CYTOGEN CORPORATION
650 College Road East, Suite 3100
Princeton, New Jersey 08540
October 11, 2006
VIA EDGAR
Securities and Exchange Commission
Division of Corporate Finance
100 F Street, NE
Washington, D.C. 20549
Attention: Jim B. Rosenberg, Senior Assistant Chief Accountant
Re: Cytogen Corporation
Form 10-K for the Year Ended December 31, 2005
Filed March 16, 2006
File Number 000-14879
Ladies and Gentlemen:
On behalf of Cytogen Corporation (the "Company" or "Cytogen"), this letter
is being submitted in response to comments received from the Securities and
Exchange Commission (the "Commission") by letter dated September 26, 2006,
regarding the Company's Annual Report on Form 10-K for the Year Ended December
31, 2005 (the "Form 10-K"). The paragraphs below correspond to the numbered
paragraphs in such letter.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF
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OPERATIONS
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COMMITMENTS
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CONTRACTUAL OBLIGATIONS TABLE, PAGE 65
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1. PLEASE TELL US WHY YOU HAVE EXCLUDED THE AMOUNTS OF YOUR MILESTONES RELATED
TO YOUR AGREEMENT WITH, FOR EXAMPLE, AVM, PROSTAGEN AND DOW FROM YOUR
CONTRACTUAL OBLIGATIONS TABLE. REFER TO ITEM 303(A)(5) OF REGULATION S-K.
We have entered into various manufacturing, supply and marketing
agreements that may require us to make certain guaranteed minimum
payments and/or milestone payments based on the achievement of
targeted product sales levels or other events including regulatory
approval or clinical development. All guaranteed contractual minimum
payments for any period of time for which the agreement is not
cancelable have been
Securities and Exchange Commission
October 11, 2006
Page 2
included in the "Contractual Obligations" table within the
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
We have not included in the "Contractual Obligations" table any
payments that do not represent fixed or minimum payments, but are
instead payable only upon the achievement of a milestone, if the
achievement of that milestone is uncertain or the obligation amount is
not determinable. We believe that this treatment is consistent with
the criteria provided in Item 303(a)(5) of Regulation S-K regarding
contractual obligations. We have, however, previously disclosed and
will continue to disclose that we have not included in the
"Contractual Obligations" table the potential future milestone
payments, which may be required under our existing agreements if
specific developmental or commercial milestones are achieved.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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REVENUE RECOGNITION, PAGE 69
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2. WE ACKNOWLEDGE YOUR REVENUE RECOGNITION POLICY AS NOTED HEREIN AND WITHIN
YOUR "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" IN THE ACCOMPANYING NOTES
TO YOUR CONSOLIDATED FINANCIAL STATEMENTS. WE BELIEVE THAT YOUR DISCLOSURE
RELATED TO ESTIMATES OF ITEMS THAT REDUCE YOUR GROSS PRODUCT REVENUE, WHICH
YOU SPECIFY AS SALES RETURNS, REBATES AND VOLUME DISCOUNTS, COULD BE
DEFINED AND IMPROVED. PLEASE PROVIDE US WITH THE INFORMATION THAT FOLLOWS
IN A DISCLOSURE-TYPE FORMAT.
In future filings, we will provide a disclosure similar to the
following in the revenue recognition policy within the "Critical
Accounting Policies and Estimates" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations and to
enhance the existing disclosure for the "Summary of Significant
Accounting Policies" in the accompanying notes to our consolidated
financial statements correspondingly.
Product related revenues include sales of Quadramet and ProstaScint by
us to our customers. We recognize revenues in accordance with SEC
Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition."
We recognize product sales when substantially all the risks and
rewards of ownership have transferred to the customer, which generally
occurs on the date of shipment. Our revenue recognition policy has a
substantial impact on our reported results and relies on certain
estimates that require subjective judgments on the part of management.
We recognize product sales net of allowances for estimated returns,
rebates and discounts. We estimate allowances based primarily on our
past experience and other available information pertinent to the use
and marketing of the product.
Provisions for Estimated Reductions to Gross Sales
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At the time product sales are made, we reduce gross sales through
accruals for product returns, rebates and volume discounts. We account
for these reductions in accordance with Emerging Issues Task Force
Issue No. 01-9, ("EITF 01-9"), Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's
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October 11, 2006
Page 3
Products) ("EITF 01-9"), and Statement of Financial Accounting
Standard No. 48, Revenue Recognition When Right of Return Exists
("SFAS 48"), as applicable.
RETURNS
Quadramet is a radioactive product that is indicated for the relief of
pain due to metastatic bone disease arising from various types of
cancer. Due to its rapid rate of radioactive decay, Quadramet has a
shelf life of only about 72 hours. For this reason, Quadramet is
ordered for a specific patient on a pre-scheduled visit, and, as such,
our customers are unable to maintain stock inventories of this
product. In addition, because the product is ordered for pre-scheduled
visits for specific patients, product returns are very low. Our
methodology to estimate sales returns is based on historical
experience that demonstrates that the vast majority of the returns
occur within one month of when product was shipped. At the time of
sale, we estimate the quantity and value of Quadramet that may
ultimately be returned. We generally have the exact number of returns
related to prior month sales in the current month, so the provision
for returns is trued up to actual quickly.
We do not allow product returns for ProstaScint.
VOLUME DISCOUNTS
We provide volume discounts to certain customers based on sales levels
of given products during each calendar month. We recognize revenue net
of these volume discounts at the end of each month. There are no
volume discounts based on cumulative sales over more than a one month
period. Accordingly, there is no current need to estimate volume
discounts.
REBATES
From time to time, we may offer rebates to our customers. We establish
a rebate accrual based on the specific terms in each agreement, in an
amount equal to our reasonable estimate of the expected rebate claims
attributable to the sales in the current period and adjust the accrual
each reporting period to reflect the actual experience. If the amount
of future rebates cannot be reasonably estimated, a liability will be
recognized for the maximum potential amount of the rebates.
a. DESCRIBE THE EFFECT THAT COULD RESULT FROM USING ASSUMPTIONS THAT ARE
REASONABLY LIKELY TO OCCUR TO ESTIMATE THE ITEMS THAT REDUCE YOUR GROSS
PRODUCT REVENUE OTHER THAN THOSE UPON WHICH YOU BASE YOUR CURRENT RECORDED
ESTIMATES. FOR EXAMPLE, PLEASE PROVIDE A RANGE OF REASONABLY LIKELY AMOUNTS
OR OTHER TYPE OF SENSITIVITY ANALYSIS.
As explained above, there is no estimation involved in considering the
effect of volume discounts on revenue recognition since we always know
the actual value of volume discounts in a given month.
For rebates, we record all sales net of an accrual based on the
specific terms in each agreement, in an amount equal to our reasonable
estimate of the expected rebate claims attributable to the sales in
the current period and adjust the accrual each reporting period to
reflect the actual experience. If the amount of future rebates cannot
be reasonably
Securities and Exchange Commission
October 11, 2006
Page 4
estimated, a liability will be recognized for the maximum potential
amount of the rebates.
We only estimate expected returns for Quadramet, since we do not allow
returns of ProstaScint. However, the potential for misstating either
revenue or the return reserve for Quadramet is extremely small for the
following reasons:
i) Total returns of Quadramet in 2005 and 2004 were 2.7% and
2.6% of net sales, respectively.
ii) The vast majority of the returns occur within one month of
the shipment. Based on the timing of our periodic reporting
which tends to be near the statutory deadline, our
financial information reflects this actual return
information.
b. DESCRIBE THE FACTORS, OTHER THAN HISTORICAL TRENDS, THAT YOU UTILIZE TO
ESTIMATE YOUR SALES RETURNS ACCRUAL, SUCH AS LEVELS OF INVENTORY IN YOUR
DISTRIBUTION CHANNELS; ESTIMATED REMAINING PRODUCT SHELF LIFE; PRICE
CHANGES FROM COMPETITORS AND INTRODUCTIONS OF NEW OR GENERIC COMPETING
PRODUCTS.
As indicated above, our estimated returns for Quadramet are based only
on historical experience. Customers are unable to maintain inventories
of Quadramet due to its extremely short shelf life. In addition,
because the product is ordered for specific patients, product returns
are very low. By the time we finish our periodic financial statements,
we generally know the exact number of returns related to prior month
sales, so there is a very low possibility that the return provision
could be materially misstated.
For ProstaScint, we do not accrue for future returns because of our
"no return" policy.
c. TO THE EXTENT THAT THE INFORMATION YOU CONSIDER IN B) IS QUANTIFIABLE,
DISCUSS BOTH QUANTITATIVE AND QUALITATIVE FACTORS AND THE EXTENT OF
AVAILABILITY AND YOUR USE OF INFORMATION FROM EXTERNAL SOURCES; FOR
EXAMPLE, END-CUSTOMER DEMAND DATA COMPARED TO INVENTORY LEVELS. IN
DISCUSSING YOUR ESTIMATE OF PRODUCT RETURNS, PROVIDE ADDITIONAL INFORMATION
REGARDING THE TOTAL AMOUNT OF PRODUCT IN SALES DOLLARS THAT COULD
POTENTIALLY BE RETURNED AS OF THE MOST RECENT BALANCE SHEET DATE,
DISAGGREGATED BY EXPIRATION PERIOD.
We use no external information (such as end-customer demand compared to
inventory levels) to assist us in estimating product returns. For
Quadramet, customers do not keep stock inventories due to the 72 hour
shelf life.
d. DISCUSS ANY SHIPMENTS MADE AS A RESULT OF INCENTIVES AND/OR IN EXCESS OF
YOUR CUSTOMERS' ORDINARY COURSE OF BUSINESS INVENTORY LEVELS. FOR EXAMPLE,
ON PAGE 32 OF YOUR JUNE 30, 2006 FORM 10-Q, YOU DISCLOSE THAT THERE EXISTED
A "BUILD-UP" OF PROSTASCINT INVENTORY DURING FISCAL 2005. TELL US WHY YOU
BELIEVE YOU HAVE MET THE CONDITIONS OF PARAGRAPHS 6 AND 8 FROM SFAS NO. 48,
SUCH THAT YOU RECOGNIZE REVENUE AT TIME OF RECEIPT BY WHOLESALERS. IN YOUR
RESPONSE, PLEASE ALSO ADDRESS THE "OTHER FACTORS" CONDITIONS PROVIDED BY
THE STAFF WITHIN SAB NO. 104, TOPIC 13 (A)(4)(B).
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October 11, 2006
Page 5
Because Quadramet has a shelf life of only about 72 hours, our
customers do not maintain stock inventory of Quadramet. As such, there
would not be any Quadramet shipments in excess of the customers'
ordinary course of business inventory levels or as a result of an
incentive program. Because the product is ordered for pre-scheduled
visits for specific patients, product returns are very low. Our
methodology to estimate sales returns is based on historical
experience that demonstrates that the vast majority of the returns
occur within one month of when the product was shipped. At the time of
sale, we estimate the quantity and value of Quadramet that may
ultimately be returned. We generally have the exact number of returns
related to prior month sales in the current month, so the provision
for returns is trued up to actual quickly. Because of the factors
described above, there are currently no factors, including the "other
factors" as described in SAB No. 104, Topic 13 (A)(4)(b), that would
preclude us from making reasonable and reliable estimates for
Quadramet returns.
Regarding ProstaScint, we have not noted any significant changes in
our customers' buying patterns for ProstaScint as a result of volume
discounts and rebate programs, which represent all of our incentive
programs. We noted an increase in ProstaScint purchase in the second
quarter of 2004 and a decrease in the following quarter before
normalizing to a usual level, related to a price increase in June
2004. In the period prior to that price increase, we limited the
ProstaScint quantities that could be purchased by distributors at the
pre-increase price to an average order size for each specific
customer. We normally implement price increases in the middle of a
quarter to give enough time for the demand to be normalized for a
given quarter. Other than these two quarters, we have noted consistent
demand for the product between quarters. Our customers are careful to
maintain an appropriate level of inventory since we do not accept
returns related to ProstaScint. Accordingly, the "other factors" as
described in SAB No. 104, Topic 13 (A) (4) (b) related to making
reasonable and reliable estimates for returns, do not apply.
The "build-up" of ProstaScint inventory during fiscal 2005 mentioned
in the Form 10-Q for the quarter ended June 30, 2006 referred to
Cytogen's inventory, not the inventory of our customers. Due to the
very high fixed setup costs associated with the manufacture of
ProstaScint, we had ordered approximately a three-year supply of the
product from the manufacturer in order to minimize average per unit
costs. We do not believe that this inventory build-up to minimize
overall inventory costs for ProstaScint affects our ability to meet
the conditions for revenue recognition of paragraphs 6 and 8 in SFAS
48, Revenue Recognition When Right of Return Exists.
e. PLEASE PROVIDE US WITH A ROLL-FORWARD OF EACH ITEM THAT REDUCES YOUR GROSS
REVENUE FOR THE PERIODS PRESENTED THAT REFLECTS THE FOLLOWING:
o current provision related to sales made in current period;
o current provision related to sales made in prior periods;
o actual returns or credits in current period related to sales made in
current period; and
o actual returns or credits in current period related to sales made in
prior periods.
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October 11, 2006
Page 6
The following table is a roll-forward of items that reduce gross
revenue for the years ended December 31, 2003, 2004 and 2005.
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Volume
Year ended December 31, 2005 (All amounts are in thousands) Returns Rebates Discounts Total
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Beginning balance 0 57 0 57
Current provision related to sales made in current period 225 17 36 278
Current provision related to sales made in prior periods 6 0 0 6
Actual returns/credits in current period related to sales in
current period (180) (62) (36) (278)
Actual returns/credits in current period related to sales in prior
periods (6) 0 0 (6)
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Ending Balance 45 12 0 57
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Volume
Year ended December 31, 2004 (All amounts are in thousands) Returns Rebates Discounts Total
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Beginning balance 0 0 0 0
Current provision related to sales made in current period 181 57 15 253
Current provision related to sales made in prior periods 17 0 0 17
Actual returns/credits in current period related to sales in
current period (181) 0 (15) (196)
Actual returns/credits in current period related to sales in prior
periods (17) 0 0 (17)
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Ending Balance 0 57 0 57
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Volume
Year ended December 31, 2003 (All amounts are in thousands) Returns Rebates Discounts Total
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Beginning balance 0 0 0 0
Current provision related to sales made in current period 112 0 0 112
Current provision related to sales made in prior periods 3 0 0 3
Actual returns/credits in current period related to sales in
current period (112) 0 0 (112)
Actual returns/credits in current period related to sales in prior
periods (3) 0 0 (3)
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Ending Balance 0 0 0 0
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Securities and Exchange Commission
October 11, 2006
Page 7
f. FINALLY, INCLUDE INFORMATION REGARDING THE AMOUNT OF AND REASON FOR PERIOD
TO PERIOD FLUCTUATIONS WITHIN YOUR STATEMENT OF OPERATIONS WITH RESPECT TO
EACH ITEM THAT REDUCES YOUR GROSS PRODUCT REVENUE. PLEASE ALSO ADDRESS THE
EFFECT THAT CHANGES IN YOUR ESTIMATES OF THE ITEMS THAT REDUCE YOUR GROSS
PRODUCT REVENUE HAD ON YOUR RESULTS OF OPERATIONS FOR THE APPLICABLE
PERIODS PRESENTED.
The following describes the fluctuations in items that reduced gross
product revenue for the periods ended December 31, 2005, 2004 and
2003:
VOLUME DISCOUNTS
In an effort to promote Quadramet, we offered volume discounts to one
of our major customers, beginning June 2004 through 2005. As such,
there were no discounts provided in 2003 or in the first half of 2004.
REBATES
In an effort to promote our products, we offer rebates to certain
customers. In a few instances, the rebate arrangements were based on
customers achieving targeted sales at certain targeted pharmacies. One
significant rebate contract began in October 2004 and ended in June
2005. With no historical experience from a similar incentive program,
we could not reasonably estimate the rebate obligation. Accordingly,
the rebate provision in 2004 reflected the maximum potential amount of
the rebates attributable to the sales in the current period. In 2005,
the rebate obligation included adjustments to the 2004 provision based
on actual rebates earned and paid.
RETURNS
The increase in the return provision for Quadramet was consistent with
the increase in sales between 2004 and 2005. In 2003, the return
provision included the estimated returns for Quadramet which we
reacquired the marketing rights to and began selling in August 2003,
BrachySeed which we discontinued selling in January 2003 and NMP22
BladderChek which we stopped selling in December 2004.
3. PLEASE CLARIFY, IN DISCLOSURE-TYPE FORMAT, WHETHER YOU RECORD YOUR REBATES
AND VOLUME DISCOUNTS AT THE TIME YOU ORIGINALLY RECORD THE RELATED REVENUE
OR EXPLAIN TO US YOUR ACCOUNTING POLICY AND THE BASIS FOR YOUR POLICY.
At the time revenue related to product sales is recorded, we reduce
gross sales for estimated rebates and volume discounts. We account for
these reductions in accordance with Emerging Issues Task Force Issue
No. 01-9, Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products).
Securities and Exchange Commission
October 11, 2006
Page 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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4. PLEASE EXPAND THE APPLICABLE NOTES TO YOUR FINANCIAL STATEMENTS TO PROVIDE
US WITH THE INFORMATION REQUIRED BY PARAGRAPH 14 OF SFAS NO. 68, IN
DISCLOSURE-TYPE FORMAT, FOR YOUR AGREEMENTS WITH, FOR EXAMPLE, PROSTAGEN,
DOW AND AVM. IN DISCUSSING THE TERMS OF EACH AGREEMENT, PLEASE ALSO INCLUDE
INFORMATION REGARDING THE EVENTS THAT TRIGGER ANY POTENTIAL FUTURE
MILESTONE PAYMENTS THERE UNDER AS WELL AS THE AMOUNTS OF THOSE MILESTONE
PAYMENTS.
We have reviewed all of our agreements and concluded that the
agreements with Advanced Magnetics Inc and the PSMA Development
Company LLC fall within the scope of SFAS No. 68 Research and
Development Arrangements.
In future filings, we will add disclosures similar to the following
for those agreements:
Advanced Magnetics Inc.: "Under this agreement, Cytogen has no
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funding obligation regarding research and development for
Advanced Magnetics and the Company has not earned any
compensation nor incurred any costs for the research and
development activities related to Combidex in 2003, 2004 or 2005.
Pursuant to the Advanced Magnetics agreement, we may release
50,000 shares of our common stock to Advanced Magnetics, which
are currently in escrow, upon the achievement of certain
milestones. Of such 50,000 shares, 25,000 shares are being held
in escrow pending the enrolling of a certain number of patients
in a specified clinical trial related to Combidex or the
regulatory approval of Combidex and 25,000 shares are being held
in escrow pending the enrollment of at least one patient in a
phase III clinical trial relating to ferumoxytol for oncology
applications only."
PSMA Development Company LLC: "Following the sale of its interest
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in the PSMA Development Company LLC Joint Venture in April 2006,
Cytogen has no further obligations to the joint venture. During
2003, 2004 and 2005, the Company recorded revenue related to the
Joint Venture of $214,000, $106,000 and $185,000, respectively,
and incurred costs of $214,000, $88,000 and $151,000,
respectively.
Regarding our agreements with Prostagen Inc. as described in detail in
Note 4 of the 2005 Form 10-K, Cytogen acquired 100% of Prostagen. This
transaction was accounted for as a business combination and does not
fall within the scope of SFAS 68.
Regarding our agreements with The Dow Chemical Company as described in
detail in Note 6 of the 2005 Form 10-K, Cytogen is not a party to a
research and development arrangement through which it can obtain the
results of research and development funded partially or entirely by
Dow. Accordingly, these arrangements do not fall within the scope of
SFAS 68.
Securities and Exchange Commission
October 11, 2006
Page 9
Note 5. PSMA Development Company LLC, page F-15]
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5. PLEASE TELL US HOW YOU DETERMINED IT IS APPROPRIATE TO IMMEDIATELY
RECOGNIZE THE ENTIRE $12.9 MILLION GAIN INCURRED UPON THE SALE OF YOUR PSMA
JOINT VENTURE INTEREST TO PROGENICS DURING THE THREE MONTHS ENDED JUNE 30,
2006. TELL US IF YOU HAVE ANY CONTINUING OBLIGATIONS RELATED TO THE PSMA
JOINT VENTURE.
On April 20, 2006, we entered into a Membership Interest Purchase
Agreement with Progenics to sell our 50% ownership interest in the
Joint Venture and accordingly, we are no longer responsible for
providing any funding nor do we have any continuing involvement in or
continuing obligation to the Joint Venture. On the same date, we also
entered into an Amended and Restated PSMA/PSMP License Agreement with
Progenics and the Joint Venture (the "License Agreement") pursuant to
which we licensed to the Joint Venture certain rights in PSMA
technology, which is in a pre-clinical and very early stage of
development.
The License Agreement is a sublicense by us to the Joint Venture in a
specific field of use of certain intellectual property licensed to us
by Memorial Sloan Kettering Cancer Center ("MSKCC") (formerly
Sloan-Kettering Institute for Cancer Research). Pursuant to the
License Agreement, we are obligated to maintain the primary license
with MSKCC. To maintain such primary license, we are obligated to (i)
pay MSKCC $50,000 annually until the earlier of the first year in
which there are net sales resulting from the licensed technology or
the expiration of the last-to-expire patent and (ii) use reasonable
efforts to develop products incorporating the technology licensed from
MSKCC. Under the License Agreement, we have sublicensed to the Joint
Venture only the portion of the technology rights licensed to us by
MSKCC related to the in-vivo therapeutic applications and retained
rights to (i) the antibody which is used in our marketed product,
ProstaScint(R) and is being used in our CYT-500 development program,
(ii) ex-vivo applications of the licensed technology, and (iii) the
diagnostic applications. Because of our own reliance on the MSKCC
technology for the commercialization of our marketed product and
development programs, we will maintain the primary license with MSKCC,
irrespective of the License Agreement.
Under the License Agreement, the Joint Venture has agreed to pay us
75% of the annual payment obligation owed to MSKCC and undertake the
efforts imposed on us under the primary license to develop products
incorporating the licensed technology. In the event the Joint Venture
commercializes products using the licensed technology, we would be
obligated to pay earned royalties to MSKCC under the primary license.
Pursuant to the License Agreement, the Joint Venture is obligated to
pay us the earned royalties owing under the primary license with
MSKCC. If we breach the primary license with MSKCC, we are obligated
to notify the Joint Venture of such breach. In the event we fail to
cure such breach on a timely basis, the Joint Venture has the right to
cure such breach and the right to be substituted for us as a direct
licensee of MSKCC in the licensed field if agreed upon by MSKCC.
Securities and Exchange Commission
October 11, 2006
Page 10
We do not believe that these provisions constitute continuing
involvement and there are no other provisions of the agreement which
constitute continuing involvement or obligations to provide any
products, services or financial support to the Joint Venture. This
transaction was a sale of an asset in which the consideration was cash
which has been fully received and for which the earning process is
complete. Accordingly, the $12.9 million gain on the sale of our joint
venture interest was recognized immediately.
The Company acknowledges that: (i) the Company is responsible for the
adequacy and accuracy of the disclosure in the Form 10-K; (ii) staff
comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the
Form 10-K; and (iii) the Company may not assert staff comments in a
defense in any proceeding initiated by the Commission or any person
under the federal securities laws of the United States.
The Company hopes that the above responses will be acceptable to the
Commission staff. Please do not hesitate to contact me at (609)
750-8207 should you have any questions regarding the foregoing. Thank
you for your time and attention.
Sincerely,
/s/ Thu Dang
Thu Dang
Vice President, Finance
cc: Cytogen Corporation
Michael D. Becker, President and CEO
Amy C. Bruckner, Staff Accountant, Division of
Corporation Finance