approximately $2.2 million and $11.8 million in the
three-and nine-month periods ended September 30, 2004, respectively. Diluted
earnings per share decreased by $0.01 and $.07 in the three- and nine-month
periods ended September 30, 2004, respectively. The restatement did not have any
impact on previously reported total revenue or reported net cash provided by
operating activities for these same periods.
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
3. NEW ACCOUNTING PRINCIPLES
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123R, "Share-Based Payment," or SFAS 123R, that addresses the accounting for
share-based payment transactions in which employee services are received in
exchange for either equity instruments of the company, liabilities that are
based on the fair value of the company's equity instruments or that may be
settled by the issuance of such equity instruments. SFAS No. 123R addresses all
forms of share-based payment awards, including shares issued under employee
stock purchase plans, stock options, restricted stock and stock appreciation
rights. SFAS No. 123R eliminates the ability to account for share-based
compensation transactions using Accounting Principles Board, or APB, Opinion No.
25, "Accounting for Stock Issued to Employees," or APB 25, that was provided in
Statement 123 as originally issued. Instead, under SFAS No. 123R, companies are
required to record compensation expense for all share-based payment award
transactions measured at fair value. The effective date for this statement has
been delayed to the first quarter of 2006 for calendar year companies. The
Company is currently evaluating the method of adoption and the impact of
adopting this statement and has not determined if adoption of SFAS No. 123R will
result in amounts that are similar to the current pro forma disclosures in Note
9 to these unaudited consolidated financial statements.
Emerging Issues Task Force, or EITF, Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," or
EITF 03-1, was issued in February 2004. EITF 03-1 stipulates disclosure
requirements for investments with unrealized losses that have not been
recognized as other-than-temporary impairments. The provisions of EITF 03-1 are
effective for fiscal years ended after December 15, 2003. The Company has
complied with the disclosure provisions of EITF 03-1. In September 2004, the
FASB staff issued two proposed FASB Staff Positions, or FSP: Proposed FSP EITF
Issue 03-1-a, which provides guidance for the application of paragraph 16 of
EITF 03-1 to debt securities that are impaired because of interest rate and/or
sector spread increases, and Proposed FSP EITF Issue 03-1-b, which delays the
effective date of EITF 03-1 for debt securities that are impaired because of
interest rate and/or sector spread increases. The Company is currently
monitoring these developments to assess the potential impact on its financial
position and results of operations.
4. ACQUISITION
On October 21, 2004, the Company, through an indirect wholly-owned subsidiary,
acquired all of the outstanding shares of Penn T Limited, or Penn T, a worldwide
supplier of THALOMID(R), from a consortium of private investors for a US dollar
equivalency of approximately $118.3 million in cash, net of cash acquired and
including working capital adjustments and transaction costs paid during the
three-month period ended March 31, 2005. Penn T was subsequently renamed Celgene
UK Manufacturing II, Limited, or CUK II. The results of CUK II after October 21,
2004 are included in the consolidated financial statements.
8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The purchase price allocation resulted instatements
have been restated to reflect the following amounts being allocated
to the assets received and liabilities assumed based upon their respective fair
values.
----------------------------------------------------------------
Current assets $ 18,133
Intangible assets 99,841
Goodwill 35,418
--------------
Assets acquired 153,392
----------------------------------------------------------------
Current liabilities 1,983
Deferred taxes 33,144
------------
Liabilities assumed 35,127
----------------------------------------------------------------
Net assets acquired $ 118,265
================================================================
Prior to the acquisition, Celgene and Penn T were parties to a manufacturing
agreement pursuant to which Penn T manufactured THALOMID(R) for Celgene. Through
a third party manufacturing agreement entered into in connection with the
acquisition, the Company is able to control manufacturing for THALOMID(R)
worldwide and increase its participation in the potential growth of THALOMID(R)
opportunities in key international markets. This acquisition was accounted for
using the purchase method of accounting for business combinations.
The following unaudited pro forma information presents a summary of consolidated
results of operations for the three- and nine-month periods ended September 30,
2004 as if the acquisition of Penn T had occurred on July 1, 2004 and January 1,
2004, respectively. The unaudited pro forma results of operations are presented
for illustrative purposes only and are not necessarily indicative of the
operating results that would have occurred if the transaction had been
consummated on the date indicated, nor are they 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.
- --------------------------------------------------------------------------------
Three-Month Nine-Month
Period Ended Period Ended
Pro forma (UNAUDITED) September 30, 2004 September 30, 2004
- --------------------------------------------------------------------------------
Total revenues $ 104,993 $ 284,313
Net income $ 19,511 $ 33,340
Net income per diluted share $ 0.11 $ 0.19
================================================================================
5.two-for-one stock split effective February 17,
2006.
2. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per common share is computed by dividing net
income adjusted to add back the after-tax amount of interest recognized in the
period associated with any convertible debt issuance that may be dilutive 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 9
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
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 paid-in capital upon exercise. The potential common shares related to the
June 2003 convertible note issuance were determined to be
anti-dilutiveincluded in the earnings per share
calculation for the three-month periods ended September 30, 2005March 31, 2006 and 2004 and
therefore excluded from the diluted earnings per share computation. The
convertible note issuance was determined to be dilutive for the nine-month
period ended September 2005 and anti-dilutive for the nine-month period ended
September 30, 2004.2005.
The total number of potential common shares excluded from the diluted earnings
per share computation because their inclusion would have been anti-dilutive was
17,535,587832,473 and 19,581,3785,678,454 for the three-month periods ended September 30,March 31, 2006 and 2005,
and 2004, respectively, and 1,773,735 and 20,843,378 for the nine-month periods
ended September 30, 2005 and 2004, respectively.
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The following represents the reconciliation of the basic and diluted earnings
per share computations for the three- and nine-monththree-month periods ended September 30,March 31, 2006 and
2005:
- --------------------------------------------------------------------------------
Three-Month Period Ended
March 31,
2006 2005
- --------------------------------------------------------------------------------
Income available to common stockholders:
Net income $ 16,024 $ 48,214
Interest expense on convertible debt, net of tax 1,393 1,393
- --------------------------------------------------------------------------------
Net income available to common stockholders $ 17,417 $ 49,607
Weighted average number of common shares
outstanding (IN THOUSANDS):
Basic 343,966 331,225
Effect of dilutive securities:
Options 23,245 17,136
Warrants 214 332
Convertible debt 33,022 33,024
Restricted shares and 2004:
- ------------------------------------------------------------------------------------------------------------------
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
2005 2004 2005 2004
As Restated As Restated
(See Note 2) (See Note 2)
- ------------------------------------------------------------------------------------------------------------------
Income available to common stockholders:
Net income $ 668 $ 19,008 $ 59,728 $ 30,517
Interest expense on convertible debt, net of tax -- -- 4,179 --
----------------------------------------------------------
Net income available to common stockholders $ 668 $ 19,008 $ 63,907 $ 30,517
Weighted average number of common
shares outstanding (IN THOUSANDS):
Basic 168,298 164,091 167,027 163,574
Effect of dilutive securities:
Options 11,157 12,519 11,027 12,238
Warrants 178 210 174 207
Convertible debt -- -- 16,512 --
Restricted shares and other long-term incentives 229 244 262 254
- ------------------------------------------------------------------------------------------------------------------
Diluted 179,862 177,064 195,002 176,273
Earnings per share:
Basic $ 0.00 $ 0.12 $ 0.36 $ 0.19
Diluted $ 0.00 $ 0.11 $ 0.33 $ 0.17
==================================================================================================================
6.other
long-term incentives 252 499
- --------------------------------------------------------------------------------
Diluted 400,699 382,216
Earnings per share:
Basic $ 0.05 $ 0.15
Diluted $ 0.04 $ 0.13
================================================================================
3. CONVERTIBLE DEBT
In June 2003, the Company issued an aggregate principal amount of $400$400.0 million
of unsecured convertible notes in a private offering under Rule 144A.notes. The notes have a five-year term and a coupon
rate of 1.75% payable semi-annually commencing December 1, 2003 and on June 1 and December 1 thereafter.1. Each $1,000
principal amount of convertible notes is convertible into 41.279682.5592 shares of
common stock, as adjusted, or a conversion pricerate of $24.225$12.1125 per share, which represented a
50% premium to the closing price on May 28, 2003 of the Company's common stock
of $16.15 per share,$8.075, after adjusting prices for the two-for-one stock split effectedsplits affected on
February 17, 2006 and October 22, 2004. The debt issuance costs related to these
convertible 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
10
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
agreement, the noteholders can convert the outstanding notes at any time into an
aggregate of 16,511,51033,021,617 shares of common stock at the conversion price. In
addition, the noteholders have the right to require the Company to redeem the
notes in cash at a price equal to 100% of the principal amount to be redeemed,
plus accrued interest, prior to maturity in the event of a change of control and
certain other transactions defined as a "fundamental change" withinchange," in the agreement.indenture
governing the notes. The Company has registered the notes and common stock issuable
upon conversion of the notes with the Securities and Exchange Commission, and is
required to use reasonable best efforts to keep the related registration
statement effective for the defined period. DuringSubsequent to the quarter ended September
30, 2005, a note holder convertedJune 2003 issuance
date, an immaterial amount of principal was converted into common stock.
7.4. MARKETABLE SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and estimated fair value of available-for-sale securities by major
security type and class of security at September 30, 2005March 31, 2006 and December 31, 20042005 were
as follows:
- -----------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30, 2005 Cost Gain Loss Value
- -----------------------------------------------------------------------------------------------------
Government agency mortgage obligations $ 137,881 $ 481 $ (1,454) $ 136,908
Government agency bonds and notes 495 -- (13) 482
Corporate debt securities 226,998 519 (7,099) 220,418
Auction rate notes 283,575 -- -- 283,575
Marketable equity securities 20,212 22,090 -- 42,302
----------------------------------------------------------
Total $ 669,161 $ 23,090 $ (8,566) $ 683,685
=====================================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2004 Cost Gain Loss Value
- -----------------------------------------------------------------------------------------------------
Government agency mortgage obligations $ 166,959 $ 1,107 $ (904) $ 167,162
Government agency bonds and notes 798 -- (7) 791
Corporate debt securities 147,864 2,723 (650) 149,937
Auction rate notes 213,550 -- -- 213,550
Marketable equity securities 20,212 61,658 -- 81,870
----------------------------------------------------------
Total $ 549,383 $ 65,488 $ (1,561) $ 613,310
=====================================================================================================
As of September 30, 2005, the duration of the Company's debt securities
classified as marketable securities available for sale were as follows:
--------------------------------------------------------------------
Amortized Fair
Cost Value
--------------------------------------------------------------------
Duration of one year or less $ 346,068 $ 346,159
Duration of one through three years 86,298 85,477
Duration of three through five years 173,544 170,731
Duration of five through seven years 22,075 20,647
Duration greater than seven years 20,964 18,369
----------- -----------
Total $ 648,949 $ 641,383
====================================================================
118
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005MARCH 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
8.
- ----------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 2006 Cost Gain Loss Value
- ----------------------------------------------------------------------------------------------------------------------
CASH EQUIVALENTS (1)
Government sponsored agency securities $121,571 $ 19 $ (5) $121,585
Corporate debt securities 18,834 2 -- 18,836
----------------------------------------------------------------
Total available-for-sale cash equivalents 140,405 21 (5) 140,421
----------------------------------------------------------------
AVAILABLE-FOR-SALE MARKETABLE SECURITIES
Mortgage backed obligations 79,057 251 (779) 78,529
U.S. treasury securities 103,319 -- (965) 102,354
Government sponsored agency securities 231,581 2 (5,501) 226,082
Corporate debt securities 18,514 13 (1,842) 16,685
Other asset backed securities 37,701 229 (47) 37,883
Auction rate notes 81,625 -- -- 81,625
Marketable equity securities 20,212 14,739 -- 34,951
----------------------------------------------------------------
Total available-for-sale marketable securities 572,009 15,234 (9,134) 578,109
----------------------------------------------------------------
Total marketable securities $712,414 $ 15,255 $ (9,139) $718,530
=======================================================================================================================
(1) Marketable securities with maturities of three months or less at time of
purchase are classified as cash equivalents.
- ----------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2005 Cost Gain Loss Value
- ----------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE MARKETABLE SECURITIES
Mortgage backed obligations $ 86,478 $ 365 $ (524) $ 86,319
U.S. treasury securities 24,391 14 (614) 23,791
Government sponsored agency securities 183,315 25 (3,538) 179,802
Corporate debt securities 18,526 29 (2,652) 15,903
Other asset backed securities 29,765 164 (1,842) 28,087
Auction rate notes 232,575 -- -- 232,575
Marketable equity securities 20,212 14,255 -- 34,467
----------------------------------------------------------------
Total available-for-sale marketable securities $595,262 $ 14,852 $ (9,170) $600,944
=======================================================================================================================
Government sponsored agency securities include fixed asset-backed securities
issues by Fannie Mae and the Federal Home Loan Bank. Other asset-backed
securities are securities backed by collateral other than mortgage obligations.
Unrealized losses for mortgage-backed obligations, U.S. treasury securities and
government sponsored agency securities were primarily due to increases in
interest rates. Unrealized losses for corporate debt and other asset-backed
securities were primarily due to increases in interest rates as well as
downgrades by corporate bond rating agencies. The Company has more than
sufficient liquidity and the intent to hold these securities until the market
value recovers. Moreover, the Company does not believe it is probable that it
will be unable to collect all amounts due according to the contractual terms of
the individual investments. In the quarter ended March 31, 2006, the Company
determined that certain securities with an amortized cost basis of $11.0 million
had sustained an other-than-temporary impairment and recognized a $3.3 million
impairment loss related to these securities due to reductions in their future
estimated cash flows.
9
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
As of March 31, 2006, the duration of the Company's debt securities classified
as cash equivalents and marketable securities available for sale were as
follows:
----------------------------------------------------------------------
Amortized Fair
Cost Value
----------------------------------------------------------------------
Duration of one year or less $377,101 $376,869
Duration of one through three years 82,481 81,293
Duration of three through five years 215,383 208,854
Duration of five through seven years 14,380 13,735
Duration greater than seven years 2,857 2,828
-------------------
Total $692,202 $683,579
===================================================================
5. INVENTORY
Inventory at September 30, 2005March 31, 2006 and December 31, 20042005 consisted of the following:
--------------------------------------------------------------------
September 30,----------------------------------------------------------------------
March 31, December 31,
2006 2005
2004
------------------------------------------------------------------------------------------------------------------------------------------
Raw materials $ 8,9995,687 $ 4,0815,044
Work in process 1,956 4,3562,148 1,644
Finished goods 20,734 15,967
----------- -----------8,379 13,554
-----------------
Total $ 31,689 $ 24,404
====================================================================
9. STOCK-BASED$16,214 $20,242
=================================================================
6. SHARE-BASED COMPENSATION
The Company applieshas a shareholder approved 1998 equity incentive plan, or the 1998
Incentive Plan, that provides for the granting of options, restricted stock
awards, stock appreciation rights, performance awards and other share-based
awards to employees and officers of the Company to purchase not more than an
aggregate of 62,000,000 shares of common stock under the 1998 Incentive Plan, as
amended, subject to adjustment under certain circumstances. The Management
Compensation and Development Committee of the Board of Directors, or the
Compensation Committee, determines the type, amount and terms, including
vesting, of any awards made under the Incentive Plan. The 1998 Incentive Plan
will terminate in 2008.
With respect to options granted under the 1998 Incentive Plan, 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 1998 Incentive Plan 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 1998 Incentive Plan is subject to certain acceleration provisions if a
change in control, as defined in the 1998 Incentive Plan, occurs. Plan
participants may elect to exercise options at any time during the option term.
However, any shares so purchased which have not vested as of the date of
exercise shall be subject to forfeiture, which will lapse in accordance with the
established vesting time period.
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 7,700,000
shares of common stock (subject to adjustment under certain circumstances) to
directors of the Company who are not officers or employees of the Company, or
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. As amended in 2003, continuing Non-Employee
Directors receive quarterly grants of 3,750 options aggregating 15,000 options
annually, which vest in full one year from the date of grant. The 1995
Non-
10
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
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 value of the
Company's common stock at the grant date and expire ten years after the date of
grant. This plan terminates on June 30, 2015. In December 2005, in recognition
of the significance of the REVLIMID(R) regulatory approval, continuing
Non-Employee Directors received the 2006 annual stock option award of 15,000
shares, which were granted at an exercise price equal to the fair value of the
Company's common stock on December 29, 2005 and vest pursuant to the standard
terms of the plan.
Stock options available for future grants under all plans were 2,879,440 at
March 31, 2006.
Historically, the Company applied the intrinsic-value-based method of accounting
prescribed by previously definedAccounting Principles Board, or APB, Opinion No. 25, "Accounting
for Stock Issued to Employees," or APB 25, and related interpretations, in accounting for its
fixed stock option plans.interpretations. As such,
compensation expense for grants of stock options 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. Statement of
Financial Accounting Standards, or SFAS, No. 123 "Accounting forFor Stock-Based
Compensation," or SFAS 123, as
amended, establishesestablished accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation plans. As permitted underby SFAS 123, the Company has elected to continue to
apply the intrinsic-value-based method of accountingAPB 25 described above, and has adopted
only the disclosure requirements of SFAS 123, as amended.
Ifamended by SFAS No. 148,
"Accounting For Stock-Based Compensation - Transition and Disclosure."
In December 2004, the exercise price of employeeFinancial Accounting Standards Board, or director stock options is less thanFASB, issued SFAS
No. 123R, "Share-Based Payment", or SFAS 123R. SFAS 123R, which replaces SFAS
123, and supersedes APB 25, requires compensation cost relating to share-based
payment transactions be recognized in financial statements based on the fair
value for all awards granted after the date of adoption as well as for existing
awards for which the requisite service has not been rendered as of the underlying stockdate of
adoption. The modified prospective transition method as prescribed by SFAS 123R
does not require restatement of prior periods to reflect the impact of adopting
SFAS 123R.
The Company adopted SFAS 123R effective January 1, 2006 and has selected the
Black-Scholes method of valuation for share-based compensation. The Company has
adopted the modified prospective application method under which the provisions
of SFAS 123R apply to new awards and to awards modified, repurchased, or
cancelled after the adoption date. Additionally, compensation cost for the
portion of the awards for which the requisite service has not been rendered that
are outstanding as of the adoption date is recognized in the Consolidated
Statement of Operations over the remaining service period after the adoption
date based on the grant date, the Company amortizes such
differencesaward's original estimate of fair value. SFAS 123R eliminates
alternatives provided under SFAS 123 to expenserecognize compensation cost over the
vestingrequisite service period as if all awards would be earned and to reverse such
compensation costs as awards are actually forfeited. Instead, SFAS 123R requires
compensation costs to be recognized based on the estimated number of awards
expected to vest. Changes in the options. Options orestimated forfeiture rates are reflected
prospectively. Total share-based compensation expense recorded in the
Consolidated Statement of Operations for the three-month period ended March 31,
2006 was $14.8 million. The charge was recorded in all appropriate cost centers
and, has resulted in charges of $0.5 million, $3.9 million and $10.4 million
classified in cost of goods sold, research and development and selling, general
and administrative expenses, respectively. Included in stock-based compensation
expense for the three-month period ended March 31, 2006 was compensation expense
related to non-qualified stock awards issuedoptions of $9.0 million. The tax benefit (i.e.,
deferred tax asset) recorded associated with the non-qualified stock option
expense was $3.7 million.
As a result of adopting SFAS 123R at the beginning of 2006, the Company's net
income was lower by $11.1 million than if it had continued to non-employeesaccount for
share-based compensation under APB 25. Basic and consultants are recorded at fair value as
determined in accordance with SFAS 123 and EITF No. 96-18, "Accountingdiluted earnings per share for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with, Selling, Goods or Services," and expensed over the related
vesting or service period.
1211
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005MARCH 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
the three-month period ended March 31, 2006 would have been $0.08 and $0.07 per
share, respectively, if the Company had not adopted SFAS 123R, compared to
reported basic and diluted earnings per share of $0.05 and $0.04 per share,
respectively.
The following table illustrates the effect on net income and net income per
common share applicable to common stockholders for the three months ended March
31, 2005, as if the fair-value-based method underCompany had applied the fair value recognition provisions
for stock-based compensation of SFAS 123, had been applied:
- --------------------------------------------------------------------------------
Three-Month Periodas amended:
Three Months Ended
September 30,March 31, 2005
2004
As Restated
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Net income as reported $ 668 $ 19,00848,214
Add: stock-based employee compensation expense
included in reported income, (2005 net of tax) 32 63
Deduct:tax 25
Add: stock-based employee compensation expense
determined under fair-value-based method (2005 net of tax) (6,407) (7,702)
----------- -----------(1) 13,128
--------
Basic pro forma net income $ (5,707) $ 11,36961,367
Interest expense on convertible debt, net of tax -- --
----------- -----------1,393
--------
Diluted, pro forma net income $ (5,707) $ 11,36962,760
Net income per common share:
Basic, as reported $ 0.00 $ 0.120.15
Basic, pro forma $ (0.03) $ 0.070.19
Diluted, as reported $ 0.00 $ 0.110.13
Diluted, pro forma $ (0.03) $ 0.06
================================================================================
- --------------------------------------------------------------------------------
Nine-Month Period Ended
September 30,0.16
==================================================================
(1) Reflects adjustment recorded as of March 31, 2005 2004
As Restated
- --------------------------------------------------------------------------------
Net income as reported $ 59,728 $ 30,517
Add: stock-based employee compensation expense
included in reported income (2005 netto eliminate
related valuation allowances of tax) 19 187
Deduct: stock-based employee compensation
expense determined under fair-value-based
method (2005 net$17.7 million based on the
Company's determination that it was more likely than not that
certain benefits of tax)(1) 1,834 (22,218)
----------- -----------
Basic pro forma net income $ 61,581 $ 8,486
Interest expense on convertible debt, net of tax 4,179 --
----------- -----------
Diluted, pro forma net income $ 65,760 $ 8,486
Net income per common share:
Basic, as reported $ 0.36 $ 0.19
Basic, pro forma $ 0.37 $ 0.05
Diluted, as reported $ 0.33 $ 0.17
Diluted, pro forma $ 0.34 $ 0.05
================================================================================
(1) Includes benefit attributable to recognizingits deferred tax assets duringwould be realized.
In November 2005, the FASB issued FASB Staff Position 123(R)-3, "Transition
Election Related to Accounting for the Tax Effects of Share-based Payment
Awards," or FSP 123R- 3. FSP 123R-3 provides an elective alternative transition
method of calculating the additional paid-in capital pool, or APIC Pool, of
excess tax benefits available to absorb tax deficiencies recognized subsequent
to the adoption of SFAS 123R to the method otherwise required by paragraph 81 of
SFAS 123R. The Company may take up to one year from the effective date of FSP
123R-3 to evaluate its available alternatives and make its one-time election.
The Company is evaluating the impact of the adoption of this FSP in connection
with its adoption of SFAS 123R.
Prior to the adoption of SFAS 123R, the Company presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows
in the Statement of Cash Flows. SFAS 123R requires excess tax benefits (i.e.,
the tax benefit recognized upon exercise of stock options in excess of the
benefit recognized from recognizing compensation cost for those options) to be
classified as financing cash flows in the Statement of Cash Flows. Cash received
from stock option exercises for the three-month period ended March 31, 2005.
The pro forma effects on net income applicable to common stockholders2006 was
$23.1 million and net
income per common sharethe excess tax benefit recognized was $21.6 million. Cash
received from stock option exercises for the three- and nine-month periodsthree-month period ended September
30,March 31,
2005 and 2004 maywas $13.9 million. Pursuant to SFAS 123R, tax benefits resulting from the
exercise of stock options, which have been presented as operating cash flows
prior to the adoption of SFAS 123R are not reclassified to financing activities,
but rather shall continue to be representative of the pro forma effects in future
years.
13
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)presented as operating cash flows.
The weighted-average grant-date fair value per share was $14.23 and $10.05 forof the stock options granted induring
the nine-month periodsthree months ended September 30,March 31, 2006 was $15.08 per share and, the
weighted-average grant-date fair value of the stock options granted during the
three months ended March 31, 2005 and 2004,
respectively.was $5.31 per share adjusted for the February
17, 2006 two-for-one stock split. The Company estimated the fair value of
options granted using a Black-Scholes option pricing model with the following
weighted-average assumptions:
- --------------------------------------------------------------------------------
Three-Month Nine-Month
Period12
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
-------------------------------------------------------------------------
Three Months Ended Period Ended
September 30, September 30,March 31,
2006 2005
2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 4.09% 2.89% 4.03% 2.88%4.50% 4.17%
Expected stock price volatility 40% 41% 48% 41% 50%
Expected term until exercise (years) 3.5 3.6 4.0 3.55.0 4.5
Expected dividend yield 0% 0%
0% 0%
================================================================================
Restricted Stock Awards: During 2001, the Company issued to certain employees an
aggregate of 105,000 restricted stock awards of which 90,000 are still
outstanding. Such restricted stock awards will vest on September 19, 2006,
unless certain conditions that would trigger accelerated vesting are otherwise
met prior to such date. The fair value of the outstanding restricted stock
awards at the grant date was $1.2 million, which is being amortized as
compensation expense over the contractual vesting period and classified in
selling, general and administrative expenses. Compensation expense relating to
these restricted stock awards was approximately $0.1 million for the three-month
periods ended September 30, 2005 and 2004. The nine-month period ended September
30, 2005 was favorably impacted by a $0.1 million credit due to cancellation of
a 15,000 restricted stock award for a terminated employee resulting in zero
expense for the period. The expense for the nine-month period ended September
30, 2004 was approximately $0.2 million.
Stock Option Exercises: During=========================================================================
For grants during the three-month period ended September 30,March 31, 2006, the risk-free
interest rate is based on the U.S. Treasury zero coupon curve. Expected
volatility is based on implied volatility, which is determined from the market
price of the Company's publicly traded options. The expected term until exercise
is based on historical exercise activity and management estimates. Forfeiture
rates are estimated based on historical data.
In December 2005, certain employees exercised certainin recognition of the significance of the REVLIMID(R)
regulatory approval, the Board of Directors approved a resolution to grant the
2006 annual stock option awards under the 1998 Incentive Plan in 2005. All stock
options containingawarded were granted fully vested. Half of the options granted had an
exercise price of $34.05 per option, which was at a 5% premium to the closing
price of the Company's common stock of $32.43 per share on the grant date of
December 29, 2005; the remaining options granted had an exercise price of $35.67
per option, which was at a 10% premium to the closing price of the Company's
common stock of $32.43 per share on the grant date of December 29, 2005. The
Board's decision to grant these options was in recognition of the REVLIMID(R)
regulatory approval and in response to a review of the Company's long-term
incentive compensation programs in light of changes in market practices and
recently issued changes in accounting rules resulting from the issuance of SFAS
123R, which the Company adopted effective in the first quarter of 2006. In
addition, the Company granted certain options to key employees at exercise
prices equal to the market price of the Company's common stock on the date of
grant that also vested immediately. Management believes that granting these
options prior to the adoption of FASB No. 123R will result in the Company not
being required to recognize cumulative compensation expense of approximately
$70.8 million for the four-year period ending December 31, 2009.
Stock option transactions for the three months ended March 31, 2006 under all
plans are as follows:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Price Term (years) (In Thousands)
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2005 50,594,378 $ 13.70 6.9 $ 909,083
Changes during the year:
Granted 338,901 35.86 -- --
Exercised (3,973,489) 6.11 -- --
Forfeited (764,005) 13.96 -- --
Expired -- -- -- --
-------------------------------------------------------------
Outstanding at March 31, 2006 46,195,785 $ 14.49 6.8 $ 1,373,401
-------------------------------------------------------------
Vested or expected to vest at March 31, 2006 45,918,898 $ 14.47 6.8 $ 1,366,124
-------------------------------------------------------------
Vested at March 31, 2006 32,011,418 $ 14.01 6.1 $ 967,065
=============================================================
13
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The total intrinsic value of stock options exercised during the three months
ended March 31, 2006 and 2005 was $121.2 million and $32.3 million,
respectively. The Company utilizes newly issued shares to satisfy the exercise
of stock options.
As of March 31, 2006, there was approximately $48.3 million of total
unrecognized compensation cost related to stock options granted under the plans.
That cost is expected to be recognized over a weighted-average period of 1.3
years. No compensation cost related to stock options was capitalized for the
three months ended March 31, 2006.
The following table summarizes information concerning options outstanding under
the 1998 and 1995 Incentive Plans at March 31, 2006:
- ---------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Vested
------------------------------------------------- -------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Range of Exercise Number Exercise Remaining Number Exercise Remaining
Prices Outstanding Price Term (yrs.) Vested Price Term (yrs.)
- ---------------------------------------------------------------------------------------------------------------------------
$ 0.04 - 5.00 7,775,013 $ 2.21 3.8 6,853,201 $ 1.91 3.5
5.01 - 10.00 10,865,802 6.88 5.6 9,261,947 6.81 5.3
10.01 - 15.00 10,467,312 12.66 7.7 4,923,520 12.44 7.2
15.01 - 20.00 5,550,717 16.51 7.0 2,810,696 16.36 5.3
20.01 - 30.00 4,901,646 25.11 8.2 2,181,054 26.23 6.8
30.01 - 35.67 6,635,295 34.70 9.7 5,981,000 34.78 9.7
---------------------------------------------------------------------------------------------------
46,195,785 $ 14.49 6.8 32,011,418 $ 14.01 6.1
===================================================================================================
Stock options granted to executives at the vice-president level and above under
the 1998 Incentive Plan, after September 18, 2000, contained a reload feature
and pursuant to ourwhich provided that if (1) the optionee exercises all or any portion of the
stock option plan paid(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 and theirfor the
portion of the stock option exercised or pays applicable minimum statutory
withholding taxes by using 915,527 mature shares based oncommon stock owned by the current market
valueoptionee 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 exercise. Such tenderedthe 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 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. As of March 31, 2006, the Company has
issued 10,876,300 stock options to executives that contain the reload features
noted above, of which 5,803,019 options are reflected as treasurystill outstanding. The 1998
Incentive Plan was amended to eliminate the reload feature for all stock at September 30, 2005.
10.options
granted on or after October 1, 2004.
14
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
7. INVESTMENT IN AFFILIATED COMPANY
On March 31, 2005, the Company exercised warrants to purchase 7,000,000 shares
of EntreMed, Inc. common stock at an aggregate cost of $10.5 million. The fair
value of the warrants at the time of exercise was estimated to be approximately
$12.9 million. As a result, the total value ascribed to the Company's investment
was $23.4 million.stock. Since the Company also holdsheld 3,350,000 shares of
EntreMed voting preferred shares that are convertible into 16,750,000 shares of
common stock, the Company determined that it has significant influence over its
investee and isbegan applying the equity method of accounting to its common stock
investment effective March 31, 2005.
AtOn February 2, 2006 the Company, along with a group of investors, entered into a
private placement transaction to invest $30.0 million in EntreMed in return for
newly issued EntreMed common stock and warrants to purchase additional shares of
EntreMed common stock at a conversion price of $2.3125 per warrant. The
Company's portion of the investment was $2.0 million for which it received
864,864 shares of EntreMed common stock and 432,432 warrants. The fair value of
the warrants computed using the Black-Scholes model was $0.6 million and, the
remaining value of $1.4 million was ascribed to the equity investment. The
warrants are being accounted for at fair value with changes in fair value
recorded through earnings. The value of the EntreMed warrants increased by $0.1
million to $0.7 million during the three-month period ending March 31, 2006.
The Company recorded equity in losses of affiliated company of $3.1 million and
$4.4 million for the three-month periods ended March 31, 2006 and 2005,
respectively. The loss in the three-month period ended March 31, 2005 the residual investment, after
takingrelates to
a charge of approximately $4.4 million to write down thea portion of the Company's investment ascribed to
in-process research and development (the charge was
included in equity lossesat the time of affiliated company for the nine-month period ended
September 30, 2005), exceeded the Company's proportionate share of the EntreMed
net assets by approximately $13.4 million and consisted of goodwill and
intangibles of approximately $12.6 million and $0.8 million, respectively. As
prescribed under the equity method of accounting, the Company began recording
its share of EntreMed gains and losses based on the Company's common stock
ownership percentage during the three-month period ended June 30, 2005.our initial investment. The
investment in EntreMed had a carrying value of approximately $17.5$15.3 million at
September 30, 2005,March 31, 2006, which exceedsis below the estimated fair value of the Company's
7,864,864 shares of EntreMed common stock investment by approximately $0.7$5.2 million based on
the closing share price of EntreMed common stock on September 30, 2005. A summary of the unaudited
financial statements for EntreMed as of September 30, 2005 follows:
14
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
September 30,
2005
- --------------------------------------------------------------------------------
Current assets $ 35,320
Noncurrent assets 954
-----------
Total assets $ 36,274
- --------------------------------------------------------------------------------
Current liabilities $ 4,362
Noncurrent liabilities 247
Minority interest 17
Total equity 31,648
-----------
Total liabilities and equity $ 36,274
- --------------------------------------------------------------------------------
Interest in EntreMed equity (1) $ 4,387
Excess of investment over share of EntreMed equity 13,067
-----------
Total investment $ 17,454
================================================================================
Three-Month Six-Month Period
Period Ended March 31, 2005 thru
September 30, September 30,
2005 2005
- --------------------------------------------------------------------------------
Total revenues $ 1,250 $ 1,829
Operating loss 4,666 9,238
Net loss 4,380 8,680
- ---------------------------------------------------------- -----------
Celgene share of EntreMed, Inc. losses (1) $ 651 $ 1,255
Amortization of intangibles 125 161
Write off of in-process research
and development 28 4,383
Elimination of inter-company transaction 176 176
----------- -----------
Equity in losses of affiliated company $ 980 $ 5,975
================================================================================
(1) The Company records its estimated share of EntreMed losses in the current
period and subsequently adjusts to actual results, which is currently
14.0%.
Financial results of the EntreMed equity method investment are included in the
human pharmaceuticals segment. Based on the closing share price of EntreMed
common stock on September 30, 2005, the estimated fair value of the Company's
common stock investment in EntreMed was approximately $16.7 million as of
September 30, 2005.2006.
The investment is reviewed to determine whether an other-than-temporary decline
in value of the investment has been sustained. If it is determined that the
investment has sustained an other-than-temporary decline in its value, the
investment will be written down to its fair value. Such an evaluation is
judgmental and dependent on the specific facts and circumstances. Factors that
the Company considers in determining whether an other-than-temporary decline in
value has occurred include: the market value of the security in relation to its
cost basis, the period of time that the market value is below cost, the
financial condition of the investee and the intent and ability to retain the
investment for a sufficient period of time to allow for recovery in the market
value of the investment. The Company evaluates information that it is aware of
in addition to quoted market prices, if any, in determining whether an
other-than-temporary decline in value exists. After reviewing these factors, the
Company has determined that as of March 31, 2006 no adjustment to its excessinvestment
is required.
A summary of the Company's investment and equity in losses of affiliates
follows:
As of
March 31, 2006
--------------
Interest in EntreMed equity (1) $ 4,828
Excess of investment over share of EntreMed equity is temporary and that(2) 10,460
------------
Total investment $ 15,288
=============================================================================
Three-Month
Period Ended
March 31, 2006
--------------
Celgene share of EntreMed, Inc. losses (1)(3) $ 3,007
Amortization of intangibles 84
------------
Equity in losses of affiliated company $ 3,091
=============================================================================
(1) The Company records its share of losses based on its common stock
ownership, which as of September 30, 2005, no
adjustmentMarch 31, 2006 was 10.75%.
(2) Consists of intangible assets and goodwill of $841 and $9,619,
respectively.
(3) Includes $2.4 million related to the Company's share of EntreMed's
in-process research and development write-down related to its
investment is required.acquisition of Miikana Therapeutics Inc. on January 10, 2006.
15
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005MARCH 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
11.8. GOODWILL AND INTANGIBLE ASSETS
At September 30, 2005,March 31, 2006, the Company's recorded intangible assets primarily related to the
October 21, 2004 acquisition of Penn T and are being amortized over their
estimated useful lives. Intangible asset balances related toIn December 2005, the acquisition of Anthrogenesis Corp. were eliminated duringCompany recognized a $4.3 million
intangible for a licensing agreement with Children's Medical Center Corporation,
which is being amortized over the first quarter of
2005 as prescribed by SFAS 109 "Accounting for Income Taxes" due to reversalpatent life of the valuation allowance for deferred tax assets recorded at time of acquisition.
At September 30, 2005 and December 31, 2004, therelated product. The gross
carrying value and accumulated amortization by major intangible asset class at
March 31, 2006 and December 31, 2005 were as follows:
- --------------------------------------------------------------------------------
Gross Cumulative Intangible
Carrying Accumulated Translation Assets,
September 30, 2005 Value Amortization Adjustment Net
- --------------------------------------------------------------------------------
Supplier agreements $ 99,841 $ (654) $ (2,243) $ 96,944
Technology 122 -- -- 122
-------------------------------------------------------
Total $ 99,963 $ (654) $ (2,243) $ 97,066
================================================================================
- --------------------------------------------------------------------------------
Gross Cumulative Intangible
Carrying Accumulated Translation Assets,
December 31, 2004 Value Amortization Adjustment Net
- --------------------------------------------------------------------------------
Supplier agreements $ 99,841 $ (75) $ 6,802 $ 106,568
Supplier relationships 710 (284) -- 426
Customer lists 1,700 (227) -- 1,473
Technology 609 (121) -- 488
-------------------------------------------------------
Total $ 102,860 $ (707) $ 6,802 $ 108,955
================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
Gross Cumulative Intangible Weighted
Carrying Accumulated Translation Assets, Average
March 31, 2006 Value Amortization Adjustment Net Life (Years)
- -----------------------------------------------------------------------------------------------------------------------------
Penn T supply agreements $ 99,841 $ (4,920) $ (3,337) $ 91,584 12.9
License 4,250 (77) -- 4,173 13.8
Technology 122 (5) -- 117 12.0
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 104,213 $ (5,002) $ (3,337) $ 95,874 13.0
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
Gross Cumulative Intangible Weighted
Carrying Accumulated Translation Assets, Average
December 31, 2005 Value Amortization Adjustment Net Life (Years)
- -----------------------------------------------------------------------------------------------------------------------------
Penn T supply agreements $ 99,841 $ (2,787) $ (4,435) $ 92,619 12.9
License 4,250 -- -- 4,250 13.8
Technology 122 (3) -- 119 12.0
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 104,213 $ (2,790) $ (4,435) $ 96,988 13.0
=============================================================================================================================
Amortization of acquired intangible assets was approximately $0.2$2.2 million and
$0.1$0.3 million for the three-month periods ended September 30,March 31, 2006 and 2005, and 2004,
respectively, and approximately $0.6 million and $0.2 million for the nine-month
periods ended September 30, 2005 and 2004,
respectively. Assuming no changes in the gross carrying amount of intangible
assets, the amortization of intangible assets for the next five fiscal years is
estimated to be approximately $2.7
million for 2005, $8.3$8.5 million for 2006, and $8.0$8.2 million for each
of the years 2007 through 2009.2010.
At September 30, 2005,March 31, 2006, the Company's recorded goodwill related to the acquisition of
Penn T on October 21, 2004 and has been allocated to the
Company's human pharmaceuticals segment. Goodwill related to the acquisition of
Anthrogenesis Corp. was eliminated during the first quarter of 2005 as
prescribed by SFAS 109, "Accounting for Income Taxes," due to reversal of the
valuation allowance for deferred tax assets recorded at time of acquisition.2004. The changes in the carrying value of goodwill are
summarized as follows:
- --------------------------------------------------------------------------------
Human Stem Cell
Pharmaceuticals Therapy Total
- --------------------------------------------------------------------------------Goodwill
----------
Balance, December 31, 20042005 $ 38,252 $ 3,006 $ 41,258
Anthrogenesis elimination -- (3,006) (3,006)
Purchase accounting adjustments (347) -- (347)33,815
Foreign currency translation (3,272) -- (3,272)
---------------------------------------------374
---------
Balance, September 30, 2005March 31, 2006 $ 34,633 $ -- $ 34,633
================================================================================
16
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill is not amortized, but rather is reviewed at least annually for
impairment.
12.34,189
9. COMPREHENSIVE INCOME
The components of comprehensive income, which represents the change in equity
from non-owner sources, consists of net income (losses), changes in currency
translation adjustments and the change in net unrealized gains (losses) on
marketable securities classified as available for sale.
16
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
A summary of comprehensive income for the three- and nine-monththree-month periods ended September 30,March 31,
2006 and 2005 and 2004 follows:
- -------------------------------------------------------------------------------------------------------------
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
2005 2004 2005 2004
As Restated As Restated
(See Note 2) (See Note 2)
- -------------------------------------------------------------------------------------------------------------
Net income $ 668 $ 19,008 $ 59,728 $ 30,517
-------------------------------------------------------------
Other comprehensive income (loss):
Unrealized gains (losses) on marketable
securities available for sale, before tax (6,674) 40,830 (49,062) 77,595
Less: reclassification adjustment for (gains)
losses included in net income 82 (765) (341) (1,599)
-------------------------------------------------------------
Net unrealized gains (losses) on
marketable securities available for sale (6,592) 40,065 (49,403) 75,996
Tax effect on unrealized losses 2,703 -- 8,821 --
-------------------------------------------------------------
Unrealized gains (losses) on marketable
securities available for sale, net of tax (3,889) 40,065 (40,582) 75,996
Deferred income tax (see note 13) -- -- (14,775) --
Currency translation adjustments (1,677) -- (7,731) --
-------------------------------------------------------------
Total other comprehensive income (loss) (5,566) 40,065 (63,088) 75,996
-------------------------------------------------------------
Comprehensive income $ (4,898) $ 59,073 $ (3,360) $ 106,513
=============================================================================================================
- ---------------------------------------------------------------------------
Three-Month Period Ended
March 31,
2006 2005
- ---------------------------------------------------------------------------
Net income $ 16,024 $ 48,214
---------------------------
Other comprehensive income loss:
Unrealized losses on marketable
securities available for sale, net of tax (4,569) (30,845)
Deferred income tax (1) -- (14,775)
Less: reclassification adjustment for (gains)
losses included in net income 3,345 (209)
---------------------------
Unrealized losses on marketable
securities available for sale, net of tax (1,224) (45,829)
Currency translation adjustments (478) (2,538)
---------------------------
Total other comprehensive loss (1,702) (48,367)
---------------------------
Comprehensive income (loss) $ 14,322 $ (153)
===========================================================================
(1) Reflects the adjustment recorded as of March 31, 2005 to eliminate related
valuation allowances based on the Company's determination that it was more
likely than not that certain benefits of its deferred tax assets would be
realized.
The unrealized loss on marketable securities available for sale for the
three-
and nine-month periodsthree-month period ended September 30,March 31, 2005 included a decrease in fair value
related to the shares of Pharmion common stock of $2.7$25.6 million and $39.6
million, respectively. The unrealized gain on marketable securities available
for sale for the three- and nine-month periods ended September 30, 2004 included
an increasechange
in fair value related to shares of Pharmion common stock of $36.4
million and $80.1 million, respectively.
13.during the three-month period ended March 31, 2006 was immaterial.
10. 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. The Company provides a
valuation allowance when it is more likely than not that deferred tax assets
will not be realized.
17
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The Company periodically evaluates the likelihood of the realization of deferred
tax assets, and reduces the carrying amount of these deferred tax assets by a
valuation allowance to the extent it believes a portion will not be realized.
The Company considers many factors when assessing the likelihood of future
realization of its deferred tax assets, including recent cumulative earnings
experience by taxing jurisdiction, expectations of future taxable income, the
carryforward periods available to it for tax reporting purposes, and other
relevant factors. Significant judgment is required in making this assessment.
In the first quarter of 2006, the Company recorded a tax benefit of
approximately $6.1 million primarily related to the resolution of certain tax
positions taken on the Company's income tax returns in tax years 2000-2002.
At March 31, 2005, the Company determined it was more likely than not that
thecertain benefits of its deferred tax assets would be realized based on favorable
clinical data related to REVLIMID(R) (Lenalidomide) during the quarter in
concert with the Company's nine consecutive quarters of profitability. This led
to the conclusion that it was more likely than not that the Company will
generate sufficient taxable income to realize the benefits of its deferred tax
assets. TheAs a result of eliminating the related valuation allowances, the Company
recorded an income tax benefit from eliminationin 2005 of the valuation allowances
totaled $42.6 million. The elimination of valuation allowances of approximately
$3.0 million and $2.3 million relatedan increase to
certain deferred tax affectsadditional paid-in capital of historical acquisitions has been offset first to reduce related goodwill and
intangibles, respectively, with the balance to reduce income tax expense. The
elimination of valuation allowances of approximately $30.2 million related to
tax deductions that arose in connection with stock option exercises has been
offset against components of equity. The effect of elimination of the valuation
allowances of approximately $14.8 million related to certain deferred tax
affects of unrealized gains and losses on marketable securities available for
sale has been offset against accumulated other comprehensive income. Deferred
tax account balances at September 30, 2005 included deferred current and
non-current assets of $90.1 million and $58.5 million, respectively, and
deferred current and non-current liabilities of $9.0 million and $34.4 million,
respectively. Deferred tax asset and liability balances have been presented net
on the accompanying balance sheet.
14. SEGMENTS
The Company operates in two business segments - Human Pharmaceuticals and Stem
Cell Therapies. Revenues and income before taxes by segment for the three- and
nine-month periods ended September 30, 2005 and 2004 were as follows:
- -------------------------------------------------------------------------------------------------------------
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
2005 2004 2005 2004
As Restated As Restated
(See Note 2) (See Note 2)
- -------------------------------------------------------------------------------------------------------------
Revenues:
Human Pharmaceuticals $ 127,924 $ 100,100 $ 383,151 $ 268,682
Stem Cell Therapies 1,582 1,368 4,452 3,412
----------- ----------- ----------- -----------
Total $ 129,506 $ 101,468 $ 387,603 $ 272,094
----------- ----------- ----------- -----------
Income (loss) before income taxes:
Human Pharmaceuticals $ 20,336 $ 24,491 $ 88,260 $ 45,884
Stem Cell Therapies (6,693) (3,509) (19,762) (11,436)
----------- ----------- ----------- -----------
Total $ 13,643 $ 20,982 $ 68,498 $ 34,448
=============================================================================================================
Expenses incurred at the consolidated level are included in the results of the
human pharmaceuticals segment.
Total assets by segment as of September 30, 2005 and December 31, 2004 were as
follows:
18million.
17
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005MARCH 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
- --------------------------------------------------------------------------------
September 30, December 31,
2005 2004
- --------------------------------------------------------------------------------11. SEGMENTS
Effective January 1, 2006, the Company has combined the Human Pharmaceuticals
$ 439,731 $ 334,932and Stem Cell Therapies 27,734 23,824
Unallocated 745,990 748,537
---------------------------
Total $ 1,213,455 $ 1,107,293
================================================================================
Unallocated corporate assets consistsegments into a single segment. The decision to combine
the segments was based on how the Company's chief operating decision makers use
internal financial information for evaluating performance and deciding how to
allocate resources among the Company's various functions.
The Stem Cell Therapies segment originated in December 2002, with the Company's
acquisition of cashAnthrogenesis Corp. Anthrogenesis, which operates as Celgene
Cellular Therapeutics, or CCT, was organized into three main units: (1) stem
cells banking for transplantation, (2) private stem cell banking and cash equivalents(3) the
development of biomaterials for organ and available-for-sale marketable securities.
15.tissue repair. Effective January 1,
2006, CCT has been integrated with the Company's Human Pharmaceuticals
technological and research organizations. It is anticipated that integration of
CCT within the Human Pharmaceutical segment will result in new methods for
expanding and maintaining placental stem cell populations; facilitate the
identification and characterization of placental stem cell sub-populations; and,
in development of improved methods for extracting, processing, configuring and
storing stem cells and biomaterials derived from placental tissue with potential
broad therapeutic applications in cancer, as well as autoimmune, cardiovascular,
neurological, and degenerative diseases.
12. AGREEMENTS
In connection with the Company's acquisition of Penn T, the Company entered into
a Technical Services Agreement with Penn Pharmaceutical Services Limited, or
PPSL, and Penn Pharmaceutical Holding Limited pursuant to which PPSL provides
the services and facilities necessary for the manufacture of THALOMID(R) and
other thalidomide formulations. The total cost to be incurred over the five-year
minimum agreement period is approximately $11.0 million. At September 30, 2005,March 31, 2006, the
remaining cost to be incurred was approximately $8.5$7.4 million.
FollowingIn December 2004, following the Company's acquisition of Penn T acquisition, in December 2004 the CompanyLimited, its
wholly-owned subsidiary Celgene UK Manufacturing II Limited, or CUK II, entered
into an amended the
productthalidomide supply agreement between Penn T and Pharmion. Under the amended
agreement,with Pharmion paid the Companywhereby in exchange
for a reduction in Pharmion's purchase price of thalidomide to 15.5% of its net
sales of thalidomide, we received a one-time payment of $77.0 million in
return for a reduction in their total product supply purchase price from 28.0 %
of Pharmion's thalidomide net sales, for cost of goods,million. Pursuant
to 15.5 % of net sales.
Pharmion will pay the Company an additional $8.0 million over the next three
years to extend the two companies' existing thalidomide research and development
efforts. Pharmionanother December 2004 agreement, we also madereceived a one-time payment of $3.0
million in return for granting Pharmion license rights to Pharmion to develop and market
thalidomide in three additional Asian territories (Hong Kong, Korea and Taiwan),eliminating certain of our license
termination rights. Under the agreements, as well asamended, the territory licensed to
Pharmion is for eliminating
termination rights held by Celgene tied toall countries other than the United States, Canada, Mexico,
Japan and all provinces of China other than Hong Kong. The agreements with
Pharmion terminate upon the ten-year anniversary following receipt of the first
regulatory approval offor thalidomide in the United Kingdom by November 2006.Kingdom. Amounts under the
agreement are recorded as deferred revenue and will be recognized on a
straight-line basis over 13 years.
To support the further clinical development of thalidomide, Pharmion has also
provided research funding under various agreements of approximately $10.7
million through March 31, 2006 and is required to fund an additional $2.7
million in each of 2006 and 2007.
In March 2003, the Companywe entered into a three-year supply and distribution agreement with
GlaxoSmithKline ("GSK") to distribute, promote and sell ALKERAN(R) (melphalan), a
therapy approved by the U.S. Food and Drug
AdministrationFDA for the palliative treatment of multiple myeloma and
carcinoma of the ovary. Under the terms of the agreement, the Company purchaseswe purchase ALKERAN(R)
tablets and ALKERAN(R) for infusion from GSK and distributesdistribute the products in the
United States under the Celgene label. The agreement requires the Companyus 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 and
is automaticallyarrangement. The
agreement has been extended by successive one year periods, unless at least
one-year prior to the renewal date, either party advises the other party that it
elects not to extend the agreement. At September 30, 2005,through March 31, 2009.
18
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
On March 31, 2006, the remaining minimum purchase requirements under the
agreement totaled $35.1$90.7 million, consisting of $15.1$2.4 million from the initial
agreement and $20.0 million from a 12-month
extension effective tothe following subsequent extensions:
o April 1, 2006 - December 31, 2006 $21,000,000
o January 1, 2007 - December 31, 2007 $29,050,000
o January 1, 2008 - December 31, 2008 $30,525,000
o January 1, 2009 - March 2007.31, 2009 $ 7,725,000
19
(Thousands of dollars, except per share amounts, unless otherwise indicated)
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPANY BACKGROUNDINTRODUCTION
We are a multi-national integrated biopharmaceutical company primarily engaged
in the discovery, development and commercialization of innovative therapies
designed to treat cancer and immune-inflammatory related diseases. OverOur lead
products are: REVLIMID(R), which gained recent U.S. Food and Drug
Administration, or FDA, approval in myelodysplastic syndromes, or MDS, patients
with the last
several years, we have experienced rapid growth led5q chromosomal deletion and is under review by sales ofthe FDA for multiple
myeloma, and THALOMID(R) (thalidomide), our lead product, which is currently marketed for the
treatment of erythema nodosum leprosum, or ENL, but more widely usedand under review by the FDA for
the treatment of multiple myeloma. Over the past several years, THALOMID(R) net
sales have grown steadily driven mainly by its off-label use for treating
multiple myeloma and other cancers. The sales growth of THALOMID(R) has enabled
us to make substantial investments in research and development, which has
resulted in aadvanced our broad portfolio of drug candidates in our product pipeline,
including a pipeline of IMiDs(R) compounds, which are a groupclass of compounds
proprietary to Celgeneus and having certain immunomodulatory and other biologically
important properties. We have filed a New Drug
Application, or NDA, with the FDA seeking approval to market REVLIMID(R)
(Lenalidomide), our most clinically advanced IMID(R) drug for the treatment of
patients with transfusion-dependent anemia due to low-or intermediate-1- risk
myelodyplastic syndromes, or MDS, associated with a deletion 5q cytogenetic
abnormality with or without additional cytogenetic abnormalities.
Given REVLIMID(R)'s large sales potential and the leverage we can achieve from
marketing REVLIMID(R) through our established U.S. sales force, we anticipate
that, if approved, the launch of REVLIMID(R), which could occur in late 2005 or
early 2006, may result in increased revenue and earnings. Moreover, we believe that the sales growth of THALOMID(R), the
growth potential for REVLIMID(R), the depth of our product pipeline, near-term
regulatory activities and our strong balance sheet positions us
favorably withinclinical data reported at major medical conferences
provide the biopharmaceutical industry.catalyst for future growth.
FACTORS AFFECTING FUTURE RESULTS
Future operating results will depend on many factors, including demand for our
products, regulatory approvals of our products, the timing and market acceptance
of new products launched by us or competing companies, the timing of research
and development milestones, challenges to our intellectual property and our
ability to control costs (seecosts. See also the Risk Factors discussion in Part I, Item
11A of our 2005 Annual Report on Form 10-K for the year ended December 31, 2004, as
amended). We believe some10-K. Some of the more salient factors affecting future resultsthat
we are focused on are: the ability of REVLIMID(R) to successfully penetrate
relevant markets; competitive risks; and our ability to advance clinical and
regulatory programs.
THE ABILITY OF REVLIMID(R) TO SUCCESSFULLY PENETRATE RELEVANT MARKETS:
REVLIMID(R) was approved by the FDA on December 27, 2005 for the treatment of
certain myelodysplastic syndromes associated with a deletion 5q cytogenetic
abnormality and we have begun to execute our product launch strategies, which
includes among other things: registering physicians in the near term, continuedRevAssist(sm)
program, which is a proprietary risk-management distribution program tailored
specifically to help ensure the safe use of REVLIMID(R); sponsoring numerous
medical education programs designed to educate physicians on MDS; and partnering
with contracted pharmacies to ensure safe and rapid distribution of REVLIMID(R).
In addition, we have implemented an expanded access program to provide many
patients with relapsed or refractory multiple myeloma free access to REVLIMID(R)
while the FDA reviews our Supplemental New Drug Application, or sNDA, for that
indication. We do not, however, have long-term data on the use of the product
and cannot predict whether REVLIMID(R) will gain widespread acceptance, which
will mostly depend on the acceptance of regulators, physicians, patients and
opinion leaders. The success of REVLIMID(R) will also depend, in part, on
prescription drug coverage by government health agencies, commercial and
employer health plans, and other third-party payers. As an oral cancer agent,
REVLIMID(R) qualifies as a Medicare Part D drug. Each Part D plan will review
REVLIMID(R) for addition to their formulary. As with all new products introduced
into the market, demandthere may be some lag time before being added to each plan's
formulary.
20
COMPETITIVE RISKS: The landscape for the treatment of THALOMID(R), including the
impact ofmultiple myeloma and other
cancer and immune-inflammatory related diseases is highly competitive. While
competition oncould reduce THALOMID(R) sales and delays in the introduction oflimit REVLIMID(R) and, in the longer term, failure to commercialize our early-stage
drug candidates.
THALOMID(R) MARKET DEMAND: THALOMID(R) is a widely prescribed therapy for
treating multiple myeloma across all stages of disease, driven by clinical data
reported at numerous international medical meetings, multiple peer-reviewed
medical journal publications, as well as recommendations highlighted in the
National Comprehensive Cancer Network, or NCCN, guidelines. Whilelaunch
expectations, we do not believe
that THALOMID(R) will continue to be used as a treatment in multiple myeloma and that competing products will not eliminate
itsREVLIMID(R) and THALOMID(R) use competition as well as
changes in dosing regimens could reduce THALOMID(R) sales in multiple myeloma.entirely. In addition, generic competition could
reduce THALOMID(R) sales. However, we own intellectual property which includes,
for example, numerous U.S. patents covering restrictive drug distribution systems for more safely delivering drugs,
including our S.T.E.P.S.(R) distribution program for
the safer delivery of Thalidomide, ("System for Thalidomide Education and Prescribing Safety",thalidomide, which
20
(Thousands of dollars, except per share amounts, unless otherwise indicated) all patients receiving thalidomide in
the United States must follow and which
are listed in the FDA Approved Drug Products with Therapeutic Equivalence
Evaluation, or Orange Book. These patents do not expire until the years
2018-2020.follow. We also have exclusive rights to several issued
patents covering the use of THALOMID(R) in oncology and other therapeutic areas.
Even if generic competition were able to enter the market, itwe expect
REVLIMID(R), which is unlikely such products could do
so before 2008 based on a number of factors. Such factors include the time
needednow available commercially, to commercialize such a product and the fact that challenges to
THALOMID(R) will require a generic competitor to make a patent certification of
non-infringement and/or invalidity of our patents listed in the Orange Book
pursuant to the U.S. Food, Drug and Cosmetic Act, which would then, in turn,
entitle us to up to a 30-month stay of market approval of that generic
equivalent. By that time, we plan to have at least partially replacedreplace
THALOMID(R) sales withsales.
ABILITY TO ADVANCE CLINICAL AND REGULATORY PROGRAMS: A major objective of our
on-going clinical trials programs is to broaden our knowledge about the full
potential of REVLIMID(R) sales. On October 22, 2004,and to continue to evaluate the drug in a broad range
of hematological malignancies and other cancers. The significant near-term
regulatory catalysts that we received an
approvable letter fromare focused on include: the FDA relating toFDA's decision
regarding our sNDA for THALOMID(R) in multiple myeloma supplemental new drug application, or sNDA. The FDA letter stated that
sufficient support for an accelerated approval could be provided by the results
of the completed Eastern Cooperative Oncology Group, or ECOG, study comparing
thalidomide plus dexamethasone to dexamethasone alone in previously untreated
multiple myeloma patients. We completed and submitted our responses to the FDA
approvable letter during the second quarter of 2005. Review of the data by the
FDA may result in an accelerated approval of THALOMID(R) as a treatment for
multiple myeloma in the fourth quarter of 2005.
DELAY IN THE INTRODUCTION OF REVLIMID(R): While we believe that we have made
significant progress toward obtaining regulatory approval of REVLIMID(R), a
delay in its introduction or failure to demonstrate efficacy or an acceptable
safety profile could adversely affect our business, consolidated financial
condition and results of operations. Moreover, other factors such as the
availability of FDA-approved competing products could impact the market's
acceptance of REVLIMID(R). The FDA is currently reviewing our NDA in MDS. The
NDA is based on Phase II open label data and, while the FDA does not often grant
approvals based on such data alone, it should be noted that on September 14,
2005, the FDA's Oncologic Drugs Advisory Committee, or ODAC, recommended
approval of the REVLIMID(R) NDA, by a vote of 10 to 5. The current(a Prescription Drug User
Fee Act, or PDUFA, date of May 25, 2006 has been extended to January 7, 2006. Other
efforts directed towards gaining regulatory approvalset); the FDA's decision
regarding our sNDA for REVLIMID(R) in relapsed or refractory multiple myeloma (a
PDUFA date of REVLIMID(R) include: our
submission toJune 30, 2006 has been set); and from an international
perspective, the European Medicines Agency, or EMEA, subsequent acceptance for
review of our
Marketing Authorization Application, or MAA, on October 26, 2005,
seeking authorization to marketfor REVLIMID(R) as a treatment forin MDS with the same
indication as the U.S. NDA;5q
chromosomal deletion and plans to submit a supplemental New Drug
Application, or sNDA, in the fourth quarter of 2005, which based on Phase III
Special Protocol Assessment (SPA) trials data, will seek approval to market
REVLIMID(R) as a treatment in multiple myeloma.
FAILURE TO COMMERCIALIZE EARLY-STAGE DRUG CANDIDATES: Our long-term success and
sustainability depends on our ability to advance our earlier-stage drug
candidates through development and to realize the commercial potential of our
broad product pipeline.
ACQUISITION
On October 21, 2004, we acquired all of the outstanding shares of Penn T
Limited, or Penn T, a worldwide supplier of THALOMID(R), from a consortium of
private investors for a US dollar equivalency of approximately $118.3 million in
cash, net of cash acquired and including working capital adjustments and
transaction costs. For more information see Note 4 of the Notes to the Unaudited
Consolidated Financial Statements.
21
(Thousands of dollars, except per share amounts, unless otherwise indicated)Multiple Myeloma.
RESULTS OF OPERATIONS-
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2005MARCH 31, 2006 VS. THREE-MONTH
PERIOD ENDED SEPTEMBER 30, 2004MARCH 31, 2005
TOTAL REVENUE: Total revenue and related percentages for the three-month periods
ended September 30,March 31, 2006 and 2005 and 2004 were as follows:
- --------------------------------------------------------------------------------
Three-Month Period Ended
September 30,
- ----------------------------------------------------------------------------------------------------------
Three-Month Period Ended
March 31,
(IN THOUSANDS $) 2006 2005 % Change
- ----------------------------------------------------------------------------------------------------------
Net product sales:
REVLIMID(R) $ 32,443 $ - N/A
THALOMID(R) 107,211 88,391 21.3%
ALKERAN(R) 18,295 7,739 136.4%
Focalin(TM) 2,101 1,226 71.4%
Other 193 289 (33.2%)
------------------------------
Total net product sales 160,243 97,645 64.1%
Collaborative agreements
and other revenue 3,893 5,229 (25.5%)
Royalty revenue 17,705 9,522 85.9%
------------------------------
Total revenue $ 181,841 $ 112,396 61.8%
==========================================================================================================
NET PRODUCT SALES:
REVLIMID(R) was approved by the FDA on December 27, 2005 2004 % Change
- --------------------------------------------------------------------------------
Netand consequently sales
for this product sales:
THALOMID(R) $ 99,134 $ 78,716 25.9%
Focalin(TM) 326 1,504 (78.3%)
ALKERAN(R) 13,945 3,202 335.5%
Other 495 381 29.9%
----------------------------
Total net product sales 113,900 83,803 35.9%
Collaborative agreements
and other revenue 4,879 10,392 (53.1%)
Royalty revenue 10,727 7,273 47.5%
----------------------------
Total revenue $ 129,506 $ 101,468 27.6%
================================================================================are reflected only in the 2006 period. Nearly 70% of
REVLIMID(R) dispenses during the period were for
21
the treatment of patients with MDS. Multiple myeloma accounted for the majority
of the remaining dispenses.
THALOMID(R) net sales were higher in the three-month period ended September 30,
2005, asMarch 31,
2006, compared to the three-month period ended September 30, 2004,March 31, 2005, primarily due to
price increases implemented as we move towards a cost of therapy pricing
structure as opposed to a price per milligram basis. Sales volumes decreased due
to lowerchanges in sales mix (i.e., capsule strength) resulting from continued
average daily doses anddose declines as well as a slight decrease in the total number of
prescriptions. Partially offsetting the increase in THALOMID(R) sales were
higher gross to net sales accruals for sales returns, Medicaid rebates and
distributor chargebacks, which are recorded based on historical data.chargebacks. Included in the three-month period ended September 30, 2005March 31, 2006
were sales of approximately $2.8$2.2 million from our U.K. subsidiary, Celgene U.K.
Manufacturing II, Limited, or CUK II, which was formerly known as Penn T Limited and was acquired through
an indirect wholly-owned subsidiary on October 21, 2004. Focalin(TM) netto Pharmion Corporation, compared to sales
were lower inof $1.5 million for the three-month period ended September 30, 2005, as compared to
the three-month period ended September 30, 2004, due to the timing of shipments
to Novartis for their commercial distribution.March 31, 2005.
ALKERAN(R) net sales were higher in the three-month period ended September 30, 2005, asMarch 31, 2006,
compared to the three-month period ended September 30, 2004,March 31, 2005, due to an increase in
sales volumes as well as price increases implemented since the end of the third quarter of 2004 and an increase in sales volumes.March 31, 2005.
ALKERAN(R) use in combination therapies for the treatment of hematological
diseases continues to grow driven by clinical data reported at major medical
conferences around the world.
Also contributingNet sales of Focalin(TM), which is sold exclusively to Novartis and is dependent
on the timing of orders from Novartis for their commercial distribution, were
higher in the three-month period ended March 31, 2006, compared to the
increasethree-month period ended March 31, 2005, due to increased end-market demand.
GROSS TO NET SALES ACCRUALS: Gross to net sales accruals are recorded for sales
returns, sales discounts, Medicaid rebates and distributor charge-backs and
services. Allowance for sales returns are based on the actual returns history
for consumed lots and the trend experience for lots where product is still being
returned. Sales discounts accruals are based on payment terms extended to
customers. Medicaid rebate accruals are based on historical payment data and
estimates of future Medicaid beneficiary utilization. Distributor charge-back
accruals are based on the differentials between product acquisition prices paid
by wholesalers and lower government contract pricing paid by eligible customers
covered under federally qualified programs. Distributor services accruals are
based on actual fees paid to wholesale distributors for services provided.
Gross to net sales accruals for the three-month periods ended March 31, 2006 and
2005 were as follows:
- ----------------------------------------------------------------------------------------------------------------
Three-Month Period Ended
March 31,
(IN THOUSANDS $) 2006 2005 % Change
- ----------------------------------------------------------------------------------------------------------------
Gross product sales $ 206,598 $ 116,881 76.8%
Less: Gross to net sales accruals
Returns and allowances 16,602 4,661 256.2%
Discounts 4,160 2,291 81.6%
Medicaid rebates 11,712 7,077 65.5%
Distributor charge-backs 12,978 5,207 149.2%
Distributor services 903 - N/A
------------------------------
Total net product sales $ 160,243 $ 97,645 61.8%
================================================================================================================
Gross to net sales adjustments were higher in ALKERAN(R)
sales volumes was the resolution of supply disruptions experiencedthree-month period ended March
31, 2006, compared to the three-month period ended March 31, 2005, in 2004,
which resolution ledgeneral,
due to more consistent supplies of ALKERAN(R) IVhigher gross sales. In addition, lower
22
safety stocking at retail pharmacies resulted in higher accruals for returns
allowances and consequently more consistent end-market buying patterns.price increases implemented since March 31, 2005 resulted in
higher accruals for distributor chargebacks.
OTHER REVENUES:
Revenues from collaborative agreements and other sources for the three-month
periodperiods ended September 30,March 31, 2006 and 2005 included approximately $3.5included: $2.7 million and $3.6 million,
respectively, related to our sponsored research, license and other agreements
with Pharmion CorporationCorporation; and approximately $1.4$1.2 million fromand $1.0 million, respectively,
related to umbilical cord blood enrollment, collection and storage fees
generated through our LifeBank USA(SM) business. The three-month period ended
September 30, 2004March 31, 2005 also included a $7.5 million milestone
payment from Novartis for the NDA submission of Focalin XR(TM); approximately
$1.8 million related to our sponsored research, license and other agreements
with Pharmion Corporation; approximately $0.9 million from umbilical cord blood
22
(Thousands of dollars, except per share amounts, unless otherwise indicated)
enrollment, collection and storage fees generated through our LifeBank USA(SM)
business; and approximately $0.1$0.6 million from other miscellaneous license and
research and development agreements.
Royalty revenue for the three-month periodperiods ended September 30,March 31, 2006 and 2005
included
approximately $10.4included: $17.3 million and $9.3 million, respectively, of royalties received
from Novartis on sales of their entire family of Ritalin(R) drugs and Focalin
XR(TM); approximately$0.2 million and $0.1 million, respectively, of royalties received from
Pharmion Corporation on their commercial sales of THALOMID(R); and approximately $0.2 million
and $0.1 million, respectively, of other miscellaneous other royalties.
The three-month period ended September 30, 2004 included approximately $7.3
million of royalties received from Novartis on sales of their entire family of
Ritalin(R) drugs. The increase
in Ritalin(R) and Focalin XR(TM) royalty revenue was due to increasesmarket share gains
by Novartis in the royalty rate on both Ritalin(R) and Ritalin(R) LA as well as an
increase in Ritalin(R) LA sales by Novartis.once-a-day attention deficit disorder market.
COST OF GOODS SOLD: Cost of goods sold and related percentages for the
three-month periods ended September 30,March 31, 2006 and 2005 and 2004 were as follows:
- --------------------------------------------------------------------------------
Three-Month Period Ended
September 30,March 31,
(IN THOUSANDS $) 2006 2005 2004
- --------------------------------------------------------------------------------
Cost of goods sold $ 23,19930,144 $ 15,16612,604
Increase from prior year $ 8,03317,540 N/A
Percentage increase from prior year 53.0%139.2% N/A
Percentage of net product sales 20.4% 18.1%18.8% 12.9%
================================================================================
Cost of goods sold were higher in the three-month period ended September 30,
2005, as compared to the three-month period ended September 30, 2004, primarily
due to higher ALKERAN(R) costs as a result of higher sales volumes and higher
royalties on THALOMID(R) net sales. Costcost of goods sold as a percentage of net product sales
increasedwere higher in the three-month period ended September 30, 2005, asMarch 31, 2006, compared to the
three-month period ended September 30, 2004,March 31, 2005, primarily due to higher ALKERAN(R)
costs. ALKERAN(R) costs increased due to higher per unit costs and, to a lesser
extent, higher sales mix (i.e., higher ALKERAN sales, which hasvolumes. Under the ALKERAN(R) supply and distribution
agreement with GlaxoSmithKline, or GSK, we are required to purchase certain
minimum quantities each year. Purchases made after the minimum quantities have
been reached are at a significantly higher cost
structure than THALOMID).lower purchase price. As a result, ALKERAN(R) costs tend
to experience variability depending on the purchase price of the specific units
sold during a given period.
RESEARCH AND DEVELOPMENT: Research and development expenses consist primarily of
salaries and benefits, contractor fees (paid principally to contract research
organizations to assist in our clinical development programs), costs of drug
supplies for our clinical and preclinical programs, costs of other consumable
research supplies, regulatory and quality expenditures and allocated facilities
charges such as building rentdepreciation, utilities and utilities.property taxes.
23
(Thousands of dollars, except per share amounts, unless otherwise indicated)
Research and development expenses and related percentages for the three-month
periods ended September 30,March 31, 2006 and 2005 and 2004 were as follows:
- --------------------------------------------------------------------------------
Three-Month Period Ended
September 30,March 31,
(IN THOUSANDS $) 2006 2005 2004
- --------------------------------------------------------------------------------
Research and development expenses $ 49,34854,524 $ 40,15440,037
Increase from prior year $ 9,19414,487 N/A
Percentage increase from prior year 22.9%36.2% N/A
Percentage of total revenue 38.1% 39.6%30.0% 35.6%
================================================================================
Research and development expenses were higher in the three-month period ended
September 30, 2005, asMarch 31, 2006, compared to the three-month period ended September 30,
2004,March 31, 2005,
primarily due to higher clinical research and development quality and
regulatory affair costs toexpenses, which among
other things support on-going clinical development and regulatory
advancement of REVLIMID(R)multiple Phase II and Phase III programs in myelodysplastic
syndromesevaluating
REVLIMID(R) across a broad range of hematological cancers, including chronic
lymphocyte leukemia and pivotal Phase III SPA trials for multiple myelomanon-Hodgkin's lymphoma; higher medical education
expenses, which support educating and training the medical community on MDS; and
higher expenses to support ongoing development of other compounds such as
well as
higher drug discovery costs. ResearchCC-10004, CC-4047, CC-11006, CC-10050, CC-401 and development expenses are expected to
increaseCC-8490. Included in the
fourth quarterthree-month period ended March 31, 2006 was share-based compensation expense of
2005 in support$3.9 million resulting from the adoption of our ongoing global
regulatory filings, late stage clinical trials, clinical progress in multiple
proprietary development programs and related clinical manufacturing costs.Statement of Financial Accounting
Standards, or SFAS, No. 123R, "Share-Based Payments," or SFAS 123R, effective
January 1, 2006.
Research and development expenses in the three-month period ended September 30,
2005March 31, 2006
consisted of approximately $23.6$19.7 million spent on human pharmaceutical clinical
programs; $13.7$22.7 million spent on other pharmaceutical programs, including
toxicology, analytical research and development, drug discovery, quality and
regulatory affairs; $9.4$9.5 million spent on biopharmaceutical discovery and
development programs; and $2.6 million spent on placental stem cell and
biomaterials programs. These expenditures support ongoing clinical progress in
multiple coreproprietary development programs includingfor THALOMID(R), and REVLIMID(R), ACTIMID(TM), CC-11006,
TNF-alpha/PDE4 inhibitors,and
for other investigational compounds such asas: CC-10004, our lead anti-inflammatory compound,
CC-4047; CC-11006; CC-10050; and our kinase
inhibitors, benzopyranones and ligase inhibitors andinhibitor programs as
well as the placental and cord blood
derived stem cell programs.program. In the three-month period ended September 30, 2004,March
31, 2005, approximately $19.6$15.5 million was spent on human pharmaceutical clinical
programs; $9.2$13.0 million was spent on other human pharmaceutical programs,
including toxicology, analytical research and development, drug discovery,
quality and regulatory affairs; $8.7$8.9 million was spent on biopharmaceutical
discovery and development programs; and $2.6 million was spent on placental stem
cell and biomaterials programs.
As total revenue increases, research and development expense may continue to
decrease as a percentage of total revenue, however the actual dollar amount may
continue to increase as earlier stage compounds are moved through the
preclinical and clinical stages. Generally, the time to completion of each phase
is estimated as follows:follows for oncology indications and can be longer for
non-oncology indications:
Phase I ----- 1-2 years
Phase II ---- 2-33-5 years
Phase III --- 2-3 years
Due to the significant risk factors and uncertainties inherent in preclinical
tests and clinical trials associated with each of our research and development
projects, the cost to complete such projects is not reasonably estimable. The
data obtained from these tests and trials may be susceptible to varying
interpretation that could delay, limit or prevent a project's advancement
through the various stages of clinical development, which would significantly
impact the costs incurred to bring a project to completion.
24
(Thousands of dollars, except per share amounts, unless otherwise indicated)
SELLING, GENERAL AND ADMINISTRATIVE: Selling expenses consisted primarily of
salaries and benefits for sales and marketing and customer service personnel and
other commercial expenses to support our sales force. General and administrative
expenses consisted 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
three-month periods ended September 30, 2005 and 2004 were as follows:
- --------------------------------------------------------------------------------
Three-Month Period Ended
September 30,
2005 2004
- --------------------------------------------------------------------------------
Selling, general and administrative expenses $ 46,941 $ 27,750
Increase from prior year $ 19,191 N/A
Percentage increase from prior year 69.2% N/A
Percentage of total revenue 36.2% 27.3%
================================================================================
Selling, general and administrative expenses were higher in the three-month
period ended September 30, 2005, as compared to the three-month period ended
September 30, 2004, primarily due to an increase of approximately $10.3 million
in marketing expenses consisting of approximately $13.0 million related to
market research, headcount and other pre- REVLIMID(R) launch expenses offset by
lower THALOMID(R) and ALKERAN(R) related marketing expenses and an increase of
approximately $5.5 million in general administrative expenses resulting from
higher professional and other miscellaneous outside service fees, higher
personnel-related expenses, higher facility related expenses and higher
insurance costs. Selling, general and administrative expenses are expected to
increase in the fourth quarter of 2005 as we near the commercial launch of
REVLIMID(R).
INTEREST AND OTHER INCOME, NET: Interest and other income, net was approximately
$7.0 million and $5.0 million for the three-month periods ended September 30,
2005 and 2004, respectively. Included in the three-month period ended September
30, 2004 was a charge of approximately $2.2 million related to changes in the
estimated value of our investment in EntreMed, Inc. warrants, which were
exercised on March 31, 2005. Excluding this charge, interest and other income,
net was approximately $7.2 million for the three-month period ended September
30, 2004. The period-over-period decrease in interest and other income, net was
primarily due to lower returns on our cash and marketable securities portfolio.
EQUITY IN LOSSES OF AFFILIATED COMPANY: On March 31, 2005, we exercised warrants
to purchase 7,000,000 shares of EntreMed, Inc. common stock. Since we also hold
3,350,000 shares of EntreMed voting preferred shares convertible into 16,750,000
shares of common stock, we determined that we have significant influence over
EntreMed and are applying the equity method of accounting to our common stock
investment effective March 31, 2005. Under the equity method of accounting, we
recorded equity losses of approximately $1.0 million for the three-month period
ended September 30, 2005, which included approximately $0.7 million to record
our share of EntreMed losses, approximately $0.1 million related to amortization
of acquired intangible assets and a charge of approximately $0.2 million to
eliminate our share of THALOMID(R) royalties payable to EntreMed, Inc.
INTEREST EXPENSE: Interest expense was approximately $2.4 million for each of
the three-month periods ended September 30, 2005 and 2004 and primarily reflects
three months of interest expense and amortization of debt issuance costs on the
$400 million convertible notes issued on June 3, 2003.
25
(Thousands of dollars, except per share amounts, unless otherwise indicated)
INCOME TAX PROVISION: The income tax provision for the three-month period ended
September 30, 2005 was approximately $13.0 million and reflects the impact of
certain expenses that are not currently deductible for tax purposes. The income
tax provision for the three-month period ended September 30, 2004 was
approximately $2.0 million.
NET INCOME: Net income and per common share amounts for the three-month periods
ended September 30, 2005 and 2004 were as follows:
- --------------------------------------------------------------------------------
Three-Month Period Ended
September 30,
2005 2004
As Restated
- --------------------------------------------------------------------------------
Net income $ 668 $ 19,008
Per common share amounts:
Basic $ 0.00 $ 0.12
Diluted $ 0.00 $ 0.11
Weighted average number of shares of
common stock utilized to calculate
per common share amounts:
Basic 168,298 164,091
Diluted 179,862 177,064
================================================================================
Net income and per common share amounts were lower in the three-month period
ended September 30, 2005, as compared to the three-month period ended September
30, 2004, primarily due to higher operating expenses of approximately $36.4
million (driven by REVLIMID(R) clinical and regulatory research and development
costs and related pre-launch selling, general and administrative costs) and an
increase of approximately $11.0 million in the income tax provision resulting
from certain expenses that are not currently deductible for tax purposes
partially offset by an increase in total revenues of approximately $28.0 million
(driven primarily by a $20.4 million increase in THALOMID(R) net sales and a
$10.7 million increase in ALKERAN(R) net sales). Also offsetting the decrease
was the fact that included in the three-month period ended September 30, 2004
was a charge of approximately $2.2 million for the change in the estimated value
of our investment in EntreMed warrants, which were exercised on March 31, 2005.
26
(Thousands of dollars, except per share amounts, unless otherwise indicated)
RESULTS OF OPERATIONS-
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2005 VS. NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2004
TOTAL REVENUE: Total revenue and related percentages for the nine-month periods
ended September 30, 2005 and 2004 were as follows:
- --------------------------------------------------------------------------------
Nine-Month Period Ended
September 30,
2005 2004 % Change
- --------------------------------------------------------------------------------
Net product sales:
THALOMID(R) $ 281,972 $ 222,498 26.7%
Focalin(TM) 3,129 3,698 (15.4%)
ALKERAN(R) 30,803 12,025 156.2%
Other 1,024 712 43.8%
-----------------------------
Total net product sales $ 316,928 $ 238,933 32.6%
Collaborative agreements
and other revenue 35,829 15,420 132.4%
Royalty revenue 34,846 17,741 96.4%
-----------------------------
Total revenue $ 387,603 $ 272,094 42.5%
================================================================================
THALOMID(R) net sales were higher in the nine-month period ended September 30,
2005, as compared to the nine-month period ended September 30, 2004, primarily
due to price increases implemented as we move towards a cost of therapy pricing
structure as opposed to a price per milligram. Sales volumes decreased due to
lower average daily doses; however, the total number of prescriptions for the
nine-month period ended September 30, 2005 remained essentially flat when
compared to the prior year period. Partially offsetting the increase in
THALOMID(R) sales were higher gross to net sales accruals for sales returns,
Medicaid rebates and distributor chargebacks, which are recorded based on
historical data. Included in the nine-month period ended September 30, 2005 were
sales of approximately $5.8 million from our U.K. subsidiary, CUK II.
Focalin(TM) net sales were lower in the nine-month period ended September 30,
2005, as compared to the nine-month period ended September 30, 2004, due to the
timing of shipments to Novartis for their commercial distribution. ALKERAN(R)
net sales were higher in the nine-month period ended September 30, 2005, as
compared to the nine-month period ended September 30, 2004, due to price
increases implemented since the end of the third quarter of 2004 and an increase
in sales volumes. ALKERAN(R) use in combination therapies for the treatment of
hematological diseases continues to grow driven by clinical data reported at
major medical conferences around the world. Also contributing to the increase in
ALKERAN(R) sales volumes was the resolution of supply disruptions experienced in
2004, which resolution led to more consistent supplies of ALKERAN(R) IV and
consequently more consistent end-market buying patterns.
Revenues from collaborative agreements and other sources for the nine-month
period ended September 30, 2005 included a $20.0 million milestone payment from
Novartis for the NDA approval of Focalin XR(TM); approximately $10.6 million
related to our sponsored research, license and other agreements with Pharmion
Corporation; approximately $3.7 million from umbilical cord blood enrollment,
collection and storage fees generated through our LifeBank USA(SM) business;
approximately $0.9 million for licensing to EntreMed, Inc. rights to develop and
commercialize our tubulin inhibitor compounds; $0.5 million related to the
agreements providing manufacturers of isotretinoin, a non-exclusive license to
our S.T.E.P.S.(R) patent portfolio encompassing restrictive drug distribution
systems; and $0.1
27
(Thousands of dollars, except per share amounts, unless otherwise indicated)
million from other miscellaneous research and development agreements. The
nine-month period ended September 30, 2004 included a $7.5 million milestone
payment from Novartis for the NDA submission of Focalin XR(TM); approximately
$5.0 million related to our sponsored research, license and other agreements
with Pharmion Corporation; approximately $2.7 million from umbilical cord blood
enrollment, collection and storage fees generated through our LifeBank USA(SM)
business; and approximately $0.2 million from other miscellaneous research and
development agreements.
Royalty revenue for the nine-month period ended September 30, 2005 included
approximately $33.9 million of royalties received from Novartis on sales of
their entire family of Ritalin(R) drugs and Focalin XR(TM); approximately $0.3
million of royalties received from Pharmion on their commercial sales of
THALOMID(R), and approximately $0.6 million of miscellaneous other royalties.
The nine-month period ended September 30, 2004 included approximately $17.7
million of royalties received from Novartis on sales of their entire family of
Ritalin(R) drugs. The increase in Ritalin(R) royalty revenue was due to
increases in the royalty rate on both Ritalin(R) and Ritalin(R) LA as well as an
increase in Ritalin(R) LA sales by Novartis.
COST OF GOODS SOLD: Cost of goods sold and related percentages for the
nine-month periods ended September 30, 2005 and 2004 were as follows:
- --------------------------------------------------------------------------------
Nine-Month Period Ended
September 30,
2005 2004
- --------------------------------------------------------------------------------
Cost of goods sold $ 53,999 $ 43,655
Increase from prior year $ 10,344 N/A
Percentage increase from prior year 23.7% N/A
Percentage of net product sales 17.0% 18.3%
================================================================================
Cost of goods sold were higher in the nine-month period ended September 30,
2005, as compared to the nine-month period ended September 30, 2004, primarily
due to higher royalties on THALOMID(R) net sales and higher ALKERAN(R) costs as
a result of higher sales volumes. Cost of goods sold as a percentage of net
product sales decreased in the nine-month period ended September 30, 2005, as
compared to the nine-month period ended September 30, 2004, primarily related to
higher gross profit margins on ALKERAN(R) net sales due to selling price
increases implemented since September 30, 2004.
RESEARCH AND DEVELOPMENT: Research and development expenses and related
percentages for the nine-month periods ended September 30, 2005 and 2004 were as
follows:
- --------------------------------------------------------------------------------
Nine-Month Period Ended
September 30,
2005 2004
- --------------------------------------------------------------------------------
Research and development expenses $ 138,413 $ 116,520
Increase from prior year $ 21,893 N/A
Percentage increase from prior year 18.8% N/A
Percentage of total revenue 35.7% 42.8%
================================================================================
Research and development expenses were higher in the nine-month period ended
September 30, 2005, as compared to the nine-month period ended September 30,
2004, primarily due to higher clinical research and development, quality and
regulatory affair costs to support on-going clinical development and
28
(Thousands of dollars, except per share amounts, unless otherwise indicated)
regulatory advancement of REVLIMID(R) Phase II and Phase III programs in
myelodysplastic syndromes and pivotal Phase III SPA trials for multiple myeloma,
as well as higher toxicology, process chemistry and drug discovery costs to
support further development of early stage clinical and preclinical compounds
such as ACTIMID(TM), CC-11006, CC-10015 and TNF-alpha/PDE4. Research and
development expenses are expected to increase in the fourth quarter of 2005 in
support of our ongoing global regulatory filings, late stage clinical trials,
clinical progress in multiple proprietary development programs and related
clinical manufacturing costs.
Research and development expenses in the nine-month period ended September 30,
2005 consisted of approximately $67.1 million spent on human pharmaceutical
clinical programs; $36.0 million spent on other pharmaceutical programs,
including toxicology, analytical research and development, drug discovery,
quality and regulatory affairs; $27.5 million spent on biopharmaceutical
discovery and development programs; and $7.8 million spent on placental stem
cell and biomaterials programs. These expenditures support multiple core
programs, including THALOMID(R), REVLIMID(R), ACTIMID(TM), CC-11006,
TNF-alpha/PDE4 inhibitors, other investigational compounds, such as kinase
inhibitors, benzopyranones and ligase inhibitors and placental and cord blood
derived stem cell programs. In the nine-month period ended September 30, 2004,
approximately $59.7 million was spent on human pharmaceutical clinical programs;
$25.4 million was spent on other human pharmaceutical programs, including
toxicology, analytical research and development, drug discovery, quality and
regulatory affairs; $25.4 million was spent on biopharmaceutical discovery and
development programs; and $6.0 million was spent on placental stem cell and
biomaterials programs.
As total revenue increases, research and development expense may continue to
decrease as a percentage of total revenue, however the actual dollar amount may
continue to increase as earlier stage compounds are moved through the
preclinical and clinical stages. Due to the significant risk factors and
uncertainties inherent in preclinical tests and clinical trials associated with
each of our research and development projects, the cost to complete such
projects can vary. The data obtained from these tests and trials may be
susceptible to varying
interpretation that could delay, limit or prevent a project's advancement
through the various stages of clinical development, which would significantly
impact the costs incurred to bring a project to completion.
SELLING, GENERAL AND ADMINISTRATIVE: Selling expenses consisted primarily of
salaries and benefits for sales and marketing and customer service personnel and
other commercial expenses to support our sales force. General and administrative
expenses consisted primarily of salaries and benefits, outside services for
legal, audit, tax and investor activities and allocations of facilities costs,
principally for rent,depreciation, utilities and property taxes.
Selling, general and administrative expenses and related percentages for the
nine-monththree-month periods ended September 30,March 31, 2006 and 2005 and 2004 were as follows:
- --------------------------------------------------------------------------------
Nine-MonthThree-Month Period Ended
September 30,March 31,
(IN THOUSANDS $) 2006 2005 2004
- --------------------------------------------------------------------------------
Selling, general and administrative expenses $ 126,11466,897 $ 79,40837,806
Increase from prior year $ 46,70629,091 N/A
Percentage increase from prior year 58.8%76.9% N/A
Percentage of total revenue 32.5% 29.2%36.8% 33.6%
================================================================================
Selling, general and administrative expenses were higher in the nine-monththree-month
period ended September 30, 2005, asMarch 31, 2006, compared to the nine-monththree-month period ended September 30, 2004,March 31,
2005, primarily due to an increase of 29
(Thousands of dollars, except per share amounts, unless otherwise indicated)
approximately $20.3$15.1 million in commercial expenses
primarily related to sales and marketing expenses consisting of approximately
$23.0 million related to market research, headcount and other pre-for REVLIMID(R) launch
expenses offset by lower THALOMID(R) and ALKERAN(R) related marketing
expensesactivities in the United States and an increase of approximately $16.2$11.9 million
in general administrative expenses resulting fromprimarily related to costs incurred in
connection with our international expansion in Europe, Japan, Australia and
Canada and higher professional and other miscellaneous outside service fees and
higher personnel-related expenses, higher
facility related expenses and higher insurance costs.expenses. Included in the nine-monththree-month period ended
September 30, 2005March 31, 2006 was approximately $2.4share-based compensation expense of $10.4 million resulting
from the adoption of expense
related to accelerated depreciation of leasehold improvements at four New Jersey
locations being consolidated into our new corporate headquarters. Selling,
general and administrative expenses are expected to increase in the fourth
quarter of 2005 as we near the commercial launch of REVLIMID(R).SFAS 123R, effective January 1, 2006.
INTEREST AND OTHER INCOME (EXPENSE), NET: Interest and other income (expense)
was a net $6.2 million of income for the nine-month periodsthree-month period ended September 30, 2005March 31, 2006
and 2004 primarily reflectsincluded interest income and net realized gains (losses) on our cash and
marketable securities portfolio as well as
charges related toof $7.9 million, foreign exchange gains of $1.4
million, gains recorded for changes in the estimated value of our investment in
EntreMed, Inc. warrants which were exercisedof $0.1 million and other net miscellaneous income of
$0.1 million, offset by an other-than-temporary impairment loss on marketable
securities available for sale of $3.3 million. Interest and other income
(expense), was a net $1.2 million of expense for the three-month period ended
March 31, 2005. Excluding the charges
related to2005 and included losses recorded for changes in the estimated value
of theour investment in EntreMed, Inc. warrants of $6.9 million, other net
miscellaneous charges of $0.2, offset by interest income and other income, net for the nine-month period ended September 30, 2005 and 2004
was approximately $19.4 million and $20.9 million, respectively. The decrease
was primarily due to lower returnsrealized gains
(losses) on our cash and marketable securities portfolio.portfolio of $5.9 million.
EQUITY IN LOSSES OF AFFILIATED COMPANY: On March 31, 2005, we exercised warrants
to purchase 7,000,000 shares of EntreMed, Inc. common stock. Sincestock and, since we also
hold 3,350,000 shares of EntreMed voting preferred shares convertible into
16,750,000 shares of common stock, we determined that we have significant
influence over EntreMed and arebegan applying the equity method of accounting to
our common stock investment effective March 31, 2005.
On February 2, 2006 the Company invested an additional $2.0 million in EntreMed
in a private-placement transaction for which it received an additional 864,864
shares of EntreMed common stock and
25
432,432 warrants. The fair value of the warrants computed using the
Black-Scholes model was $0.6 million and, the remaining value of $1.4 million
was ascribed to the equity investment. The warrants are being accounted for at
fair value with changes in fair value recorded through interest and other income
(expense), net.
Under the equity method of accounting, we recorded equity losses of approximately $6.0$3.1 million
and $4.4 million for the nine-monththree-month periods ended March 31, 2006 and 2005,
respectively. Equity losses recorded for the three-month period ended September 30,March 31,
2005, which includes a charge of approximately $4.4 millionrelated to write down the value of theour investment ascribed to in-process research and
development approximately $0.1 million related to amortizationand written-off as of acquired
intangible assets, approximately $1.3 million to record our shareMarch 31, 2005 (the initial date of EntreMed
losses and a charge of approximately $0.2 million to eliminate our share of
THALOMID(R) royalties payable to EntreMed, Inc.the
investment).
INTEREST EXPENSE: Interest expense was approximately $7.1 million and $7.2$2.4 million for each of the nine-month periodthree-month
periods ended September 30,March 31, 2006 and 2005 and 2004,
respectively, and primarily reflects ninethree months of
interest expense and amortization of debt issuance costs on the $400 million
convertible notes issued on June 3, 2003.
INCOME TAX PROVISION:PROVISION (BENEFIT): The income tax provision for the nine-monththree-month
period ended September 30, 2005March 31, 2006 was approximately $8.8$15.0 million and reflects an underlying
effective tax expense
impacted by certain expenses that are not currently deductiblerate of 68%, adjusted for tax purposes
offset bybenefits of approximately $6.1
million primarily related to the resolution of certain tax positions taken on
our income tax returns for the tax years 2000 through 2002. The income tax
benefit for the three-month period ended March 31, 2005 was $34.2 million and
included the one-time benefit from elimination ofeliminating deferred tax asset valuation
allowances totaling
approximately $42.6 million as of March 31, 2005, which was based on2005. Excluding this benefit,
the fact
that we determined it was more likely than not that the benefits of our deferred
tax assets would be realized. This determination was based upon the external
Independent Data Monitoring Committee's ("IDMC") analyses of two Phase III
Special Protocol Assessment (SPA) multiple myeloma trials and the conclusion
that these trials exceeded the pre-specified stopping rule. The IDMC found a
statistically significant improvement in time to disease progression -- the
primary endpoint of these Phase III trials -- in patients receiving REVLIMID(R)
plus dexamethasone compared to patients receiving dexamethasone alone. This, in
concert with our nine consecutive quarters of profitability led to the
conclusion that is was more likely than not that we will generate sufficient
taxable income to realize the benefits of our deferred tax assets. The
elimination of valuation allowances relating to certain historical acquisitions
were first offset against goodwill and intangibles with the balance applied to
reduce income tax expense. The elimination of valuation allowances relating to
tax deductions that arose in connection with stock option exercises were offset
against components of equity. Income tax provision for the nine-month periodthree-months ended September 30, 2004 was approximately $3.9 million.
30
(ThousandsMarch 31, 2005 would have
been $8.4 million, which reflects an underlying effective tax rate of dollars, except per share amounts, unless otherwise indicated)60%. Our
underlying tax rate will continue to exceed the statutory rate for the near term
as a result of certain expenses being incurred outside the United States for
which no tax benefit can be recorded.
NET INCOME: Net income and per common share amounts for the nine-monththree-month periods
ended September 30,March 31, 2006 and 2005 and 2004 were as follows:
- --------------------------------------------------------------------------------
Nine-MonthThree-Month Period Ended
September 30,March 31,
(IN THOUSANDS $) 2006 2005 2004
As Restated
- --------------------------------------------------------------------------------
Net income $ 59,72816,024 $ 30,51748,214
Per common share amounts:
Basic $ 0.360.05 $ 0.190.15
Diluted $ 0.330.04 $ 0.170.13
Weighted average number of shares of
common stock utilized to calculate per
common share amounts:
Basic 167,027 163,574343,966 331,225
Diluted 195,002 176,273400,699 382,216
================================================================================
Net income and per common share amounts were higherlower in the nine-monththree-month period
ended September 30, 2005, asMarch 31, 2006, compared to the nine-monththree-month period ended September
30, 2004,March 31, 2005,
primarily due to an increase of $61.1 million in total revenuesoperating expenses, which
includes $14.8 million of approximately $115.5
million (driven primarily by a $59.5 millionshare-based compensation expense resulting from the
adoption of SFAS 123R, effective January 1, 2006, and an increase in THALOMID(R) net sales,
an $18.8the income
tax provision of $49.2 million, increase in ALKERAN(R) net sales, a $16.1 million increase in
royalty revenues received from Novartis relatedwhich is primarily due to the Ritalin(R) lineone-time benefit
of drugs
and Focalin XR(TM) and a $12.5$42.6 million increaserecognized in milestone paymentsthe prior year period from Novartis related to Focalin XR(TM)the elimination of
deferred tax asset valuation allowances, partially offset by higher operating expensesrevenues of
approximately $78.9 million (driven by REVLIMID(R) clinical and regulatory
research and development costs and related prelaunch selling, general and
administrative costs).$69.4 million.
26
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $54.6$15.7 million for the nine-monththree-month
period ended September 30, 2005, asMarch 31, 2006, compared to $46.2net cash used in operating activities
of $5.1 million for the nine-monththree-month period ended September 30, 2004. NetMarch 31, 2005. Operating cash
provided by operating
activitiesflows for the nine-monththree-month period ended September 30, 2005March 31, 2006 reflects our strong
operating performance, which included a 42.5%period-over-period increase in total
revenue and over a 112% increase in ourof 61.8% partially offset by higher operating income, offset byexpenses and an increase
in working capital levels. The decrease in operating cash flows during the
three-month period ended March 31, 2005 was largely due to income taxes paid
an increase in current assets and liabilities, excludingduring the effectsfirst quarter of acquisitions.2005 totaling $17.5 million.
Net cash provided by investing activities was $8.8 million for the three-month
period ended March 31, 2006, compared to net cash used in investing activities
was approximately $162.5of $70.1 million for the nine-monththree-month period ended September 30, 2005 compared to $54.7 million for the
nine-month period ended September 30, 2004.March 31, 2005. Included in
the nine-monththree-month period ended September 30,March 31, 2006 were cash inflows of $20.2 million
for net sales of marketable securities available for sale, offset by cash
outflows of $9.4 million for capital expenditures and $2.0 million for an
additional investment made in EntreMed, Inc., ($1.4 million investment in
EntreMed common stock and $0.6 million investment in EntreMed warrants).
Included in the three-month period ended March 31, 2005 were cash outflows of
$22.6$4.2 million for capital expenditures, $8.4 million for working capital
adjustments and acquisition costs related to theour October 2004 acquisition of
Penn T $120.8Limited, $47.0 million for net purchases of marketable securities
available for sale and $10.5 million for the exercise of warrants to purchase 7,000,000
shares of EntreMed common stock.
Included in the nine-month period ended September 30, 2004 were cash outflows of
$6.7 million for capital expenditures, $41.0 million for net purchases of
marketable securities available for sale and $7.0 million for an investment made
in Royalty Pharma Strategic Partners, LP, which is classified in other assets on
the consolidated balance sheet.
Net cash provided by financing activities was approximately $37.9$44.7 million for the nine-monththree-month
period ended September 30, 2005March 31, 2006, compared to $10.7net cash provided by financing
activities of $13.9 million for the nine-monththree-month period ended September 30, 2004. Included inMarch 31, 2005.
Prior to the nine-month periods
ended September 30, 2005 and 2004 were proceedsadoption of SFAS 123R, we presented all tax benefits of deductions
resulting from
31
(Thousands of dollars, except per share amounts, unless otherwise indicated) the exercise of common stock and warrantsoptions as operating cash flows in the
Statement of approximately $37.9Cash Flows. SFAS 123R requires excess tax benefits (i.e., the tax
benefit recognized upon exercise of stock options in excess of the benefit
recognized from recognizing compensation cost for those option) to be classified
as financing cash flows in the Statement of Cash Flows. Cash received from stock
option exercises for the three-month period ended March 31, 2006 was $23.1
million and $10.7 million, respectively.the excess tax benefit recognized was $21.6 million. Cash received
from stock option exercises for the three-month period March 31, 2005 was $13.9
million. Pursuant to SFAS 123R tax benefits resulting from the exercise of stock
options, which have been presented as operating cash flows prior to the adoption
of SFAS 123R are not reclassified to financing activities, but rather shall
continue to be presented as operating cash flows.
We expect increased research and product development costs, clinical trial
costs, expenses associated with the regulatory approval process, international
expansion costs and commercialization of products and capital investments. In addition, we expect
commercial expenses, such as marketing and market research expenses, to increase
leading up to and following a potential approval of REVLIMID(R) by the FDA.
However, existing cash, cash equivalents and marketable securities available for
sale, combined with expected net product sales and revenues from various
research, collaboration and royalties agreements are expected to provide
sufficient capital resources to fund our operations for the foreseeable future.
CONTRACTUAL OBLIGATIONS
Our major outstanding contractual obligations relate primarily to our
convertible note obligation, operating leases, ALKERAN(R) supply and
distribution agreement, Penn Pharmaceutical HoldingServices Limited technical services
agreement employment agreements and certain other contractual commitments. For more information on
these contractual obligations see Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and Notes 9 and 18 of the
Notes to the Consolidated Financial Statements contained in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2005.
27
The following table sets forth our contractual obligations as of September 30, 2005March 31, 2006
by contractual due dates:
- --------------------------------------------------------------------------------
Contractual Due Dates
Less Than 1-3 3-5 More Than
(IN MILLIONS $) 1 Year Years Years 5 Years Total
- --------------------------------------------------------------------------------
Convertible notes obligation $ -- $ 400.0 $ -- $ -- $ 400.0
Operating leases 3.0 5.3 5.0 4.5 17.8
ALKERAN(R) agreements 15.1 20.0 -- -- 35.1
Employment agreements 1.3 -- -- -- 1.3
Other contract commitments 4.0 8.2 2.5 -- 14.7
-------------------------------------------------
Total $ 23.4 $ 433.5 $ 7.5 $ 4.5 $ 468.9
================================================================================
In 2003, we adopted a Long-Term Incentive Plan, or LTIP, designed to provide key
officers and executives with long-term performance-based incentive opportunities
contingent upon achievement of pre-established corporate performance objectives,
and payable only if the officer or executive is employed at the end of the
performance cycle. There are three active plans. The performance cycle is
generally three years for the 2005, 2006 and 2007 Plans and ends on December
31st of each respective plan year.
Payouts may be in the range of 0% to 200% of the participant's salary for the
2005 and 2007 Plans and 0% to 150% of the participant's salary for the 2006
Plan. The maximum potential payout, assuming objectives are achieved at the 200%
level for the 2005 and 2007 Plans and 150% level for the 2006 Plan are $6.1
million, $4.9 million and $7.1 million for the 2005 Plan, 2006 Plan and 2007
Plan, respectively, and are not reflected in the above table. Such awards are
payable in cash or, at our discretion, we can elect to pay the same value in our
common stock based upon the fair value of our common stock at the payout date.
Upon a change in control, participants will be entitled to an immediate payment
equal to their target awards, or, if greater, an award based on actual
performance through the date of the change in control.
32
(Thousands of dollars, except per share amounts, unless otherwise indicated)
2005 FINANCIAL OUTLOOK
In our November 3, 2005 earnings release, we updated our financial guidance for
full year 2005. The updated 2005 financial guidance anticipates total revenue in
the $535 million range, research and development expenses in the $200 million
range and selling, general and administrative expenses in the $175 million
range. Although management believes that the November 3, 2005 financial guidance
update continues to reflect the current thinking of management, there can be no
assurance that revenues or expenses will develop in the manner projected or, if
the analysis on which the earnings projection was based were to be redone on the
date hereof, that there would be no change in the guidance.
----------------------------------------------------------------------------------------------------------------
Contractual Due Dates
Less Than 1-3 3-5 More Than
(IN MILLIONS $) 1 Year Years Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------
Convertible notes obligation $ - $ 400.0 $ - $ - $ 400.0
Operating leases 3.5 5.7 4.9 3.4 17.5
ALKERAN(R) agreements 23.4 67.3 - - 90.7
Other contract commitments 3.5 7.0 1.5 - 12.0
-----------------------------------------------------------------------
Total $ 30.4 $ 480.0 $ 6.4 $ 3.4 $ 520.2
=================================================================================================================
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both important to the portrayal of
our 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. Our
significant accounting policies are fully described in Note 1 of the Notes to
the Consolidated Financial Statements included in our Annual Report on Form 10-K
for the year ended December 31, 2004, as amended.2005. Our critical accounting policies are
disclosed in the Management's Discussion and Analysis of Financial Condition and
Results of Operation section of our Annual Report on Form 10-K for the year
ended December 31, 2004, as amended.2005. The only significant changechanges as it pertains to such
critical accounting policies relatesare as follows:
STOCK-BASED COMPENSATION: We adopted the provisions of SFAS 123R effective
January 1, 2006, which requires that the cost resulting from all share-based
payment transactions be recognized in the financial statements at their fair
values. We adopted SFAS 123R using the modified prospective application method
under which the provisions of SFAS 123R apply to our investmentnew awards and to awards
modified, repurchased, or cancelled after the adoption date. We use the
Black-Scholes option pricing model to estimate the fair value of options on the
date of grant which requires certain estimates by management including the
expected forfeiture rate and expected term of the options. Management also makes
decisions regarding the method of calculating the expected volatilities and the
risk free interest rate used in EntreMed, Inc.the model. Fluctuations in the market that
affect these estimates could have an impact on the resulting compensation cost.
Additionally, compensation cost for the portion of awards for which the
requisite service has not been rendered that are outstanding as of the adoption
date is recognized over the remaining service period after the adoption date
(see Note 6 to the Consolidated Financial Statements included in this quarterly
report for additional information).
OTHER-THAN-TEMPORARY IMPAIRMENTS OF EQUITY METHOD INVESTMENTS: On March 31,
2005, the Companywe exercised warrants to purchase 7,000,000 shares of EntreMed, Inc.
common stock (approximately 14.05% of the outstanding common shares) at
an aggregate cost of $10.5 million. The fair value of the warrants at the time
of exercise was estimated to be approximately $12.9 million. As a result, the
total value ascribed to the Company's investment was $23.4 million. Since the
Companyand, since we also holdshold 3,350,000 shares of EntreMed voting
preferred shares convertible into 16,750,000 shares of common stock, the Companywe
determined that it haswe have significant influence over its investeeEntreMed and isbegan applying
the equity method of accounting to itsour common stock investment effective March
31, 2005. At March
31, 2005, the residual investment, after takingOn February 2, 2006 we invested an additional $2.0 million in EntreMed
in a chargeprivate-placement transaction for which we received an additional 864,864
shares of approximately $4.4
million to write down the portion of the investmentEntreMed common stock and 432,432 warrants. The value ascribed to in-process
research and development (the charge was included in equity in losses of
affiliated company for the nine-month period ended September 30, 2005), exceeded
the Company's proportionate share of the EntreMed net assets by approximately
$13.4 million and consisted of goodwill and intangibles of approximately $12.6
million and $0.8 million, respectively. As prescribed under the
equity method of
accounting,investment was $1.4 million with the Company began recording its share of EntreMed gains and losses
based onremaining $0.6 million assigned to
the Company's common stock ownership percentage during the three-month
period ended June 30, 2005.warrants, which are being accounted for at fair value with changes in fair
value recorded through earnings.
The investment in EntreMed had a carrying value of approximately $17.5$15.3 million
at September 30, 2005,March 31, 2006, which exceedsis below the estimated fair value of our 7,864,864
shares of EntreMed common stock investment by approximately $0.7a
28
pproximately $5.2 million based on the closing share price of EntreMed common
stock on September 30, 2005.March 31, 2006.
The investment is reviewed to determine whether an other-than-temporary decline
in value of the investment has been sustained. If it is determined that the
investment has sustained an other-than-temporary decline in its value, the
investment will be written downwritten-down to its fair value. Such an evaluation is
judgmental and dependent on the specific facts and circumstances. Factors that
arewe considered by the Company in determining whether an other-than-temporary decline in value
has occurred include: the market value of the security in relation to its cost
basis, the period of time that the market value is below cost, the financial
condition of the investee and theour intent and ability to retain the investment
for a sufficient period of time to allow for recovery in the market value of the
investment. The Company evaluatesWe evaluate information that it iswe are aware of in addition to quoted
market prices, if any, in determining whether an other-than-temporary decline in
value exists.
33
(Thousands of dollars, except per share amounts, unless otherwise indicated)
RECENT DEVELOPMENTS
We currently are dependent on ChemSyn Laboratories, a Division of Eagle-Picher
Technologies, L.L.C., for the supply of the raw material for THALOMID(R).
ChemSyn Laboratories operates a cGMP, or current Good Manufacturing Practices,
compliant, FDA-approved facility for the manufacture of the bulk active
pharmaceutical ingredient, or API, for THALOMID(R). On April 11, 2005,
Eagle-Picher filed to reorganize under Chapter 11 of the Bankruptcy Code.
Eagle-Picher plans to continue to operate while it seeks to divest a number of
its operating units. In papers filed with the U.S. Bankruptcy Court in the
Southern District of Ohio in Cincinnati, Eagle-Picher indicated that it has
received a commitment for up to $50 million in debtor-in-possession financing
from a group of lenders led by Harris Trust and Savings Bank, subject to certain
limitations and conditions. We currently have adequate supplies of API on hand
to support long-term requirements. Although we do not believe that the
Eagle-Picher's Chapter 11 bankruptcy filing will result in any supply
disruptions, we will continue to monitor the status of the proceeding.
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
The Management's Discussion and Analysis of Financial Condition and Results of
Operations provided above contains certain forward-looking statements which
involve known and unknown risks, delays, uncertainties and other factors not
under our control which may cause actual results, performance and achievements
to be materially different from the results, performance or other expectations
implied by these forward-looking statements. These factors include the results
of current or pending clinical trials, our productsproducts' failure to demonstrate
efficacy or an acceptable safety profile, actions by the FDA, the financial
condition of suppliers including their solvency and ability to supply product
and other factors detailed herein and in our other filings with the Securities
and Exchange Commission.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion provides forward-looking quantitative and qualitative
information about our potential exposure to market risk. Market risk represents
the potential loss arising from 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.
We have 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, our investment policy specifies
credit quality standards for our investments and limits the amount of credit
exposure from any single issue, issuer or type of investment. Our investments
are also subject to interest rate risk and will decrease in value if market
interest rates increase. We do not use derivative instruments for trading
purposes. At September 30, 2005,March 31, 2006, our market risk sensitive instruments consisted of
a foreign currency denominated forward contract, marketable securities
available-for-sale, other equity investments and unsecured convertible notes
issued by us.
3429
(ThousandsFOREIGN CURRENCY DENOMINATED FORWARD CONTRACT: We may periodically utilize
foreign currency denominated forward contracts to hedge currency fluctuations of
transactions denominated in currencies other than the functional currency. At
March 31, 2006, we were party to foreign currency forward contracts to buy U.S.
dollars except per share amounts, unless otherwise indicated)and sell Swiss francs for a notional amount of $63.7 million. The
forward contracts expire on April 13, 2006 and are an economic hedge of a U.S.
dollar payable of a Swiss foreign entity, which is remeasured through earnings
each period based on changes in the spot rate. The fair value of the forward
contracts at March 31, 2006 and December 31, 2005 were net losses of
approximately $0.3 million and $0.2 million, respectively, and were recorded in
accrued expenses with the change in fair value recorded in current year's
earnings. Assuming that the March 31, 2006 exchange rates between the U.S.
dollar and the Swiss franc were to adversely change by a hypothetical ten
percent, the change in the fair value of the contract would decrease by
approximately $7.4 million. However, since the contracts hedge foreign currency
payables, any change in the fair value of the contracts would be offset by a
change in the underlying value of the hedged item.
MARKETABLE SECURITIES AVAILABLE FOR SALE: At September 30, 2005March 31, 2006, our marketable
securities available for sale consisted of U.S. treasury securities, government
sponsored agency mortgagesecurities, auction rate notes, mortgage-backed obligations, U.S. government agency bonds,
corporate debt securities, other asset-backed securities and 1,939,600 shares of
Pharmion Corporation common stock. Marketable securities available for sale are
carried at fair value, are held for an indefinite period of time and are
intended to be used to meet our ongoing liquidity needs. Marketable securities
with original maturities of three months or less when purchased are generally
classified as cash equivalents. Unrealized gains and losses on available for
sale securities, which are deemed to be temporary, are reported as a separate
component of stockholders' equity, net of tax. 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, net. During the quarter ended March 31, 2006, we determined
that certain securities with an amortized cost basis of $11.0 million had
sustained an other-than-temporary impairment and recognized a $3.3 million
impairment loss related to these securities due to reductions in their future
estimated cash flows.
As of September 30, 2005,March 31, 2006, the principal amounts, fair values and related weighted
average interest rates of our investments in debt securities classified as
marketable securities available-for-sale were as follows:
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Duration
------------------------------------------------------------------------------------------------------------------------------
Less Than 1-3 3-5 5-71 1 to 3 3 to 5 5 to 7 Over 7 Years Total
(IN THOUSANDS $) 1 Year Years Years Years
7 Years Total
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Principal amount $345,881 $84,214 $172,634 $24,150 $26,513 $653,392$ 379,019 $81,308 $226,739 $14,500 $2,900 $704,466
Fair value $346,159 $85,477 $170,731 $20,647 $18,369 $641,383$ 376,870 $81,293 $208,853 $13,735 $2,828 $683,579
Average Interest Rate 3.9%interest rate 4.7% 4.7% 4.4% 4.8% 6.5% 4.0% 4.3%
================================================================================================1.5% N/A 4.5%
PHARMION COMMON STOCKSTOCK: At September 30, 2005,March 31, 2006, we held a total of 1,939,600 shares of
Pharmion Corporation common stock, which based on the closing share price of
Pharmion common stock on September 30, 2005 had an estimated fair value of
approximately $42.3$35.0 million (based on the closing price reported by the National
Association of Securities Dealers Automated Quotations, or NASDAQ system, and
which exceeded the cost by approximately $22.1$14.8 million. The amount by which the
fair value exceeded the cost (i.e., the unrealized gain) was included in
Accumulated Other Comprehensive Income in the Stockholders' Equity section of
the Consolidated Balance Sheet. The fair value of the Pharmion common stock
investment is subject to market price volatility and any increase or decrease in
Pharmion's common stock quoted market price will have a similar percentage
increase or decrease in the fair value of theour investment.
30
INVESTMENT IN AFFILIATED COMPANIES: At September 30, 2005,March 31, 2006, we held 7,000,0007,864,864 shares
of EntreMed, Inc. common stock to which we are applying the equity method of
accounting. The investment in EntreMed had a carrying value of approximately
$17.5$15.3 million at September 30, 2005,March 31, 2006, which exceedsis below the estimated fair value of our
7,864,864 shares of EntreMed common stock investment by approximately $0.7$5.2 million based on
the closing share price of EntreMed common stock on September 30, 2005.March 31, 2006. Under the
equity method, the investment is reviewed to determine whether an
other-than-temporary decline in value of the investment has been sustained. If
it is determined that the investment has sustained an other-than-temporary
decline in its value, the investment will be written down to its fair value.
Such an evaluation is judgmental and dependent on the specific facts and
circumstances. Factors that
are considered in determining whether an other-than-temporary decline in value
has occurred include: the market valueSee our discussion of the security in relation to its cost
basis, the period of time that the market value is below cost, the financial
condition of the investee and the intent and ability to retain the investment
for a sufficient period of time to allow for recovery in the market value of the
investment. We evaluate information that we are aware of in addition to quoted
market prices, if any, in determining whether an other-than-temporary decline in
value exists. For more information on the EntreMed equity method investment see
Note 10 of the Notes to Unauditied Consolidated Financial Statements and further
discussionsCritical Accounting Policy contained in
Item 2, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
35
(ThousandsOperation for factors that are considered in determining whether an
other-than-temporary decline in value has occurred.
We also hold warrants to purchase an additional 432,432 shares of dollars, exceptEntreMed
common stock at a conversion price of $2.3125 per share amounts, unless otherwise indicated)warrant. The warrants are
being accounted for at fair value with changes in fair value recorded through
earnings. At March 31, 2006, the warrants had a fair value of $0.7 million and
are classified in other non-current assets. Since the warrants give us the
right, but not an obligation, to purchase the shares of EntreMed common stock,
the fair value of the warrants can never fall below zero and, the maximum
cumulative charge is $0.6 million, which is fair value of the warrants, computed
using the Black-Scholes model, on February 2, 2006, or the date of the
investment.
CONVERTIBLE DEBT: In June 2003, we issued an aggregate principal amount of
$400.0 million of unsecured convertible notes. The convertible notes have a five-year term
and a coupon rate of 1.75% payable semi-annually. The outstandingsemi-annually on June 1 and December 1. Each
$1,000 principal amount of convertible notes is convertible into 82.5592 shares
of common stock, or a conversion rate of $12.1125 per share, which represented a
50% premium to the closing price on May 28, 2003 of our common stock of $8.075
per share, after adjusting prices for the two-for-one stock splits affected on
February 17, 2006 and October 22, 2004. The debt issuance costs related to these
convertible 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 noteholders can be convertedconvert the outstanding notes at any time into an
aggregate of 16,511,51033,021,617 shares of common stock at the conversion price. In
addition, the noteholders have the right to require us to redeem the notes in
cash at a conversion price of $24.225 per share (for more
information see Note 6equal to 100% of the Notesprincipal amount to be redeemed, plus
accrued interest, prior to maturity in the event of a change of control and
certain other transactions defined as a "fundamental change," in the indenture
governing the notes. We registered the notes and common stock issuable upon
conversion of the notes with the Securities and Exchange Commission, and are
required to use reasonable best efforts to keep the related registration
statement effective for the defined period. Subsequent to the unaudited Consolidated Financial
Statements).June 2003 issuance
date, an immaterial amount of principal was converted into common stock.
At September 30, 2005,March 31, 2006, the fair value of our convertible notes exceeded the carrying
value of $400.0 million by approximately $462.0 million,$1.0 billion, which we believe reflects
the increase in the market price of our common stock to $54.32$44.22 per share as of
September 30, 2005.March 31, 2006. 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 our
stock price generally results in an increase in the fair value of convertible
debt, but does not impact the carrying value.
3631
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this quarterly report, we carried out an evaluation,
under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)). Based upon the
foregoing evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission.
(b) Changes in Internal Control Over Financial Reporting. There have not
been any changes in our internal control over financial reporting
during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
3732
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- NoneWe are not engaged in any material legal proceedings.
Item 1A. Risk Factors
The risk factors included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2005 have not materially changed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
- NoneWe held a Special Meeting of stockholders on February 16, 2006. At this meeting,
our stockholders were asked to approve an amendment to our Certificate of
Incorporation to increase the total number of shares of capital stock we are
authorized to issue from 280,000,000 to 580,000,000. The amendment to our
Certificate of Incorporation was approved by the following votes on a pre-split
basis:
NUMBER OF SHARES
FOR AGAINST ABSTAINED
----------- ---------------- ---------
105,167,061 1,160,152 160,644
Item 5. Other Information - None
Item 6. Exhibits
3.2 Bylaws of the Company.
10.1 Services Agreement effective May 1, 2006 between the
Company and John W. Jackson
10.2 Employment Agreement effective May 1, 2006 between the
Company and Sol J. Barer
10.3 Employment Agreement effective May 1, 2006 between the
Company and Robert J. Hugin
31.1 Certification by the Company's Chief Executive Officer
dated November 9, 2005.May 10, 2006.
31.2 Certification by the Company's Chief Financial Officer
dated November 9, 2005.May 10, 2006.
32.1 Certification by the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350 dated November 9, 2005.May 10, 2006.
32.2 Certification by the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 dated November 9, 2005.
38May 10, 2006.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELGENE CORPORATION
DATE November 9, 2005May 10, 2006 By: /s//s/Robert J. Hugin
--------------------------- ---------------------------------------------------------- --------------------------------
Robert J. Hugin
Senior Vice President, Chief Operating Officer and
Chief Financial Officer
DATE November 9, 2005May 10, 2006 By: /s//s/James R. Swenson
--------------------------- ---------------------------------------------------------- --------------------------------
James R. Swenson
Controller
(Chief Accounting Officer)
3934