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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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,
2005
|_| 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: 000-14879
Cytogen Corporation
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 22-2322400
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(State of Incorporation) (I.R.S. Employer Identification No.)
650 College Road East, Suite 3100, Princeton, New Jersey 08540-5308
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(Address of principal executive offices)(Zip Code)
(609) 750-8200
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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 the
filing requirements for at least the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d)of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
|_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common Stock, $.01 par value Outstanding at November 10, 2005:
18,741,488
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CYTOGEN CORPORATION
QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2005
TABLE OF CONTENTS
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Page
----
PART I. FINANCIAL INFORMATION............................................ 1
Item 1. Consolidated Financial Statements (unaudited)............... 1
Consolidated Balance Sheets as of September 30, 2005
and December 31, 2004..................................... 2
Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 2005 and
2004...................................................... 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2005 and 2004 ........................ 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 32
Item 4. Controls and Procedures..................................... 33
PART II. OTHER INFORMATION................................................ 35
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.................................................. 35
Item 5. Other Information........................................... 35
Item 6. Exhibits.................................................... 35
SIGNATURES................................................................ 37
PROSTASCINT(R), QUADRAMET(R) and ONCOSCINT(R) are registered United States
trademarks of Cytogen Corporation. All other trade names, trademarks or
servicemarks appearing in this Quarterly Report on Form 10-Q are the property of
their respective owners, and not the property of Cytogen Corporation or any of
its subsidiaries.
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-1-
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share and per share data)
(Unaudited)
SEPTEMBER 30, 2005 DECEMBER 31,
2004
------------------ -----------------
ASSETS:
Current assets:
Cash and cash equivalents....................................... $ 23,467 $ 13,046
Short-term investments.......................................... -- 22,779
Accounts receivable, net........................................ 1,606 1,406
Inventories..................................................... 4,542 3,623
Prepaid expenses................................................ 1,312 1,242
Other current assets............................................ 111 258
------------- -------------
Total current assets.......................................... 31,038 42,354
Property and equipment, less accumulated depreciation
and amortization of $887 and $656 at September 30, 2005 and
December 31, 2004, respectively................................. 847 787
QUADRAMET license fee, less accumulated amortization
of $1,499 and $976 at September 30, 2005 and December 31, 2004,
respectively.................................................... 6,501 7,024
Other assets......................................................... 470 248
------------- -------------
$ 38,856 $ 50,413
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term liabilities........................ $ 18 $ 2,296
Liability related to joint venture.............................. -- 396
Accounts payable and accrued liabilities........................ 6,163 7,644
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Total current liabilities..................................... 6,181 10,336
Warrant liability.................................................... 2,832 --
Other long-term liabilities.......................................... 33 47
------------- -------------
Total liabilities.............................................. 9,046 10,383
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Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,400,000 shares
authorized-Series C Junior Participating Preferred
Stock, $.01 par value, 200,000 shares authorized,
none issued and outstanding................................... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 18,741,488 and 15,489,116 shares issued
and outstanding at September 30, 2005 and December 31,
2004, respectively............................................ 188 155
Additional paid-in capital...................................... 438,082 426,153
Unearned compensation........................................... (774) --
Accumulated other comprehensive income.......................... 47 --
Accumulated deficit............................................. (407,733) (386,278)
------------- -------------
Total stockholders' equity.................................... 29,810 40,030
------------- -------------
$ 38,856 $ 50,413
============= =============
The accompany notes are an integral part of these statements.
-2-
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------- ------------------------------
2005 2004 2005 2004
----------- ------------- ----------- -----------
REVENUES:
Product revenue:
QUADRAMET............................................. $ 1,991 $ 1,924 $ 6,198 $ 5,394
PROSTASCINT........................................... 1,525 1,308 5,348 5,347
Other................................................. -- -- -- 1
----------- ------------- ----------- ------------
Total product revenue.............................. 3,516 3,232 11,546 10,742
License and contract revenue............................ 35 29 155 72
----------- ------------- ----------- ------------
Total revenues..................................... 3,551 3,261 11,701 10,814
----------- ------------- ----------- ------------
OPERATING EXPENSES:
Cost of product revenue................................. 2,386 2,188 7,064 6,983
Selling, general and administrative..................... 6,740 5,343 20,456 14,148
Research and development................................ 1,746 608 3,847 1,953
Equity in loss of joint venture......................... 677 805 2,879 2,156
----------- ------------- ----------- ------------
Total operating expenses........................... 11,549 8,944 34,246 25,240
----------- ------------- ----------- ------------
Operating loss..................................... (7,998) (5,683) (22,545) (14,426)
INTEREST INCOME............................................ 195 133 492 303
INTEREST EXPENSE........................................... (21) (46) (105) (139)
DECREASE IN VALUE OF WARRANT LIABILITY..................... 703 -- 703 --
----------- ------------- ----------- ------------
NET LOSS $ (7,121) $ (5,596) $ (21,455) $ (14,262)
=========== ============= =========== ============
BASIC AND DILUTED NET LOSS PER SHARE....................... $ (0.40) $ (0.36) $ (1.31) $ (0.99)
=========== ============= =========== ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................. 17,857 15,435 16,326 14,386
=========== ============= =========== ============
The accompany notes are an integral part of these statements.
-3-
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2005 2004
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (21,455) $ (14,262)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................. 753 760
Stock-based compensation expenses............................. 78 15
Decrease in value of warrant liability........................ (703) --
Stock-based milestone payment................................. 500 --
Decrease in provision for doubtful accounts................... (13) --
Amortization of premiums/discounts on investments, net........ 52 44
Deferred rent................................................. 16 19
Write down of property and equipment.......................... -- 100
Loss on disposition of assets................................. -- 3
Changes in assets and liabilities:
Receivables................................................. (187) 61
Inventories................................................. (914) (142)
Other assets................................................ (98) (100)
Liability related to joint venture.......................... (396) --
Accounts payable and accrued liabilities.................... (1,497) 437
------------- ------------
Net cash used in operating activities......................... (23,864) (13,065)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of short-term investments................................. 22,727 12,500
Purchases of short-term investments.................................. -- (23,017)
Purchases of property and equipment.................................. (295) (463)
------------- ------------
Net cash provided by (used in) investing activities........... 22,432 (10,980)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............................... 10,610 23,999
Proceeds from issuance of warrants................................... 3,535 --
Payment of long-term liabilities..................................... (2,292) (124)
------------- ------------
Net cash provided by financing activities..................... 11,853 23,875
------------- ------------
Net increase (decrease) in cash and cash equivalents................. 10,421 (170)
Cash and cash equivalents, beginning of period....................... 13,046 13,630
------------- ------------
Cash and cash equivalents, end of period............................. $ 23,467 $ 13,460
============= ============
Supplemental disclosure of non-cash information:
Capital lease of equipment........................................... $ -- $ 70
============= ============
Unrealized holding gain on marketable securities..................... $ 47 $ --
============= ============
Supplemental disclosure of cash information:
Cash paid for interest............................................... $ 386 $ 99
============= ============
The accompany notes are an integral part of these statements.
-4-
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY
BACKGROUND
Founded in 1980, Cytogen Corporation (the "Company" or "Cytogen") of
Princeton, NJ is a biopharmaceutical company that acquires, develops and
commercializes innovative molecules targeting the sites and stages of cancer
progression. The Company's marketed products include QUADRAMET(R) (samarium
Sm-153 lexidronam injection) and PROSTASCINT(R) (capromab pendetide) kit for the
preparation of Indium In-111 capromab pendetide in the United States.
The Company also has exclusive United States marketing rights to
COMBIDEX(R) (ferumoxtran-10) for all applications, and the exclusive right to
market and sell ferumoxtol (formerly Code 7228) for oncology applications in the
United States. On March 3, 2005, the U.S. Food and Drug Administration's (the
"FDA") Oncologic Drugs Advisory Committee (ODAC) voted to not recommend approval
of the proposed broad indication for COMBIDEX. On March 24, 2005, Advanced
Magnetics, Inc. informed Cytogen that Advanced Magnetics received an approvable
letter from the FDA for COMBIDEX, subject to certain conditions.
The Company is also developing therapeutics targeting prostate-specific
membrane antigen ("PSMA"), a protein highly expressed on the surface of prostate
cancer cells and the neovasculature of solid tumors.
The Company has had a history of operating losses since its inception. The
Company currently relies on two products, PROSTASCINT and QUADRAMET, for
substantially all of its revenues. In addition, the Company has, from time to
time, stopped selling certain products, such as NMP22 BLADDERCHEK, BRACHYSEED
and ONCOSCINT, that the Company previously believed would generate significant
revenues. The Company's products are subject to significant regulatory review by
the FDA and other federal and state agencies, which requires significant time
and expenditures in seeking, maintaining and expanding product approvals. In
addition, the Company relies on collaborative partners to a significant degree,
among other things, to manufacture its products, to secure raw materials, and to
provide licensing rights to their proprietary technologies for the Company to
sell and market to others. The Company is also subject to credit concentration
risks as a limited number of its customers provide a high percentage of total
revenues and corresponding receivables.
The Company has also incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend, substantial
funds to implement its planned product development efforts, including
acquisition of products and complementary technologies, research and
development, clinical studies and regulatory activities, and to further the
Company's marketing and sales programs. The Company expects that it will have
additional
-5-
requirements for debt or equity capital, irrespective of whether or when it
reaches profitability, for further product development costs, product and
technology acquisition costs and working capital.
BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Cytogen and its subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
BASIS OF PRESENTATION
The consolidated financial statements and notes thereto of Cytogen are
unaudited and include all adjustments which, in the opinion of management, are
necessary to present fairly the financial condition and results of operations as
of and for the periods set forth in the Consolidated Balance Sheets,
Consolidated Statements of Operations and Consolidated Statements of Cash Flows.
All such accounting adjustments are of a normal, recurring nature. The
consolidated financial statements do not include all of the information and
footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles and should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K, as amended, filed with the
Securities and Exchange Commission, which includes financial statements as of
and for the year ended December 31, 2004. The results of the Company's
operations for any interim period are not necessarily indicative of the results
of the Company's operations for any other interim period or for a full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash in banks and all
highly-liquid investments with a maturity of three months or less at the time of
purchase.
SHORT-TERM INVESTMENTS
The Company had no short-term investments at September 30, 2005 compared to
$22.8 million at December 31, 2004, which consisted of investments in U.S.
government agency notes. The Company had the ability and intent to hold these
investments until maturity and therefore had classified the investments as
held-to-maturity. Held-to-maturity investments were recorded at amortized cost,
adjusted for the accretion of discounts or premiums. Discounts or premiums were
accreted into interest income over the life of the related investment using the
straight-line
-6-
method, which approximated the effective yield method. Dividend and interest
income were recognized when earned.
INVENTORIES
The Company's inventories are primarily related to PROSTASCINT. Inventories
are stated at the lower of cost or market using the first-in, first-out method
and consisted of the following (all amounts in thousands):
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
Raw materials....................... $ 291 $ 427
Work-in-process..................... 3,262 2,345
Finished goods...................... 989 851
--------- ----------
$ 4,542 $ 3,623
========= ==========
NET LOSS PER SHARE
Basic net loss per common share is calculated by dividing the Company's net
loss by the weighted-average common shares outstanding during each period.
Diluted net loss per common share is the same as basic net loss per share for
each of the three and nine month periods ended September 30, 2005 and 2004
because the inclusion of common stock equivalents, which consist of warrants and
options to purchase shares of the Company's common stock, would be antidilutive
due to the Company's losses.
VARIABLE INTEREST ENTITIES
The Company follows the revised Financial Accounting Standards Board
("FASB") Interpretation No. 46 ("FIN 46R"), "Consolidation of Variable Interest
Entities", which addresses how a business enterprise should evaluate whether it
has a controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity.
In June 1999, Cytogen entered into a joint venture with Progenics
Pharmaceuticals, Inc. ("Progenics," and collectively with Cytogen, the
"Members") to form the PSMA Development Company LLC (the "Joint Venture"). The
Joint Venture is currently developing antibody-based and vaccine
immunotherapeutic products utilizing Cytogen's exclusively licensed
prostate-specific membrane antigen ("PSMA") technology. The Joint Venture is
owned equally by the Members (see Note 2). Cytogen accounts for the Joint
Venture using the equity method of accounting. The Company is not required to
consolidate the Joint Venture under the requirements of FIN 46R.
STOCK-BASED COMPENSATION
The Company follows the intrinsic value method of accounting for
stock-based employee compensation in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The Company records
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unearned compensation for option grants to employees for the amount, if any, by
which the market price per share exceeds the exercise price per share at the
measurement date, which is generally the grant date.
The Company follows the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." Had compensation cost for options
been recognized in the consolidated statements of operations using the fair
value method of accounting, the Company's net loss and net loss per share would
have been as follows (all amounts in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------
2005 2004 2005 2004
---- ---- ---- ----
Net loss, as reported................................... $(7,121) $(5,596) $(21,455) $(14,262)
Add: Stock-based employee compensation
expense included in reported net loss ............. 65 4 78 15
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards............. (525) (1,088) (1,653) (1,662)
------- ------- --------
Pro forma net loss...................................... $(7,581) $(6,680) $(23,030) $(15,909)
======= ======= ======== ========
Basic and diluted net loss per
share, as reported................................... $ (0.40) $ (0.36) $ (1.31) $ (0.99)
======= ======= ======== ========
Pro forma basic and diluted net
loss per share....................................... $ (0.42) $ (0.43) $ (1.41) $ (1.11)
======= ======= ======== ========
On June 14, 2005, the Company awarded an aggregate of 168,600 shares of
restricted common stock, $0.01 par value per share, to employees of the Company
pursuant to the terms of the Company's 2004 Stock Incentive Plan, as long term
incentive compensation. Such restricted shares are subject to future vesting
over a period of six years, and will be issued upon the satisfaction of such
vesting provisions and other terms and conditions related thereto. The Company
recorded $868,000 of unearned compensation upon the granting of the restricted
stock, which represented the fair market value of Cytogen's common stock on the
date of grant. The unearned compensation is being amortized over the six year
vesting period. For the three and nine months ended September 30, 2005, the
Company recorded a charge of $50,000 and $58,000, respectively, in the
accompanying statements of operations for the amortization of unearned
compensation. The Company reversed $36,000 of unearned compensation related to
unvested restricted stock upon the termination of certain employees in 2005.
OTHER COMPREHENSIVE INCOME OR LOSS
Other comprehensive income consisted of an unrealized holding gain or loss
on marketable securities. For the three months ended September 30, 2005, the
unrealized holding loss on those securities was $3,000 and, as a result, the
comprehensive loss for the three months ended September 30, 2005 was $7,124,000.
For the nine months ended September 30, 2005, the
-8-
unrealized holding gain on the securities was $47,000 and, as a result, the
comprehensive loss for the nine months ended September 30, 2005 was $21,408,000.
There was no other comprehensive income or loss in the three and nine months
ended September 30, 2004.
RECENT ACCOUNTING PRONOUNCEMENTS
Abnormal Inventory Costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"), to clarify that abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage) should be recognized as current period charges, and that fixed
production overheads should be allocated to inventory based on the normal
capacity of production facilities. This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Accordingly,
the Company will adopt SFAS No. 151 in its fiscal year beginning January 1,
2006. The Company is currently evaluating the impact of adopting this statement.
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which revised SFAS No. 123 and superseded APB Opinion No. 25. SFAS No. 123(R)
requires that companies recognize compensation expense associated with grants of
stock options and other equity instruments to employees in the financial
statements effective as of the first interim or annual reporting period that
begins after June 15, 2005. In April 2005, the Securities and Exchange
Commission announced the adoption of a new rule allowing companies to implement
SFAS No. 123(R) at the beginning of their next fiscal year that begins after
June 15, 2005. Accordingly, the Company will adopt SFAS No. 123(R) in its fiscal
year beginning January 1, 2006. Under this new standard, compensation cost will
be measured based on the fair value of the instrument on the grant date and will
be recognized over the vesting period. This pronouncement applies to all grants
after the effective date and to the unvested portion of stock options
outstanding as of the effective date. SFAS No. 123(R) eliminates the Company's
ability to account for such transactions using the intrinsic method currently
used by the Company. SFAS No. 123(R) also requires that companies recognize
compensation expense associated with purchases of shares of common stock by
employees at a discount to market value under employee stock purchase plans that
do not meet certain criteria. Although management has not yet determined the
impact of the adoption of this standard, it is expected to have a material
effect on the Company's consolidated financial statements.
RECLASSIFICATION
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the current year presentation.
-9-
2. EQUITY LOSS IN THE PSMA DEVELOPMENT COMPANY LLC
In June 1999, Cytogen entered into a joint venture with Progenics to form
the PSMA Development Company LLC (the "Joint Venture"), a development stage
enterprise. The Joint Venture is currently developing antibody-based and vaccine
immunotherapeutic products utilizing Cytogen's proprietary PSMA technology. The
Joint Venture is owned equally by Cytogen and Progenics.
Cytogen accounts for the Joint Venture using the equity method of
accounting. Cytogen has recognized 50% of the Joint Venture's operating results
in its consolidated statements of operations for the three and nine months ended
September 30, 2005 and 2004. For the three and nine months ended September 30,
2005, Cytogen recognized $677,000 and $2.9 million, respectively, of the Joint
Venture's losses, compared to $805,000 and $2.2 million of the Joint Venture's
losses in the same periods of 2004.
On June 6, 2005, Cytogen and Progenics agreed on a work plan and annual
budget for the Joint Venture for 2005. In 2005, the Members each expect to
provide up to $5.7 million in funding for the development of the PSMA
technologies through the Joint Venture. Each Member has contributed capital of
$3.5 million to the Joint Venture for the nine months ended September 30, 2005.
The report of the independent auditors on the financial statements of the Joint
Venture included in the Company's Annual Report on Form 10-K, as amended, for
the year ended December 31, 2004 filed with the Securities and Exchange
Commission, contained an explanatory paragraph which states that the Joint
Venture has suffered recurring losses from operations and has a net capital
deficiency that raises substantial doubt about its ability to continue as a
going concern, and that its financial statements do not include any adjustments
that might result from the outcome of that uncertainty. The Members have not
committed to fund the Joint Venture beyond December 31, 2005 at this time,
except for obligations under existing contractual commitments as of that date.
The Joint Venture may incur losses in future years provided an agreement between
the Members is reached on research program goals and budgets for periods after
2005 and the Joint Venture's operations are funded.
As of September 30, 2005, the carrying value of the Company's investment in
the Joint Venture was $175,000, which represents the Company's investment in the
Joint Venture, less its cumulative share of losses, and is recorded in other
assets in the accompanying consolidated balance sheet. At December 31, 2004,
Cytogen's cumulative share of losses exceeded its investment in the Joint
Venture resulting in a liability to the Joint Venture of $396,000, as recorded
in the Liability Related to Joint Venture in the accompanying consolidated
balance sheet. Selected financial statement information of the Joint Venture is
as follows (all amounts in thousands):
-10-
BALANCE SHEET DATA:
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------------ -------------------
ASSETS:
Cash..................................................................... $ 1,103 $ --
Receivable from Progenics Pharmaceuticals, a related
party................................................................. 48 --
Prepaid expenses......................................................... 19 12
------------------ ------------------
$ 1,170 $ 12
================== ==================
LIABILITIES AND MEMBERS' EQUITY (DEFICIT):
Accounts payable to Cytogen Corporation, a related party................. $ 65 $ 4
Accounts payable to Progenics Pharmaceuticals, Inc.,
a related party..................................................... -- 189
Accounts payable and accrued expenses.................................... 773 629
------------------ ------------------
Total liabilities............................................... 838 822
------------------ ------------------
Capital contributions.................................................... 30,198 23,298
Deficit accumulated during the development stage......................... (29,866) (24,108)
------------------ ------------------
Total members' equity (deficit)................................. 332 (810)
------------------ ------------------
Total liabilities and members' equity (deficit)................. $ 1,170 $ 12
================== ==================
INCOME STATEMENT DATA:
THREE NINE
MONTHS ENDED MONTHS ENDED FOR THE PERIOD
SEPTEMBER 30, SEPTEMBER 30, FROM JUNE 15, 1999
----------------------------- ----------------------------- (INCEPTION) TO
2005 2004 2005 2004 SEPTEMBER 30, 2005
---- ---- ---- ---- ------------------
Interest income...................$ 3 $ 1 $ 6 $ 6 $ 247
Total expenses.................... 1,358 1,611 5,764 4,318 30,113
------------ ------------ ------------ ----------- ----------------
Net loss..........................$ (1,355) $ (1,610) $ (5,758) $ (4,312) $ (29,866)
============ ============ ============ ============ ================
In June 2005, the Joint Venture entered into a collaboration agreement (the
"SGI Agreement") with Seattle Genetics, Inc. ("SGI"). Under the SGI Agreement,
SGI provided an exclusive worldwide license to its proprietary antibody-drug
conjugate technology (the "ADC Technology") to the Joint Venture. Under the
license, the Joint Venture has the right to use the ADC Technology to link
cell-killing drugs to the Joint Venture's monoclonal antibodies that target
prostate-specific membrane antigen. During the initial research term of the SGI
Agreement, SGI will also provide technical information to the Joint Venture
related to implementation of the licensed technology, which period may be
extended for an additional period upon payment of an additional fee. The Joint
Venture may replace PSMA with another antigen, subject to certain restrictions,
upon payment of an antigen replacement fee. The ADC Technology is based, in
part, on technology licensed by SGI from third parties (the "Licensors"). The
Joint Venture is responsible for research, product development, manufacturing
and commercialization of all products under the SGI Agreement. The Joint Venture
may sub-license the ADC Technology to a third-party to manufacture the ADC's for
both research and commercial use. The Joint Venture made a $2.0
-11-
million technology access payment in the second quarter of 2005 to SGI upon
execution of the SGI Agreement and will make additional maintenance payments
during the term of the SGI Agreement. In addition, the Joint Venture will make
payments aggregating $15.0 million, upon the achievement of certain defined
milestones, and will pay royalties to SGI and its Licensors, as applicable, on a
percentage of net sales, as defined. In the event that SGI provides materials or
services to the Joint Venture under the SGI Agreement, SGI will receive supply
and/or labor cost payments from the Joint Venture at agreed-upon rates. The
Joint Venture's monoclonal antibody project is currently in the pre-clinical
phase of research and development. All costs incurred by the Joint Venture under
the SGI Agreement during the research and development phase of the project will
be expensed in the period incurred. The SGI Agreement terminates at the later of
(a) the tenth anniversary of the first commercial sale of each licensed product
in each country or (b) the latest date of expiration of patents underlying the
licensed products. The Joint Venture may terminate the SGI Agreement upon
advance written notice to SGI. SGI may terminate the SGI Agreement if the Joint
Venture breaches an SGI in-license that is not cured within a specified time
period after written notice. In addition, either party may terminate the SGI
Agreement, upon breach by the other party that is not cured within a specified
time period, after written notice or in the event of bankruptcy of the other
party. The ability of the Joint Venture to comply with the terms of the SGI
Agreement will depend on agreement by the Members regarding work plans and
budgets of the Joint Venture in future years.
3. BRISTOL-MYERS SQUIBB MEDICAL IMAGING, INC.
Effective January 1, 2004, the Company entered into a new manufacturing and
supply agreement with Bristol-Myers Squibb Medical Imaging, Inc. ("BMSMI"),
whereby BMSMI will manufacture, distribute and provide order processing and
customer service for Cytogen relating to QUADRAMET. Under the terms of the
agreement, Cytogen is obligated to pay at least $4.2 million annually, subject
to future annual price adjustment, through 2008, unless terminated by BMSMI or
Cytogen on two years prior written notice. This agreement will automatically
renew for five successive one-year periods unless terminated by BMSMI or Cytogen
on two years prior written notice. During each of the three month periods ended
September 30, 2005 and 2004, Cytogen incurred $1.1 million of manufacturing
costs for QUADRAMET, all of which is included in Cost of Product Revenue. During
each of the nine month periods ended September 30, 2005 and 2004, Cytogen
incurred $3.2 million of manufacturing costs for QUADRAMET. The Company also
pays BMSMI a variable amount per month for each QUADRAMET order placed to cover
the costs of customer service which is included in Selling, General and
Administrative Expenses.
The two primary components of QUADRAMET, particularly Samarium-153 and
EDTMP, are provided to BMSMI by outside suppliers. BMSMI obtains its supply of
Samarium-153 from a sole supplier, and EDTMP from another sole supplier.
Alternative sources for these components may not be readily available, and any
alternate suppliers would have to be identified and qualified, subject to all
applicable regulatory guidelines. If BMSMI cannot obtain sufficient quantities
of these components on commercially reasonable terms, or in a timely manner, it
would be unable to manufacture QUADRAMET on a timely and cost-effective basis.
-12-
4. LAUREATE PHARMA, L.P.
In September 2004, the Company entered into a non-exclusive manufacturing
agreement with Laureate Pharma, L.P. pursuant to which Laureate shall
manufacture PROSTASCINT and its primary raw materials for Cytogen in Laureate's
Princeton, New Jersey facility. Laureate is the sole manufacturer of PROSTASCINT
and its underlying antibodies. The agreement will terminate, unless terminated
earlier pursuant to its terms, upon Laureate's completion of the specified
production campaign for PROSTASCINT and shipment of the resulting products from
Laureate's facility. Under the terms of the agreement, the Company is obligated
to pay at least an aggregate of $5.1 million through 2006. Approximately $4.1
million has been incurred under this agreement through September 30, 2005, and
is recorded as inventory in the accompanying consolidated balance sheet as of
September 30, 2005. Of this amount, approximately $12,000 and $1.8 million were
recorded during the three and nine month periods ended September 30, 2005.
5. THE DOW CHEMICAL COMPANY
On May 6, 2005, the Company entered into a license agreement with The Dow
Chemical Company to create a targeted oncology product designed to treat
prostate and other cancers. The agreement applies proprietary MeO-DOTA
bifunctional chelant technology from Dow to radiolabel Cytogen's PSMA antibody
with a therapeutic radionuclide. Under the agreement, proprietary chelation
technology and other capabilities, provided through ChelaMedSM
radiopharmaceutical services from Dow, will be used to attach a therapeutic
radioisotope to the same murine monoclonal antibody utilized in Cytogen's
PROSTASCINT molecular imaging agent which is called 7E11-C5.3 ("7E11"). The 7E11
antibody was excluded from the PSMA technology licensed to the Joint Venture. As
a result of the agreement, Cytogen is obligated to pay a minimal license fee and
aggregate future milestone payments of $1.9 million for each licensed product
and royalties based on sales of related products, if any. Unless terminated
earlier, the Dow agreement terminates at the later of (a) the tenth anniversary
of the date of first commercial sale for each licensed product or (b) the
expiration of the last to expire valid claim that would be infringed by the sale
of the licensed product. The Company may terminate the license agreement with
Dow on 90 days written notice.
6. INCREASE IN AUTHORIZED COMMON STOCK
On June 14, 2005, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the total authorized shares
of common stock of the Company from 25,000,000 to 50,000,000 shares.
7. SALE OF COMMON STOCK AND WARRANTS
On July 19, 2005, the Company announced that it entered into a Securities
Purchase Agreement with certain institutional investors for the sale of
3,104,380 shares of its common stock and 776,096 warrants to purchase shares of
its common stock having an exercise price of $6.00 per share, through a
registered direct offering. In exchange for $4.50, the purchasers received one
share of common stock and warrants to purchase .25 shares of common stock. These
warrants are exercisable for ten years, beginning six months after their
issuance. The
-13-
transaction provided net proceeds of approximately $13.9 million to Cytogen. The
transaction closed on July 20, 2005 and August 2, 2005.
The shares of common stock and the shares of common stock underlying the
warrants offered by the Company in this transaction will be registered upon
issuance under the Company's existing shelf registration statement. The Company
is not listing the warrants on an exchange or any trading system and does not
expect that a trading market for the warrants will develop. The Company is
required to maintain the effectiveness of the registration statement so long as
any warrants are outstanding.
Emerging Issues Task Force (EITF) No. 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock, addresses the accounting for equity derivative contracts indexed to, and
potentially settled in a company's own stock, or equity derivatives, by
providing guidance for distinguishing between permanent equity, temporary equity
and assets and liabilities. Under EITF 00-19, to qualify as permanent equity,
the equity derivative must permit the issuer to settle in unregistered shares.
The Company does not have that ability under the Securities Purchase Agreement
and as EITF 00-19 considers the ability to keep a registration statement
effective as beyond the Company's control, the warrants cannot be classified as
permanent equity and are instead classified as a liability in the accompanying
consolidated balance sheet. Upon issuance of the warrants in July and August
2005, the Company recorded the warrant liability at its initial fair value of
$3.5 million using a Black-Scholes option-pricing model with the following
assumptions:
July 20, 2005 August 2, 2005 September 30, 2005
------------- -------------- ------------------
Dividend yield.............................. 0% 0% 0%
Expected volatility......................... 105.27% 105.03% 105.38%
Expected life............................... 10.0 years 10.0 years 9.8 years
Risk-free interest rate..................... 4.25% 4.41% 4.40%
Equity derivatives not qualifying for permanent equity accounting are
recorded at fair value and are remeasured at each reporting date until the
warrants are exercised or expired. Changes in the fair value of the warrants
will be reported in the consolidated statements of operations as non-operating
income or expense. At September 30, 2005, the fair value of the warrants
decreased to $2.8 million resulting in a gain of $703,000 for the three and nine
months ended September 30, 2005. There was no warrant liability at December 31,
2004.
8. PROSTAGEN MILESTONE PAYMENT
Pursuant to a Stock Exchange Agreement (the "Prostagen Agreement") related
to the Company's 1999 acquisition of Prostagen Inc. ("Prostagen"), as amended in
May 2002, August 2002, and November 2004, the Company agreed to issue up to an
additional $1.5 million worth of Cytogen common stock to the shareholders and
debtholders of Prostagen (the "Prostagen Partners"), if certain milestones are
achieved in the PSMA development programs. During the second quarter of 2005,
the Company recorded a $500,000 charge to Research and Development Expense upon
the achievement of a certain milestone related to the PSMA development programs
as specified in the Prostagen Agreement. The Company issued 92,799 shares of its
-14-
common stock in the third quarter of 2005 related to this milestone. The
remaining $1.0 million of future milestone payments, if any, will be paid in
Cytogen common stock upon the achievement of a certain milestone in the PSMA
development programs.
9. PAYMENT OF ELAN CONVERTIBLE PROMISSORY NOTE
In August 1998, the Company received $2.0 million from Elan Corporation,
plc in exchange for a convertible promissory note. The note bore annual interest
of 7%, however, such interest was not payable in cash, but was added to the
principal of the note through August 2000; thereafter interest was paid in cash.
In August 2005, the Company made a payment of $2.3 million to satisfy its
obligations on the promissory note and unpaid accrued interest.
10. 2005 EMPLOYEE STOCK PURCHASE PLAN
On September 23, 2005, the Board of Directors of the Company adopted the
2005 Employee Stock Purchase Plan (the "2005 ESPP"). The 2005 ESPP, which is
effective October 1, 2005, will replace the Company's existing Employee Stock
Purchase Plan. Under the 2005 ESPP, eligible employees may elect to purchase
shares of Cytogen common stock at 85% of the lower of fair market value as of
the first or last trading day of each participation period. Under the 2005 ESPP,
officers of the Company who purchase shares may not transfer such shares for a
period of 12 months after the purchase date. The Company has reserved 500,000
shares of common stock for future issuance under the 2005 ESPP. The Company
intends to submit the 2005 ESPP for consideration by the stockholders of the
Company at the Company's Annual Meeting of Stockholders in 2006. The Company
will not sell any shares of common stock pursuant to the 2005 ESPP unless such
plan is approved by the stockholders of the Company.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements regarding future events and our future results are
based on current expectations, estimates, forecasts, and projections and the
beliefs and assumptions of our management including, without limitation, our
expectations regarding results of operations, selling, general and
administrative expenses, research and development expenses and the sufficiency
of our cash for future operations. Forward-looking statements may be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"estimate," "anticipate," "continue," or similar terms, variations of such terms
or the negative of those terms. These forward-looking statements include the
impact of SFAS No. 123(R), additional funding and development of the PSMA
technologies, growth and market penetration for QUADRAMET and PROSTASCINT,
revenues, if any, from our joint venture with Progenics Pharmaceuticals, Inc.,
increased expenses resulting from our sales force and marketing expansion,
including sales and marketing expenses for QUADRAMET and PROSTASCINT, the
sufficiency of our capital resources and supply of products for sale, the
continued cooperation of our contractual and collaborative partners, our need
for additional capital and other statements included in this Quarterly Report on
Form 10-Q that are not historical facts. Such forward-looking statements involve
a number of risks and uncertainties and investors are cautioned not to put any
undue reliance on any forward-looking statement. We cannot guarantee that we
will actually achieve the plans, intentions or expectations disclosed in any
such forward-looking statements. Factors that could cause actual results to
differ materially, include, market acceptance of our products, the results of
our clinical trials, our ability to hire and retain employees, economic and
market conditions generally, our receipt of requisite regulatory approvals for
our products and product candidates, the continued cooperation of our marketing
and other collaborative and strategic partners, our ability to protect our
intellectual property, and the other risks identified under the caption
"Additional Factors That May Affect Future Results" in our Annual Report on Form
10-K for the year ended December 31, 2004, as amended, and those under the
caption "Risk Factors," as included in certain of our other filings, from time
to time, with the Securities and Exchange Commission.
Any forward-looking statements made by us do not reflect the potential
impact of any future acquisitions, mergers, dispositions, joint ventures or
investments we may make. We do not assume, and specifically disclaim, any
obligation to update any forward-looking statements, and these statements
represent our current outlook only as of the date given.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes thereto contained
elsewhere herein, as well as in our Annual Report on Form 10-K for the year
ended December 31, 2004, as amended, and from time to time in our other filings
with the Securities and Exchange Commission.
-16-
OVERVIEW
Founded in 1980, Cytogen Corporation of Princeton, NJ is a
biopharmaceutical company that acquires, develops and commercializes innovative
molecules targeting the sites and stages of cancer progression. Our marketed
products include QUADRAMET (samarium Sm-153 lexidronam injection) and
PROSTASCINT (capromab pendetide) kit for the preparation of Indium In-111
capromab pendetide in the United States. We also have exclusive United States
marketing rights to COMBIDEX (ferumoxtran-10) for all applications, and the
exclusive right to market and sell ferumoxytol (formerly Code 7228) for oncology
applications in the United States. We are also developing therapeutics targeting
prostate-specific membrane antigen ("PSMA"), a protein highly expressed on the
surface of prostate cancer cells and the neovasculature of solid tumors. Full
prescribing information for our products including warnings, precautions,
adverse events and other safety information is available at www.cytogen.com or
by calling 800-833-3533.
SIGNIFICANT EVENTS IN 2005
FDA Committee Votes Not to Recommend Approval of Proposed Broad Indication for
Combidex
On March 3, 2005, the FDA's Oncologic Drugs Advisory Committee voted to not
recommend approval of the proposed broad indication for COMBIDEX.
Advanced Magnetics Receives Approvable Letter for Combidex
On March 24, 2005, we announced that Advanced Magnetics, Inc., the
developer of COMBIDEX, which is exclusively licensed to Cytogen for marketing in
the United States, had informed Cytogen that Advanced Magnetics received an
approvable letter from the FDA for COMBIDEX, subject to certain conditions.
Collaboration with The Dow Chemical Company to Develop PSMA Antibody for
Treatment of Cancer
On May 6, 2005, we announced that we had entered into a collaboration with
The Dow Chemical Company to create a targeted oncology product designed to treat
prostate and other cancers. The agreement applies proprietary MeO-DOTA
bifunctional chelant technology from Dow to radiolabel our PSMA antibody with a
therapeutic radionuclide. PSMA is a protein highly expressed on the surface of
prostate cancer cells and the neovasculature of many solid tumors. Under the
agreement, proprietary chelation technology and other capabilities, provided
through ChelaMedSM radiopharmaceutical services from Dow, will be used to attach
a therapeutic radioisotope to the same murine monoclonal antibody utilized in
our PROSTASCINT (capromab pendetide) molecular imaging agent. This antibody,
called 7E11-C5.3 ("7E11"), is directed against an intracellular epitope of PSMA.
Dow's MeO-DOTA bifunctional chelant will be utilized to attach the beta emitting
radionuclide lutetium-177 as a payload to the 7E11 antibody, enabling targeted
delivery of this cytotoxic agent. The 7E11 antibody was excluded from the PSMA
technology licensed to our PSMA joint venture. We intend to develop the
resulting innovative molecule for the treatment of various cancers, but
initially in prostate, that express the PSMA marker.
-17-
Cytogen and Progenics Approve 2005 Work Plan and Budget for Joint Venture
On June 6, 2005, we and Progenics Pharmaceuticals, Inc. agreed on a work
plan and annual budget for 2005 for our PSMA joint venture.
Sale of Common Stock and Warrants
On July 19, 2005, we announced that we entered into a securities purchase
agreement with certain institutional investors for the sale of 3,104,380 shares
of our common stock and 776,096 warrants to purchase shares of our common stock
having an exercise price of $6.00 per share, through a registered direct
offering. In exchange for $4.50, the purchasers received one share of common
stock and warrants to purchase .25 shares of common stock. These warrants are
exercisable for ten years, beginning six months after their issuance. The
transaction provided net proceeds of approximately $13.9 million to us. The
transaction closed on July 20, 2005 and August 2, 2005. There was no placement
agent in this transaction.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
REVENUES
INCREASE/(DECREASE)
-------------------
2005 2004 $ %
---- ---- ------ ------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
QUADRAMET.................................. $ 1,991 $ 1,924 $ 67 3%
PROSTASCINT................................ 1,525 1,308 217 17%
License and Contract....................... 35 29 6 21%
------- -------- ------
$ 3,551 $ 3,261 $ 290 9%
======= ======== ======
Total revenues for the third quarter of 2005 were $3.6 million compared to
$3.3 million for the same period in 2004. Product revenues accounted for 99% of
total revenues for each of the third quarters of 2005 and 2004. License and
contract revenues accounted for the remainder of revenues.
QUADRAMET. QUADRAMET sales were $2.0 million for the third quarter of 2005,
compared to $1.9 million in the third quarter of 2004. QUADRAMET sales accounted
for 57% and 60% of product revenues for the third quarters of 2005 and 2004,
respectively. We have the right to market QUADRAMET in North America and Latin
America. Currently, we market QUADRAMET only in the United States. We believe
that the future growth and market penetration of QUADRAMET is dependent upon,
among other things: (i) distinguishing the physical properties of QUADRAMET from
first-generation agents within its class; (ii) empowering and marketing to key
prescribing audiences; (iii) broadening palliative use within label beyond
prostate cancer to include breast, lung and multiple myeloma; (iv) evaluating
the role of QUADRAMET in combination with other commonly used oncology agents;
and (v) expanding clinical development to demonstrate the potential tumoricidal
versus palliative
-18-
attributes of QUADRAMET. We cannot provide any assurance that we will be able to
successfully market QUADRAMET or that QUADRAMET will achieve greater market
penetration on a timely basis or result in significant revenues for us.
PROSTASCINT. PROSTASCINT sales were $1.5 million for the third quarter of
2005, compared to $1.3 million in the third quarter of 2004. PROSTASCINT sales
accounted for 43% and 40% of product revenues for the third quarters of 2005 and
2004, respectively. We believe that future growth and market penetration of
PROSTASCINT is dependent upon, among other things: (i) improving image quality
through fusion technology; (ii) validating the antigen targeted by PROSTASCINT
as an independent prognostic factor; (iii) the publication and presentation of
outcomes data; (iv) development of image-guided applications including
brachytherapy, intensity modulated radiation therapy, surgery, and cryotherapy;
and (v) expanding clinical development to demonstrate the potential for
PROSTASCINT to monitor response to cytotoxic therapies and image other cancers.
We cannot provide any assurance that we will be able to successfully market
PROSTASCINT, or that PROSTASCINT will achieve greater market penetration on a
timely basis or result in significant revenues for us.
LICENSE AND CONTRACT REVENUES. License and contract revenues were $35,000
and $29,000 for the third quarters of 2005 and 2004, respectively, and primarily
reflects contract revenues for limited research and development services
provided by us to the PSMA Development Company LLC, our joint venture with
Progenics. The level of future revenues for the remainder of 2005, if any, for
contract services provided to the joint venture may vary and will depend upon
the extent of research and development services required by the joint venture.
OPERATING EXPENSES
INCREASE/(DECREASE)
-----------------------
2005 2004 $ %
---- ---- -------- -------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Cost of product revenue...................... $ 2,386 $ 2,188 $ 198 9%
Selling, general and administrative.......... 6,740 5,343 1,397 26%
Research and development..................... 1,746 608 1,138 187%
Equity in loss of joint venture.............. 677 805 (128) (16)%
-------- -------- --------
$ 11,549 $ 8,944 $ 2,605 29%
======== ======== ========
Total operating expenses for the third quarter of 2005 were $11.5 million
compared to $8.9 million in the same quarter of 2004.
COST OF PRODUCT REVENUE. Cost of product revenue for the third quarters of
2005 and 2004 were $2.4 million and $2.2 million, respectively, and primarily
reflects manufacturing costs for PROSTASCINT and QUADRAMET, royalties on our
sales of products and amortization of the up-front payment to Berlex
Laboratories to reacquire the marketing rights to QUADRAMET in 2003.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the third quarter of 2005 were $6.7 million compared to $5.3
million in the same period of 2004. The increase from the prior year period is
primarily driven by the expanded investment for the commercial support of both
QUADRAMET and PROSTASCINT, including the implementation
-19-
of new marketing initiatives and expansion of our sales force which was
substantially completed in January 2005.
RESEARCH AND DEVELOPMENT. Research and development expenses for the third
quarter of 2005 were $1.7 million compared to $608,000 in the same period of
2004. The increase from the prior year period is primarily driven by new
clinical development initiatives for both QUADRAMET and PROSTASCINT and the
preclinical development costs associated with our radiolabeled therapeutic
program to attach the therapeutic radionuclide lutetium-177 as a payload to the
7E11 monoclonal antibody utilized in PROSTASCINT. The increase is partially
offset by savings from the closure of our AxCell Biosciences facility in the
fourth quarter of 2004. During the third quarter of 2005, we incurred $25,000 in
expenses relating to AxCell's operations compared to $113,000 in the same period
of 2004. Research projects through academic, governmental and corporate
collaborators to be supported and additional applications for the intellectual
property and technology at AxCell are being pursued.
EQUITY IN LOSS OF JOINT VENTURE. Our share of the loss of the PSMA
Development Company LLC, our joint venture with Progenics, was $677,000 and
$805,000 during the third quarters of 2005 and 2004, respectively. Such amounts
represented 50% of the joint venture's operating losses. We equally share
ownership and costs of the joint venture with Progenics and account for the
joint venture using the equity method of accounting. On June 6, 2005, we and
Progenics agreed on a work plan and annual budget for the joint venture for
2005. In 2005, we and Progenics each expect to provide up to $5.7 million in
funding for the development of the PSMA technologies through the joint venture.
Each member of the joint venture has contributed capital of $3.5 million for the
nine months ended September 30, 2005. We and Progenics have not committed to
fund the joint venture beyond December 31, 2005 at this time, except for
obligations under existing contractual commitments as of that date. We may incur
significant and increasing costs in the future to fund our share of the
development costs of the joint venture, although we cannot provide any assurance
that any further agreements between us and Progenics will be reached regarding
the joint venture.
INTEREST INCOME/EXPENSE. Interest income for the third quarter of 2005 was
$195,000 compared to $133,000 in the same period of 2004. The increase in 2005
from the prior year period was due primarily to a higher average yield on cash
balances in 2005. Interest expense for the third quarter of 2005 was $21,000
compared to $46,000 in the same period in 2004. Interest expense includes
interest on outstanding debt which was paid off in August 2005 and finance
charges related to various equipment leases that are accounted for as capital
leases.
DECREASE IN WARRANT LIABILITY. In connection with the sale of our common
stock and warrants that provided us with net proceeds of approximately $13.9
million in July and August 2005, we recorded the warrants as a liability at
their fair value using a Black-Scholes option-pricing model and will remeasure
them at each reporting date until exercised or expired. Changes in the fair
value of the warrants are reported in the statements of operations as
non-operating income or expense. For the three months ended September 30, 2005,
we reported a gain of $703,000 related to the decrease in fair value of these
warrants from issuance dates.
NET LOSS. Net loss for the third quarter of 2005 was $7.1 million compared
to $5.6 million reported in the third quarter of 2004. The basic and diluted net
loss per share for the third quarter of 2005 was $0.40 based on 17.9 million
weighted average common shares outstanding,
-20-
compared to a basic and diluted net loss per share of $0.36 based on 15.4
million weighted average common shares outstanding for the same period in 2004.
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
REVENUES
INCREASE/(DECREASE)
-------------------
2005 2004 $ %
---- ---- ------- -----
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
QUADRAMET............................................ $ 6,198 $ 5,394 $ 804 15%
PROSTASCINT.......................................... 5,348 5,347 1 --%
NMP22 BLADDERCHEK.................................... -- 1 (1) (100)%
License and Contract................................. 155 72 83 115%
------- -------- -----
$11,701 $ 10,814 $ 887 8%
======= ======== =====
Total revenues for the first nine months of 2005 were $11.7 million
compared to $10.8 million for the same period in 2004. Product revenues
accounted for 99% of total revenues for the first nine months of each of 2005
and 2004. License and contract revenues accounted for the remainder of revenues.
QUADRAMET. Cytogen recorded QUADRAMET sales of $6.2 million for the first
nine months of 2005 compared to $5.4 million of QUADRAMET sales during the first
nine months of 2004. QUADRAMET sales accounted for 54% and 50% of product
revenues for such periods, respectively. We have the right to market QUADRAMET
in North America and Latin America. Currently, we market QUADRAMET only in the
United States. We believe that the future growth and market penetration of
QUADRAMET is dependent upon, among other things: (i) distinguishing the physical
properties of QUADRAMET from earlier generation agents within its class, (ii)
empowering and marketing to key prescribing audiences, (iii) broadening
palliative use within label beyond prostate cancer to include breast, lung and
multiple myeloma, (iv) evaluating the role of QUADRAMET in combination with
other commonly used oncology agents, and (v) expanding clinical development to
demonstrate the potential tumoricidal versus palliative attributes of QUADRAMET.
We cannot provide any assurance that we will be able to successfully market
QUADRAMET or that QUADRAMET will achieve greater market penetration on a timely
basis or result in significant revenues for us.
PROSTASCINT. PROSTASCINT sales for each of the first nine months of 2005
and 2004 were $5.3 million. Sales of PROSTASCINT accounted for 46% and 50% of
product revenues for such periods, respectively. We believe that future growth
and market penetration of PROSTASCINT is dependent upon, among other things, (i)
improving image quality through fusion technology, (ii) validating the antigen
targeted by PROSTASCINT as an independent prognostic factor, (iii) the
publication and presentation of outcomes data, (iv) development of image-guided
applications including brachytherapy, intensity modulated radiation therapy,
surgery, and cryotherapy, and (v) expanding clinical development to demonstrate
the potential for PROSTASCINT to monitor response to cytotoxic therapies and
image other cancers. We
-21-
cannot provide any assurance that we will be able to successfully market
PROSTASCINT, or that PROSTASCINT will achieve greater market penetration on a
timely basis or result in significant revenues for us.
NMP22 BLADDERCHEK. There were no sales of NMP22 BLADDERCHEK during the
first nine months of 2005 compared to $1,000 in the same period in 2004.
Effective December 31, 2004, we stopped selling NMP22 BLADDERCHEK.
LICENSE AND CONTRACT REVENUES. License and contract revenues were $155,000
and $72,000 for the first nine months of 2005 and 2004, respectively. During the
first nine months of 2005, we recognized $152,000 of contract revenues compared
to $47,000 in the first nine months of 2004 for limited research and development
services provided by us to the PSMA Development Company LLC, our joint venture
with Progenics. We expect that the level of future revenues for the remainder of
2005, if any, for contract services provided to the joint venture may vary and
will depend upon the extent of research and development services required by the
joint venture.
OPERATING EXPENSES
INCREASE/(DECREASE)
----------------------
2005 2004 $ %
---- ---- ------- ------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Cost of product revenues..................... $ 7,064 $ 6,983 $ 81 1%
Selling, general and administrative.......... 20,456 14,148 6,308 45%
Research and development..................... 3,847 1,953 1,894 97%
Equity in loss of joint venture.............. 2,879 2,156 723 34%
------- ------- -------
$34,246 $25,240 $ 9,006 36%
======= ======= =======
Total operating expenses for the first nine months of 2005 were $34.2
million compared to $25.2 million in the same period of 2004.
COST OF PRODUCT REVENUES. Cost of product revenues for the first nine
months of 2005 were $7.1 million compared to $7.0 million in the same period of
2004 and primarily reflects manufacturing costs for PROSTASCINT and QUADRAMET,
royalties on our sales of products and amortization of the up-front payment to
Berlex Laboratories to reacquire the marketing rights to QUADRAMET in 2003.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the first nine months of 2005 were $20.5 million compared to $14.1
million in the same period of 2004. The increase from the prior year period is
primarily driven by the expanded investment for the commercial support of both
QUADRAMET and PROSTASCINT, including the implementation of new marketing
initiatives and expansion of our sales force which was substantially completed
in January 2005.
RESEARCH AND DEVELOPMENT. Research and development expenses for the first
nine months of 2005 were $3.8 million compared to $2.0 million in the same
period of 2004. The
-22-
increase from the prior year period is primarily driven by new clinical
development initiatives for both QUADRAMET and PROSTASCINT, a $500,000 charge in
the second quarter of 2005 for a non-cash milestone payment related to the
progress of PSMA development programs and the preclinical development costs
associated with our radiolabeled therapeutic program to attach the therapeutic
radionuclide lutetium-177 as a payload to the 7E11 monoclonal antibody utilized
in PROSTASCINT. The increase is partially offset by savings from the closure of
our AxCell Biosciences facility in the fourth quarter of 2004. During the first
nine months of 2005 and 2004, we incurred $37,000 and $631,000, respectively, in
expenses relating to AxCell's operations.
EQUITY IN LOSS OF JOINT VENTURE. Our share of the loss of the PSMA
Development Company LLC, our joint venture with Progenics, was $2.9 million
during the first nine months of 2005 compared to $2.2 million in the same period
of 2004 and represented 50% of the joint venture's operating losses. We equally
share ownership and costs of the joint venture with Progenics and account for
the joint venture using the equity method of accounting. The increase over the
prior year period is primarily due to our share of the $2.0 million upfront fee
incurred by the joint venture in the second quarter of 2005 to license
proprietary antibody-drug conjugate technology from Seattle Genetics, Inc. for
use with the joint venture's antibodies targeting PSMA (described below). On
June 6, 2005, we and Progenics agreed on a work plan and annual budget for the
joint venture for 2005. In 2005, we and Progenics each expect to provide up to
$5.7 million in funding for the development of the PSMA technologies through the
joint venture. Each member of the joint venture has contributed capital of $3.5
million for the nine months ended September 30, 2005. We and Progenics have not
committed to fund the joint venture beyond December 31, 2005 at this time,
except for obligations under existing contractual commitments as of that date.
We may incur significant and increasing costs in the future to fund our share of
the development costs of the joint venture, although we cannot provide any
assurance that any further agreements between us and Progenics will be reached
regarding the joint venture.
The joint venture's work plan and budget for 2005 includes funding to be
made by the joint venture in accordance with a collaboration agreement with
Seattle Genetics, Inc. ("SGI"), commencing in June 2005. Under the SGI
agreement, SGI provided an exclusive worldwide license to its proprietary
antibody-drug conjugate technology (the "ADC Technology") to the joint venture.
Under the license, the joint venture has the right to use the ADC Technology to
link cell-killing drugs to the joint venture's monoclonal antibodies that
targets prostate-specific membrane antigen. During the initial research term of
the agreement, SGI will also provide technical information to the joint venture
related to implementation of the licensed technology, which period may be
extended for an additional period upon payment of an additional fee. The joint
venture may replace PSMA with another antigen, subject to certain restrictions,
upon payment of an antigen replacement fee. The ADC Technology is based, in
part, on technology licensed by SGI from third parties. The joint venture is
responsible for research, product development, manufacturing and
commercialization of all products under the SGI agreement. The joint venture may
sub-license the ADC Technology to a third-party to manufacture the ADC's for
both research and commercial use. The joint venture made a $2.0 million
technology access payment to SGI, upon execution of the SGI agreement in June
2005, following a capital contribution by the members. The SGI agreement
requires the joint venture to make maintenance payments during the term of the
SGI agreement, aggregate payments of $15.0 million upon the achievement of
certain defined milestones, and royalties, on a percentage of net sales, as
defined,
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to SGI and its third party licensors. In the event that SGI provides materials
or services to the joint venture under the SGI agreement, SGI will receive
supply and/or labor cost payments from the joint venture at agreed upon rates.
Unless terminated earlier, the SGI agreement terminates at the later of (a) the
tenth anniversary of the first commercial sale of each licensed product in each
country or (b) the latest date of expiration of patents underlying the licensed
products. The ability of the joint venture to comply with the terms of the SGI
agreement will depend on agreement by the members regarding work plans and
budgets of the joint venture in future years.
INTEREST INCOME/EXPENSE. Interest income for the first nine months of 2005
was $492,000 compared to $303,000 in the same period of 2004. The increase in
2005 from the prior year period was due to a higher average yield on cash
balances in 2005. Interest expense was $105,000 and $139,000 for the first nine
months of 2005 and 2004, respectively. Interest expense includes interest on
outstanding debt which was paid off in August 2005 and finance charges related
to various equipment leases that are accounted for as capital leases.
DECREASE IN WARRANT LIABILITY. In connection with the sale of our common
stock and warrants that provided us with net proceeds of approximately $13.9
million in July and August 2005, we recorded the warrants as a liability at
their fair value using a Black-Scholes option-pricing model and will remeasure
them at each reporting date until exercised or expired. Changes in the fair
value of the warrants are reported in the statements of operations as
non-operating income or expense. For the nine months ended September 30, 2005,
we reported a gain of $703,000 related to the decrease in fair value of these
warrants from issuance dates.
NET LOSS. Net loss for the first nine months of 2005 was $21.5 million
compared to $14.3 million reported in the first nine months of 2004. The basic
and diluted net loss per share for the first nine months of 2005 was $1.31 based
on 16.3 million weighted average common shares outstanding, compared to a basic
and diluted net loss per share of $0.99 based on 14.4 million weighted average
common shares outstanding for the same period in 2004.
-24-
COMMITMENTS
We have entered into various contractual and commercial commitments. The
following table summarizes our obligations with respect to these commitments as
of September 30, 2005.
LESS
THAN 1 TO 3 4 TO 5 MORE THAN
1 YEAR YEARS YEARS 5 YEARS TOTAL
-------- --------- --------- ---------- ----------
(ALL AMOUNTS IN THOUSANDS)
Capital lease obligations.......................... $ 18 $ 33 $ -- $ -- $ 51
Facility leases.................................... 338 366 -- -- 704
Research and development and
other obligations............................... 625 215 151 569 1,560
Manufacturing contracts(1)......................... 5,399 4,401 -- -- 9,800
Capital contribution to joint venture(2)........... 2,200 -- -- -- 2,200
Minimum royalty payments(3)........................ 1,131 2,000 2,000 3,083 8,214
------- ------- ------- -------- --------
Total........................................ $ 9,711 $ 7,015 $ 2,151 $ 3,652 $ 22,529
======= ======= ======= ======== ========
(1) Effective January 1, 2004, we entered into a new manufacturing and
supply agreement with BMSMI for QUADRAMET whereby BMSMI manufactures,
distributes and provides order processing and customer services for us
relating to QUADRAMET. Under the terms of our agreement, we are
obligated to pay at least $4.2 million annually, subject to future
annual price adjustment, through 2008, unless terminated by BMSMI or
us on a two year prior written notice. This agreement will
automatically renew for five successive one-year periods unless
terminated by BMSMI or us on a two-year prior written notice.
Accordingly, we have not included commitments beyond September 30,
2007.
Additionally, in September 2004, we entered into a non-exclusive
manufacturing agreement with Laureate Pharma, L.P. pursuant to which
Laureate shall manufacture PROSTASCINT for us in its Princeton, New
Jersey facility. The agreement will terminate, unless earlier
terminated pursuant to its terms, upon Laureate's completion of the
production campaign for PROSTASCINT and shipment of the resulting
products from Laureate's facility. Under the terms of the agreement,
we are obligated to pay at least an aggregate of $5.1 million through
2006, of which approximately $4.1 million was incurred through
September 30, 2005. We expect that the agreement will provide us with
a sufficient supply of PROSTASCINT to satisfy our commercial
requirements for approximately the next four years, based upon current
sales levels. In addition, we believe the agreement will provide
sufficient supply of 7E11 required for initial clinical development of
our therapeutic program.
(2) On June 6, 2005, we and Progenics agreed on a work plan and annual
budget for the joint venture for 2005. In 2005, we have each funded
$3.5 million for the nine months ended September 30, 2005. We may
incur significant and increasing costs in the future to fund our share
of the development costs from the joint venture, although we cannot be
sure that any further agreements between us and Progenics will be
reached regarding the joint venture. The joint venture's work plan and
budget for 2005 includes funding to be made by the joint venture in
accordance with the agreement with SGI, commencing in June 2005. The
joint venture made a $2.0 million technology access payment to SGI,
upon execution of the SGI agreement during June 2005, following a
capital contribution by the members. The SGI agreement requires the
joint venture to make maintenance payments during the term of the SGI
agreement, aggregate payments of $15.0 million upon the achievement of
certain defined milestones, and royalties, on a percentage of net
sales, as defined, to SGI and its licensors. In the event that SGI
provides materials or services to the joint venture under the SGI
agreement, SGI will receive supply and/or labor cost payments from the
joint venture at agreed upon rates. The ability of the joint venture
to comply with the terms of the SGI agreement will depend on agreement
by the members regarding work plans and budgets of the joint venture
in future years.
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(3) We acquired an exclusive license from The Dow Chemical Company for
QUADRAMET for the treatment of osteoblastic bone metastases in certain
territories. The agreement requires us to pay Dow royalties based on a
percentage of net sales of QUADRAMET, or a guaranteed contractual
minimum payment, whichever is greater, and future payments upon
achievement of certain milestones. Future annual minimum royalties due
to Dow are $1.0 million per year in 2005 through 2012 and $833,000 in
2013.
In addition to the above, we are obligated to make certain royalty payments
based on sales of the related product and certain milestone payments if our
collaborative partners achieve specific development milestones or commercial
milestones.
LIQUIDITY AND CAPITAL RESOURCES
CONDENSED STATEMENT OF CASH FLOWS:
SEPTEMBER 30, 2005
--------------------------
(ALL AMOUNTS IN THOUSANDS)
Net loss......................................... $ (21,455)
Adjustments to reconcile net loss to net
cash used in operating activities.............. (2,409)
---------
Net cash used in operating activities............ (23,864)
Net cash provided by investing activities........ 22,432
Net cash provided by financing activities........ 11,853
---------
Net increase in cash and cash equivalents........ $ 10,421
=========
OVERVIEW
Our cash and cash equivalents were $23.5 million as of September 30, 2005,
compared to $13.0 million as of December 31, 2004. As of September 30, 2005, our
total cash, cash equivalents and short-term investments was $23.5 million
compared to $35.8 million as of December 31, 2004. The decrease in cash, cash
equivalents and short term investments from the December 31, 2004 balance was
primarily due to the payment of $2.3 million to Elan Corporation, plc to satisfy
our obligations for a promissory note that matured in August 2005, the build-up
of PROSTASCINT inventory and to increased operating expenditures in 2005,
including costs to promote and support our oncology products and to expand our
internal sales force, new clinical development initiatives for both QUADRAMET
and PROSTASCINT, pre-clinical development programs associated with the 7E11
antibody and funding for the PSMA Development Company joint venture, partially
offset by the net proceeds of $13.9 million we received in the offering of
common stock and warrants to purchase common stock in August 2005. During the
first nine months of 2005 and 2004, net cash used for operating activities was
$23.9 million and $13.1 million, respectively.
Historically, our primary sources of cash have been proceeds from the
issuance and sale of our stock through public offerings and private placements,
product related revenues, revenues from contract research services, fees earned
under license agreements, and interest earned on cash and short-term
investments.
On July 19, 2005, we announced that we entered into a securities purchase
agreement with certain institutional investors for the sale of 3,104,380 shares
of its common stock and 776,096 warrants to purchase shares of its common stock
having an exercise price of $6.00 per
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share, through a registered direct offering. In exchange for $4.50, the
purchasers received one share of common stock and warrants to purchase .25
shares of common stock. These warrants are exercisable for ten years, beginning
six months after their issuance. The transaction provided net proceeds of
approximately $13.9 million to us. The transaction closed on July 20, 2005 and
August 2, 2005. There was no placement agent in this transaction. The shares of
common stock and the shares of common stock underlying the warrants offered by
us in this transaction will be registered upon issuance under our existing shelf
registration statement (referred to below). We are required to maintain the
effectiveness of the registration statement as long as the warrants are
outstanding. As a result, we classified these warrants as a liability at their
fair value using a Black-Scholes option-pricing model and will remeasure them at
each reporting date until exercised or expired. At September 30, 2005, the fair
value of the warrants was $2.8 million. We are not listing the warrants on an
exchange or any trading system and do not expect that a trading market for the
warrants will develop. On November 5, 2004, we filed a registration statement
(File No. 333-120262) on Form S-3 with the Securities and Exchange Commission
relating to the public offering pursuant to Rule 415 under the Securities Act of
1933, of up to an aggregate of $70 million of debt securities, common stock,
preferred stock, warrants and units of the Company. The SEC declared such
registration statement effective on November 14, 2004.
Our primary financial objectives are to meet our capital and operating
requirements through revenues from existing products and licensing arrangements.
To achieve these objectives, we may enter into research and development
partnerships and acquire, in-license and develop other technologies, products or
services. Certain of these strategies may require payments by us in either cash
or stock in addition to the costs associated with developing and marketing a
product or technology. However, we believe that, if successful, such strategies
may increase long-term revenues. There can be no assurance as to the success of
such strategies or that resulting funds will be sufficient to meet cash
requirements until product revenues are sufficient to cover operating expenses,
if ever. To fund these strategic and operating activities, we may sell equity,
debt or other securities as market conditions permit or enter into credit
facilities.
OTHER LIQUIDITY EVENTS
In September 2004, we entered into a non-exclusive manufacturing agreement
with Laureate Pharma, L.P. pursuant to which Laureate is manufacturing
PROSTASCINT for us in its Princeton, New Jersey facility. Our agreement will
terminate, unless terminated earlier pursuant to its terms, upon Laureate's
completion of the production campaign and shipment of the resulting products
from Laureate's facility. Under the terms of the agreement, we are obligated to
pay at least an aggregate of $5.1 million through 2006. Approximately $4.1
million has been incurred under this agreement through September 30, 2005, and
is recorded as inventory in the accompanying balance sheet as of September 30,
2005. Of this amount, approximately $1.8 million was recorded during the first
nine months of 2005. We expect that the agreement will provide us with a
sufficient supply of PROSTASCINT to satisfy our commercial requirements for
approximately the next four years, based upon current sales levels. In addition,
we believe the agreement will provide sufficient supply of 7E11 required for
initial clinical development of our therapeutic program. In October 2004,
Laureate was acquired by Safeguard Scientifics, Inc. Laureate has continued to
operate as a full service contract manufacturing organization and we
-27-
have not experienced any disruption in Laureate's performance of its obligations
to produce PROSTASCINT.
Effective January 1, 2004, we entered into a new manufacturing and supply
agreement with BMSMI whereby BMSMI manufactures, distributes and provides order
processing and customer services for us relating to QUADRAMET. Under the terms
of the agreement, we are obligated to pay at least $4.2 million annually,
subject to future annual price adjustment, through 2008, unless terminated by
BMSMI or us on two years prior written notice. During the first nine months of
2005, we incurred $3.2 million of manufacturing costs for QUADRAMET. This
agreement will automatically renew for five successive one-year periods unless
terminated by BMSMI or us on a two year prior written notice. We also pay BMSMI
a variable amount per month for each QUADRAMET order placed to cover the costs
of customer service. In addition, we expect our QUADRAMET sales and marketing
expenses to increase in 2005.
Beginning in December 2001, we began to equally share the costs of the
joint venture with Progenics. On June 6, 2005, we and Progenics agreed on a work
plan and annual budget for the Joint Venture for 2005. In 2005, we and Progenics
each expect to provide up to $5.7 million in funding for the development of the
PSMA technologies through the Joint Venture. Each member of the joint venture
has contributed capital of $3.5 million for the nine months ended September 30,
2005. The joint venture's work plan and budget for 2005 includes funding to be
made by the joint venture in accordance with the agreement with SGI, commencing
in June 2005. The joint venture made a $2.0 million technology access payment to
SGI, upon execution of the SGI agreement during June 2005, following a capital
contribution by the members. The SGI agreement requires the joint venture to
make maintenance payments during the term of the SGI agreement, aggregate
payments of $15.0 million upon the achievement of certain defined milestones,
and royalties, on a percentage of net sales, as defined, to SGI and its
licensors. In the event that SGI provides materials or services to the joint
venture under the SGI agreement, SGI will receive supply and/or labor cost
payments from the joint venture at agreed upon rates. The ability of the joint
venture to comply with the terms of the SGI agreement will depend on agreement
by the members regarding work plans and budgets of the joint venture in future
years. We and Progenics have not committed to fund the Joint Venture beyond
December 31, 2005 at this time, except for obligations under existing
contractual commitments as of that date. We may incur significant and increasing
costs in the future to fund our share of the development costs from the joint
venture although we cannot provide any assurance that any further agreements
between us and Progenics will be reached regarding the joint venture. Any
funding amount in subsequent periods may vary dependent upon, among other
things, the results of the clinical trials and research and development
activities, competitive and technological developments, and market
opportunities. If no agreement is reached with Progenics, we also may have
commitments for certain wind down costs under third party agreements with the
joint venture.
We acquired an exclusive license from The Dow Chemical Company for
QUADRAMET for the treatment of osteoblastic bone metastases in certain
territories. The agreement requires us to pay Dow royalties based on a
percentage of net sales of QUADRAMET, or a guaranteed contractual minimum
payment, whichever is greater, and future payments upon achievement of certain
milestones. Future annual minimum royalties due to Dow are $1.0 million per year
in 2005 through 2012 and $833,000 in 2013.
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On May 6, 2005, we entered into a license agreement with The Dow Chemical
Company to create a targeted oncology product designed to treat prostate and
other cancers. The agreement applies proprietary MeO-DOTA bifunctional chelant
technology from Dow to radiolabel our PSMA antibody with a therapeutic
radionuclide. Under the agreement, proprietary chelation technology and other
capabilities, provided through ChelaMedSM radiopharmaceutical services from Dow,
will be used to attach a therapeutic radioisotope to the 7E11 monoclonal
antibody utilized in our PROSTASCINT molecular imaging agent. As a result of the
agreement, we are obligated to pay a minimal license fee and aggregate future
milestone payments of $1.9 million for each licensed product and royalties based
on sales of related products, if any. Unless terminated earlier, the Dow
agreement terminates at the later of (a) the tenth anniversary of the date of
first commercial sale for each licensed product or (b) the expiration of the
last to expire valid claim that would be infringed by the sale of the licensed
product. We may terminate the license agreement with Dow on 90 days written
notice.
In August 1998, we received $2.0 million from Elan Corporation, plc in
exchange for a convertible promissory note. The note bore annual interest of 7%,
however, such interest was not payable in cash, but was added to the principal
of the note through August 2000; thereafter interest was paid in cash. In August
2005, we made a payment of $2.3 million to satisfy its obligations on the
promissory note and unpaid accrued interest.
We have incurred negative cash flows from operations since our inception,
and have expended, and expect to continue to expend in the future, substantial
funds to implement our planned product development efforts, including
acquisition of products and complementary technologies, research and
development, clinical studies and regulatory activities, and to further our
marketing and sales programs. We expect that our existing capital resources,
should be adequate to fund our operations and commitments at least into
mid-2006. We cannot assure you that our business or operations will not change
in a manner that would consume available resources more or less rapidly than
anticipated. We expect that we will have additional requirements for debt or
equity capital, irrespective of whether and when we reach profitability, for
further product development costs, product and technology acquisition costs, and
working capital.
Our future capital requirements and the adequacy of available funds will
depend on numerous factors, including: (i) the successful commercialization of
our products; (ii) the costs associated with the acquisition of complementary
products and technologies; (iii) progress in our product development efforts and
the magnitude and scope of such efforts; (iv) progress with clinical trials; (v)
progress with regulatory affairs activities; (vi) the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights; (vii) competing technological and market developments; and
(viii) the expansion of strategic alliances for the sales, marketing,
manufacturing and distribution of our products. To the extent that the currently
available funds and revenues are insufficient to meet current or planned
operating requirements, we will be required to obtain additional funds through
equity or debt financing, strategic alliances with corporate partners and
others, or through other sources. There can be no assurance that the financial
sources described above will be available when needed or at terms commercially
acceptable to us. If adequate funds are not available, we may be required to
delay, further scale back or eliminate certain aspects of our operations or
attempt to obtain funds
-29-
through arrangements with collaborative partners or others that may require us
to relinquish rights to certain of our technologies, product candidates,
products or potential markets. If adequate funds are not available, our
business, financial condition and results of operations will be materially and
adversely affected.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 to our consolidated financial statements in our
Annual Report on Form 10-K for the year ended December 31, 2004, as amended,
includes a summary of our significant accounting policies and methods used in
the preparation of our consolidated financial statements. The following is a
brief discussion of the more significant accounting policies and methods used by
us. The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our actual results could differ materially from
those estimates.
REVENUE RECOGNITION
Product revenues include product sales by us to our customers. Product
sales are recognized when the customer takes ownership of the products and
assumes risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists and the sales price is fixed or
determinable. Product returns are accepted under limited circumstances and are
estimated based upon historical experience. We may provide rebates and volume
discounts to our customers from time to time. Such rebates and discounts are
recorded as a reduction of product sales when earned by the customer.
License and contract revenues include milestone payments and fees under
collaborative agreements with third parties, revenues from research services,
and revenues from other miscellaneous sources.
In 2003, Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB
104") replaced Staff Accounting Bulletin No. 101, "Revenue Recognition In
Financial Statements" ("SAB 101"), which the Company adopted in 2000. The
provisions related to non-refundable, up-front license fees were unchanged in
SAB 104 compared to SAB 101. Accordingly, we defer up-front license fees and
recognize them over the estimated performance period of the related agreement,
when we have continuing involvement. Since the term of the performance periods
is subject to management's estimates, future revenues to be recognized could be
affected by changes in such estimates.
-30-
ACCOUNTS RECEIVABLE
Our accounts receivable balances are net of an estimated allowance for
uncollectible accounts. We continuously monitor collections and payments from
our customers and maintain an allowance for uncollectible accounts based upon
our historical experience and any specific customer collection issues that we
have identified. While we believe our reserve estimate to be appropriate, we may
find it necessary to adjust our allowance for uncollectible accounts if the
future bad debt expense exceeds our estimated reserve. We are subject to
concentration risks as a limited number of our customers provide a high percent
of total revenues, and corresponding receivables.
INVENTORIES
Inventories are stated at the lower of cost or market, as determined using
the first-in, first-out method, which most closely reflects the physical flow of
our inventories. Our products and raw materials are subject to expiration
dating. We regularly review quantities on hand to determine the need for
reserves for excess and obsolete inventories based primarily on our estimated
forecast of product sales. Our estimate of future product demand may prove to be
inaccurate, in which case we may have understated or overstated our reserve for
excess and obsolete inventories.
CARRYING VALUE OF FIXED AND INTANGIBLE ASSETS
Our fixed assets and certain of our acquired rights to market our products
have been recorded at cost and are being amortized on a straight-line basis over
the estimated useful life of those assets. If indicators of impairment exist, we
assess the recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered through undiscounted
future operating cash flows. If impairment is indicated, we measure the amount
of such impairment by comparing the carrying value of the assets to the present
value of the expected future cash flows associated with the use of the asset.
Adverse changes regarding future cash flows to be received from long-lived
assets could indicate that an impairment exists, and would require the write
down of the carrying value of the impaired asset at that time.
WARRANT LIABILITY
Emerging Issues Task Force (EITF) No. 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock addresses accounting for equity derivative contracts indexed to, and
potentially settled in a company's own stock, or equity derivatives, by
providing guidance for distinguishing between permanent equity, temporary equity
and assets and liabilities. Under EITF 00-19, to qualify as permanent equity,
the equity derivative must permit the issuer to settle in unregistered shares.
EITF 00-19 considers the ability to keep a registration statement effective as
beyond the Company's control and warrants that cannot be classified as permanent
equity are instead classified as a liability in the accompanying consolidated
balance sheet.
-31-
Equity derivatives not qualifying for permanent equity accounting are
recorded at their fair value using a Black-Scholes option-pricing model and are
remeasured at each reporting date until the warrants are exercised or expired.
Changes in the fair value of the warrants will be reported in the consolidated
statements of operations as non-operating income or expense. The fair value of
the warrants as calculated using a Black-Scholes option-pricing model is subject
to significant fluctuation based on changes in the Company's stock price,
expected volatility, expected life, the risk-free interest rate and dividend
yield.
RECENT ACCOUNTING PRONOUNCEMENTS
Abnormal Inventory Costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"), to clarify that abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage) should be recognized as current period charges, and that fixed
production overheads should be allocated to inventory based on the normal
capacity of production facilities. This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Accordingly,
we will adopt SFAS No. 151 in our fiscal year beginning January 1, 2006. We are
currently evaluating the impact of adopting this statement.
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which revised SFAS No. 123 and superseded APB Opinion No. 25. SFAS No. 123(R)
requires that companies recognize compensation expense associated with grants of
stock options and other equity instruments to employees in the financial
statements effective as of the first interim or annual reporting period that
begins after June 15, 2005. In April 2005, the Securities and Exchange
Commission announced the adoption of a new rule allowing companies to implement
SFAS No. 123(R) at the beginning of their next fiscal year that begins after
June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) in our fiscal year
beginning January 1, 2006. Under the new standard, compensation cost will be
measured based on the fair value of the instrument on the grant date and will be
recognized over the vesting period. This pronouncement applies to all grants
after the effective date and to the unvested portion of stock options
outstanding as of the effective date. SFAS No. 123(R) eliminates our ability to
account for such transactions using the intrinsic method currently used by us.
SFAS No. 123(R) also requires that companies recognize compensation expense
associated with purchases of shares of common stock by employees at a discount
to market value under employee stock purchase plans that do not meet certain
criteria. Although management has not yet determined the impact of the adoption
of this standard, it is expected to have a material effect on our consolidated
financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have operations subject to risks of foreign currency
fluctuations, nor do we use derivative financial instruments in our operations.
Our exposure to market risk is principally
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confined to interest rate sensitivity. Our cash equivalents and short-term
investments are conservative in nature, with a focus on preservation of capital.
Due to the short-term nature of our investments and our investment policies and
procedures, we have determined that the risks associated with interest rate
fluctuations related to these financial instruments are not material to our
business.
We are exposed to certain risks arising from changes in the price of our
common stock, primarily due to potential effect of changes in fair value of the
warrant liability related to the warrants issued in July and August 2005. The
warrant liability is measured at fair value using a Black-Scholes option-pricing
model at each reporting date and is subject to significant increases or
decreases in value and a corresponding loss or gain in the statement of
operations due to the effects of changes in the price of common stock at period
end and the related calculation of volatility.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures as of September 30, 2005. The term "disclosure controls and
procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Securities Exchange Act of 1934 is accumulated and
communicated to the company's management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applied its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
In connection with the preparation of our consolidated financial statements
for the quarter ended September 30, 2005, we determined that we did not
recognize a warrant liability and a decrease in the value of the warrant
liability related to warrants issued by us in connection with our sale of common
stock in July and August 2005. We also have determined that an internal control
deficiency existed.
Management has determined that the internal control deficiency that
resulted in the aforementioned accounting error is a material weakness, as
defined by the Public Company Accounting Oversight Board's Auditing Standard No.
2. We have determined that the material weakness was that insufficient technical
accounting expertise existed within our accounting function to resolve
non-routine or complex accounting matters that occurred in connection with the
determination of the proper accounting treatment of the financial instrument
relating to the warrants issued by the Company in July and August 2005. The
Public Company Accounting
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Oversight Board has defined a material weakness as "a significant deficiency, or
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected." Management has reviewed the
internal control deficiency with our Audit and Finance Committee, has discussed
it with our independent registered public accounting firm, KPMG LLP, and has
advised our Audit and Finance Committee that the deficiency is a material
weakness in our internal control over financial reporting.
Based on this evaluation, our chief executive officer and chief financial
officer concluded that, as of September 30, 2005, our disclosure controls and
procedures were not effective because of the deficiency discussed above.
However, we are actively seeking to remedy this deficiency. This process is
ongoing, and includes the following:
We are actively reinforcing the technical training of certain staff members
of our finance organization. We also engaged a consulting firm in October
2005 with the requisite experience and knowledge to advise the Company's
management, and will use the services of that firm extensively in
connection with complex accounting matters. To date, we have not expended
any material costs, nor do we estimate that we will expend any material
costs associated with implementing our remediation plan and engaging the
accounting consultancy firm we hired to assist us in our technical
accounting requirements. The accounting consultancy firm does not have any
relationship with our current independent auditors.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended as of September 30, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On July 19, 2005, we announced that we entered into a Securities Purchase
Agreement with certain institutional investors for the sale of 3,104,380 shares
of our common stock and 776,096 warrants to purchase shares of our common stock
having an exercise price of $6.00 per share, through a registered direct
offering. In exchange for $4.50, the purchasers received one share of common
stock and warrants to purchase .25 shares of common stock. These warrants are
exercisable for ten years, beginning six months after their issuance. The
transaction provided net proceeds of approximately $13.9 million to us. The
transaction closed on July 20, 2005 and August 2, 2005. Although the shares of
common stock and the shares of common stock underlying the warrants were
registered under our existing shelf registration statement, the warrants
themselves were not registered. We are required to maintain the effectiveness of
the registration statement so long as any warrants are outstanding. We did not
employ an underwriter in connection with the issuance of the securities
described above. We believe that the issuance of the foregoing warrants were
exempt from registration under Section 4(2) of the Securities Act of 1933.
ITEM 5. OTHER INFORMATION.
On September 26, 2005, we announced that Thomas S. Lytle has decided to
retire from his position as Senior Vice President of Sales and Marketing of
Cytogen effective October 31, 2005. Mr. Lytle will become a consultant to
Cytogen, focusing on expanding our relationships with key physicians and
customers and developing new models to improve patient access to our oncology
products.
ITEM 6. EXHIBITS.
Exhibit No. Description
----------- -----------
10.1 Form of Securities Purchase Agreement by and among
the Company and the Purchasers dated July 19, 2005.
Filed as an exhibit to the Company's Current
Report on Form 8-K, filed with the Commission on
July 20, 2005, and incorporated herein by reference.
10.2 Form of Common Stock Purchase Warrant issued by the
Company in favor of each Purchaser dated July 19,
2005. Filed as an exhibit to the Company's Current
Report on Form 8-K, filed with the Commission on
July 20, 2005, and incorporated herein by reference.
10.3 Cytogen Corporation 2005 Employee Stock Purchase
Plan. Filed as an exhibit to the Company's Current
Report on Form 8-K, filed with the Commission on
September 27, 2005, and incorporated herein by
reference.
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31.1 Certification of President and Chief Executive
Officer pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
31.2 Certification of Senior Vice President and Chief
Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002. Filed herewith.
32.1 Certification of President and Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002. Filed herewith.
32.2 Certification of Senior Vice President and Chief
Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
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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.
CYTOGEN CORPORATION
Date: November 14, 2005 By:/s/ Michael D. Becker
--------------------------------------------
Michael D. Becker
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2005 By:/s/ Christopher P. Schnittker
--------------------------------------------
Christopher P. Schnittker
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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