SECURITIES AND EXCHANGE COMMISSION Conformed
Washington, D.C. 20549 Copy
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
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Commission file number 333-02015
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CYTOGEN Corporation
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(Exact name of Registrant as specified in its charter)
Delaware 22-2322400
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
600 College Road East, CN 5308, Princeton, NJ 08540-5308
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(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code (609) 987-8200
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days: Yes X No .
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Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
Class Outstanding at August 6, 1998
- ---------------------------- -----------------------------
Common Stock, $.01 par value 58,591,373
PART I - FINANCIAL INFORMATION
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Item I: Consolidated Financial Statements
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share data)
(Unaudited)
June 30, December 31,
ASSETS: 1998 1997
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Current Assets:
Cash and cash equivalents $ 3,018 $ 7,401
Accounts receivable, net 1,517 4,064
Inventories 313 443
Other current assets 146 258
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Total current assets 4,994 12,166
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Property and Equipment:
Leasehold improvements 10,128 10,126
Equipment and furniture 7,786 7,696
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17,914 17,822
Less- Accumulated depreciation and amortization (14,587) (13,910)
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Net property and equipment 3,327 3,912
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Investment in Subsidiary 9,376 10,343
Other Assets 1,134 1,134
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$ 18,831 $ 27,555
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable and accrued liabilities $ 5,774 $ 5,662
Current portion of long-term liabilities 1,836 1,739
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Total current liabilities 7,610 7,401
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Long-Term Liabilities 10,177 10,171
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Stockholders' Equity:
Preferred stock, $.01 par value, 5,400,000 shares authorized -
Series A Convertible and Exchangeable Preferred Stock, $.01 par value,
1,000 shares authorized, 0 and 1,000 shares issued and outstanding
in 1998 and 1997, respectively - -
Series B Convertible Preferred Stock, $.01 par value,
750 shares authorized, 100 and 750 shares issued and outstanding
in 1998 and 1997, respectively - -
Series C Junior Participating Preferred Stock, $.01 par value,
200,000 shares authorized, 0 issued and outstanding - -
Common stock, $.01 par value, 89,600,000 shares authorized,
56,789,000 and 51,170,000 shares issued and outstanding
in 1998 and 1997, respectively 568 512
Additional paid-in capital 298,324 298,212
Accumulated deficit (297,848) (288,741)
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Total stockholders' equity 1,044 9,983
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$ 18,831 $ 27,555
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The accompanying 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)
Second Quarter Ended June 30, Year-To-Date Ended June 30,
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1998 1997 1998 1997
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Revenues:
Product Related:
Product Sales
ProstaScint $ 1,458 $ 998 $ 2,996 $ 1,601
Quadramet 220 - 220 -
Others 172 312 468 579
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Product Sales 1,850 1,310 3,684 2,180
Quadramet Royalty 33 21 1,664 21
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Total Product Related 1,883 1,331 5,348 2,201
License and Contract 579 837 1,246 3,821
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Total Revenues 2,462 2,168 6,594 6,022
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Operating Expenses:
Cost of Product Related and
Contract Manufacturing Revenues 1,935 1,614 3,835 3,009
Research and Development 2,682 3,842 5,763 11,271
Equity Loss in Subsidiary - 452 1,020 740
Selling and Marketing 1,283 1,440 2,334 2,567
General and Administrative 1,216 1,372 2,621 2,902
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Total Operating Expenses 7,116 8,720 15,573 20,489
----------- --------- ----------- ----------
Operating Loss (4,654) (6,552) (8,979) (14,467)
Interest Income 222 181 428 445
Interest Expense (220) (73) (437) (146)
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Net Loss (4,652) (6,444) (8,988) (14,168)
Dividends on Series B Preferred Stock (37) - (119) -
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Net Loss to Common Stockholders $ (4,689) $ (6,444) $ (9,107) $ (14,168)
=========== ========== ========== ===========
Basic and Diluted Net Loss
per Common Share $ (0.08) $ (0.13) $ (0.17) $ (0.28)
=========== ========== ========== ===========
Basic and Diluted Weighted Average
Common Shares Outstanding 55,334 51,129 54,065 51,111
========== ========= ========== ===========
The accompanying notes are an integral part of these statements.
3
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
Year-To-Date Ended June 30,
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (8,988) $ (14,168)
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Adjustments to Reconcile Net Loss to Cash Used for
Operating Activities:
Depreciation and Amortization 677 758
Imputed Interest 81 130
Stock Grants 11 28
Equity Loss in Subsidiary 1,020 770
Changes in Assets and Liabilities:
Accounts receivable, net 2,547 (980)
Inventories 130 99
Other assets 59 (14)
Accounts payable and accrued liabilities 124 (1,046)
Other liabilities 87 -
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Total adjustments 4,736 (255)
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Net cash used for operating activities (4,252) (14,423)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption of Short Term Investments - 4,472
Purchases of Property and Equipment (92) (336)
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Net cash provided by (used for) investing activities (92) 4,136
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Common Stock 26 196
Principal Payment of Capital Lease Obligations (65) (52)
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Net cash provided by (used for) financing activities (39) 144
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Net Decrease in Cash and Cash Equivalents (4,383) (10,143)
Cash and Cash Equivalents, Beginning of Period 7,401 20,296
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Cash and Cash Equivalents, End of Period $ 3,018 $ 10,153
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The accompanying notes are an integral part of these statements.
4
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
CYTOGEN Corporation ("CYTOGEN" or the "Company") is a biopharmaceutical
company engaged in the development, commercialization and marketing of products
to improve diagnosis and treatment of cancer and other disease. In March 1997,
CYTOGEN received approval from U.S. Food and Drug Administration ("FDA") to
market Quadramet , CYTOGEN's product for the relief of pain due to cancers that
have spread to the skeleton and that can be visualized on a bone scan. In
October 1996, CYTOGEN received marketing approval from FDA for the ProstaScint
imaging agent, CYTOGEN's prostate cancer diagnostic imaging product. In
December 1992, FDA approved OncoScint CR/OV imaging agent, CYTOGEN's colorectal
and ovarian cancer specific diagnostic imaging product, for single
administration per patient. In November 1995, FDA approved an expanded
indication allowing for repeat administration of OncoScint CR/OV. All three
products are currently available in the market place. Operations of the
Company are subject to certain risks and uncertainties including, but not
limited to uncertainties related to access to capital, product market
acceptance, product efficacy and clinical trials, technological uncertainty,
uncertainties of future profitability, dependence on collaborative
relationships and key personnel. The Company has incurred losses since its
inception and expects to incur significant operating losses in the future.
There can be no assurance that the Company will ever be able to commercialize
successfully its products or that profitability will ever be achieved.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Management believes the
Company's existing capital resources and other available sources of financing
will be adequate to fund the Company's operations into 1999. Additional
financings are available under certain conditions through the sale of
Preferred Stock under an existing financing commitment. Currently,
the Company does not meet all of the conditions to draw down additional
funds. Based on the Company's historical ability to raise capital and current
market conditions, the Company believes other financing alternatives
(including arrangements with collaborative partners) are available. There
can be no assurance that the existing Preferred Stock financing commitment
or other financial alternatives will be available when needed or at terms
commercially acceptable to the Company. If necessary, management believes it
has the ability to reduce its operating expenses so the Company will have
adequate cash flow to sustain operations into 1999. If an operating expense
reduction plan was implemented, it would require the Company to delay, scale
back or eliminate significant aspects of the Company's operations.
5
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
Basis of Consolidation
The consolidated financial statements include the accounts of CYTOGEN
and its wholly-owned subsidiaries, AxCell Biosciences Corporation ("AxCell")
and Cellcor, Inc. ("Cellcor"). The financial statements also include the
losses of Targon Corporation ("Targon") through March 31, 1998, which
are accounted for on the equity method (see Investment in Subsidiary).
Intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The consolidated financial statements of CYTOGEN Corporation 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 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/A, filed with the
Securities and Exchange Commission, which includes financial statements as
of and for the year ended December 31, 1997. 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.
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.
Investment in Subsidiary (Targon Corporation)
As discussed in Note 3, on March 31, 1998, the Company's ownership
interest in Targon was reduced from 99.75% to 49.875%. As a result, the
Company began accounting for its investment in Targon using the equity method.
In addition, the Company retroactively adopted Emerging Issues Task
Force (EITF) 96-16. Under the equity method, the Company recognized 100% of
Targon's losses in its consolidated statement of operations as "Equity Loss in
Subsidiary" with a corresponding reduction in the carrying amount of its
investment. The use of the equity method had no effect on the Company's
previously reported net loss, stockholders' equity or cash flows. Included
in "Investment in Subsidiary" was a $10 million note receivable from Targon
which bears interest at the six month LIBOR plus 1%, and was adjusted on
a semi-annual basis. This amount was reduced by the equity losses discussed
above. Included in long-term liabilities was a $10 million loan payable
to Elan Corporation, plc ("Elan"), the proceed of which was used to fund
Targon. This loan bears interest at the same terms as described above.
6
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
As a result of the restatement, approximately $549,000 and $941,000 of
research and development expenses recorded in the second quarter and
year-to-date periods ended June 30, 1997, respectively, were reclassified
to "Equity Loss in Subsidiary". The primary effect on the December
31, 1997 balance sheet was the reclassification of Restricted Cash to
"Investment in Subsidiary". All other changes were immaterial.
On August 12, 1998 the Company sold its remaining ownership interest
in Targon to Elan for $2.0 million (see Note 3). As a result, the
Company will recognize a gain of approximately $2.6 million in its
statement of operations in the third quarter of 1998. The Company did
not recognize any of Targon's losses after March 31, 1998.
Net Loss Per Share
Basic net loss per common share is based upon the weighted average
common shares outstanding during each period. Diluted net loss per common
share is the same as basic net loss per common share, as the inclusion of
common stock equivalents would be antidilutive.
Reclassifications
Certain reclassifications have been reflected in the 1997
financial statements to conform with the 1998 presentation.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, which establishes standards
for reporting and disclosure of comprehensive income. SFAS No. 130 is
effective for interim and annual periods beginning after December 15, 1997.
SFAS No. 130 requires additional disclosures in the Company's consolidated
financial statements, but does not have any impact on the Company's financial
position or consolidated results of operations. The Company has reviewed
SFAS No. 130 and determined that for the second quarter and year-to-date
periods ended June 30, 1998 and 1997, no items meeting the definition of
comprehensive income as specified in SFAS No. 130 existed in the financial
statements. As a result, no disclosure is necessary to comply with
SFAS No. 130.
2. QUADRAMET RELATED REVENUES/EXPENSES:
In March 1997, the Company received marketing approval from FDA for
Quadramet. As a result of the approval CYTOGEN recorded a milestone payment
of $2.0 million from The DuPont Merck Pharmaceutical Company
("DuPont Merck"), for manufacturing and marketing rights to Quadramet,
and also recorded a $4.0 million milestone payment to The Dow Chemical Company
7
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
("Dow") for the exclusive license to Quadramet. From the time of
product launch in the second quarter of 1997 up to June 3, 1998,
CYTOGEN recorded royalty revenues from DuPont Merck based on a
percentage of sales of Quadramet or guaranteed contractual minimum
royalty payments, whichever was greater. For the second quarter
and year-to-date periods ended June 30, 1998, CYTOGEN recognized
$33,000 and $1.7 million, respectively, in royalty revenues
compared to $21,000 recorded in each of the comparable periods of
the prior year. Actual sales were substantially less than the
minimum royalties. On June 3, 1998, pursuant to an agreement
between CYTOGEN and DuPont Merck, the minimum royalty arrangement
was discontinued and CYTOGEN reclaimed the marketing rights to
Quadramet. As a result, CYTOGEN is expanding its own sales efforts
to include Quadramet. Through their own technical specialists,
CYTOGEN has been informing the physicians at more than 200 clinical
sites that are certified to use ProstaScint about the benefits of
Quadramet. CYTOGEN will also begin marketing Quadramet directly to
all national cancer centers. CYTOGEN recorded $220,000 of
Quadramet sales in the second quarter of 1998 under the new
arrangement.
CYTOGEN has also paid royalty expenses to Dow since the
product launch in 1997. The royalty expenses are based on a
percentage of sales of Quadramet or guaranteed contractual minimum
royalty payments, whichever is greater. For the second quarter and
year-to-date periods ended June 30, 1998, CYTOGEN recorded $125,000
and $250,000, respectively, in royalty expenses compared to $27,000
recorded in each of the comparable periods of 1997.
3. TARGON CORPORATION:
Targon was established in September 1996 pursuant to
agreements between CYTOGEN and Elan and was a majority-owned
(99.75%) subsidiary of CYTOGEN. On March 31, 1998, Elan exchanged
its shares of the Company's Series A Convertible Preferred Stock
for 50% of CYTOGEN's interest in Targon. On August 12, 1998,
CYTOGEN sold its remaining 49.875% interest in Targon to Elan for
$2.0 million (see Note 1). In addition, on August 14, 1998,
CYTOGEN received $2.0 million from Elan in exchange for a convertible
promissory note. The note is convertible into CYTOGEN common
shares at $2.80 per share, subject to adjustments and matures in
seven years. The note bears interest of 7% compounded semi-annually, however,
such interest shall not be payable in cash but shall be added to the
principal for the first 24 months; thereafter, interest shall be payable in
cash. As a result of the sale, the warrant to purchase up to 1 million
shares of CYTOGEN common stock previously granted to Elan and all notes
among CYTOGEN, Elan and Targon were canceled.
4. CONVERSION OF CYTOGEN'S SERIES B PREFERRED STOCK:
During the second quarter and year-to-date periods of 1998, the
aggregate face amounts of $3.5 million and $6.5 million, respectively,
of the Company's Series B Preferred Stock ("Series B")
8
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
issued in December 1997 were converted into common stock resulting
in the issuance of 3,422,549 and 5,580,309 shares, respectively, of
CYTOGEN common stock for both the conversion and accrued dividends.
On July 1, 1998, all remaining Series B was converted into common
stock resulting in the issuance of 1,796,745 shares including stock
dividends.
5. SERIES C JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS
One Series C Junior Participating Preferred Stock purchase
right (the "Right") which has a redemption value of $0.01 was
distributed as a dividend for each of CYTOGEN common share
held of record as of the close of June 30, 1998. The Rights will
be exercisable if a person or a group acquires beneficial ownership
of 20% or more of CYTOGEN common stock and can be made exercisable
by action of CYTOGEN's Board of Directors if a person or a group
commences a tender offer which would result in such person or group
beneficially owning 20% or more of CYTOGEN common stock. Each
Right will entitle the holder to buy one one-thousandth of a share
of Series C Junior Participating Preferred Stock for $20. The
Rights will expire on June 19, 2008.
9
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
From time to time, as used herein, the term "Company" may
include CYTOGEN and its wholly owned subsidiaries AxCell and
Cellcor, taken as a whole, where appropriate.
Results of Operations
Background. To date, the Company's revenues have resulted
primarily from (i) sales of ProstaScint and OncoScint, and
starting on June 3, 1998, sales of Quadramet, (ii) royalties
earned through June 2, 1998 on Quadramet sales by DuPont Merck,
(iii) the recovery of costs related to the treatment of patients
receiving autolymphocyte therapy ("ALT") for metastatic renal cell
carcinoma ("mRCC") under a Treatment Investigational New Drug
program and compassionate protocol which permits patients who do
not qualify for or have completed treatment under an ongoing study
approved by FDA to receive treatment, (iv) payments received from
contract manufacturing and research services pursuant to agreements,
(v) fees generated from the licensing of its technology and
marketing rights to its products, and (vi) milestone payments
received when events stipulated in the collaborative agreements
with third parties have been achieved.
In May 1997, CYTOGEN launched Quadramet, a drug used to
relieve pain associated with cancers that have spread to the
skeleton and can be visualized on a bone scan. Quadramet was
manufactured and marketed in the United States by DuPont Merck.
Under this arrangement, CYTOGEN recorded royalty revenues based on
a percentage of sales of Quadramet or guaranteed contractual
minimum royalty payments, whichever was greater. Actual sales were
substantially less than the minimum royalties. On June 3, 1998,
pursuant to an agreement between CYTOGEN and DuPont Merck, CYTOGEN
reclaimed marketing rights to Quadramet and the minimum royalty
arrangement was terminated. As a result, near-term royalty
revenues are adversely affected and Quadramet revenues are now
based on actual sales.
As part of the agreement, DuPont Merck has begun efforts to
identify a new partner to market Quadramet. DuPont Merck continues
to manufacture Quadramet and CYTOGEN is expanding its own sales
efforts to include Quadramet. Through their own technical
specialists, CYTOGEN has been informing the physicians at more than
200 clinical sites that are certified to use ProstaScint about the
benefits of Quadramet. CYTOGEN will also begin marketing Quadramet
directly to all national cancer centers.
CYTOGEN is currently reviewing its options for sale or
closure of the Cellcor subsidiary to focus on its primary business
of marketing Quadramet and ProstaScint. The Company anticipates
that this action will reduce operating expenses significantly and
permit allocation of additional resources to other Company
priorities. Cellcor management is seeking potential partners for the
future funding and development of ALT, but, operations will cease on or
about mid September 1998 should a transaction appear not likely to be
concluded promptly. Management of Cellcor has expressed interest in a
buyout of the operation, which the Board is considering while remaining
open to discussions with other interested parties.
10
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
On August 12, 1998, CYTOGEN completed the sale of its
remaining 49.875% ownership interest of Targon to Elan for $2.0
million As a result, the Company did not recognize any of Targon's
losses after March 31, 1998 and will recognize a gain of approximately
$2.6 million in its statement of operations in the third
quarter of 1998. All previous notes among CYTOGEN, Targon and Elan
were canceled. Also on August 14, 1998, CYTOGEN received $2.0
million from Elan in exchange for a convertible promissory note.
See Note 3 to The Consolidated Financial Statements.
Second quarter ended June 30, 1998 and 1997
Revenues. Total revenues for the second quarter in 1998
and 1997 were $2.5 million and $2.2 million, respectively. The
product related revenues, which included product sales and
Quadramet royalties, accounted for 76% of total revenues in 1998
versus 61% from the same period of 1997. License and contract
revenues accounted for the remainder of revenues with 24% and 39%
of total revenues recorded in the second quarter of 1998 and 1997,
respectively.
Product related revenues for the second quarter in 1998 and
1997 were $1.9 million and $1.3 million, respectively. ProstaScint
accounted for 77% and 75% of product related revenues in the second
quarter of 1998 and 1997, respectively, while Quadramet royalties
and sales revenue accounted for 13% and 2% of product related
revenues for the comparable periods in 1998 and 1997, respectively
(see Note 2 to The Consolidated Financial Statements). ProstaScint
and Quadramet were introduced to the market during the first and
second quarter of 1997, respectively. The increase of ProstaScint
sales over prior year period was attributable to the increased
market acceptance of the product, as well as to the increased
number of Partners in Excellence (" PIETM") sites which are
qualified to offer ProstaScint scans. The increase in PIE sites
has included a number of major cancer centers across the country.
Sales of ProstaScint were $1.5 million in the second quarter of
1998 compared to $1.0 million in the second quarter of 1997, while
revenues from Quadramet were $253,000 in the second quarter of 1998
compared to $21,000 in the second quarter of 1997. Revenues from
Others including sales from OncoScint and ALT treatments were
$172,000 in 1998 compared to $312,000 recorded in the comparable
period of 1997.
License and contract revenues for the second quarter in 1998
and 1997 were $579,000 and $837,000, respectively. The second
quarter 1998 license and contract revenues included $427,000 in
contract manufacturing revenues from eight customers and $110,000
from Boston Life Sciences for clinical services. The second
quarter 1997 revenues included $365,000 and $215,000 in research
revenues from DuPont Merck for continued clinical development of
Quadramet and from Elan, respectively, and $257,000 in contract
manufacturing revenues from six customers. License and contract
revenues have fluctuated in the past and may fluctuate in the
future.
Operating Expenses. The current year operating expenses
reflect the Company's continued efforts to control spending. In
the second quarter of 1998, operating expenses were $7.1 million
compared to $8.7 million recorded in the same period of 1997. In
addition to savings attributable to cost containing efforts, the
decrease from the prior year is also due to the absence of Targon's
loss in the second quarter of 1998 (see Note 1 to Consolidated
Financial Statements), partially offset by increased costs in 1998
11
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
from royalty expenses and manufacturing costs associated with
higher product related and contract manufacturing revenues.
Cost of product related and contract manufacturing revenues
for the second quarter of 1998 were $1.9 million compared to $1.6
million recorded in the same period of the prior year. The
increase from the prior year period is due primarily to increased
manufacturing costs associated with increased revenues in 1998, and
royalty expenses related to Quadramet (see Note 2 to the Consolidated
Financial Statements).
Research and development expenses for the second quarter of
1998 were $2.7 million compared to $3.8 million recorded in the
same period of 1997. These expenses principally reflect product
development efforts and support of clinical trials. The decrease
from the prior year period is due to various savings from the
Company's product development efforts in 1998.
Equity loss in subsidiary (Targon) for the second quarter of
1998 and 1997 was $0 and $452,000, respectively. As a result of a
sale of CYTOGEN's ownership interest in Targon to Elan, CYTOGEN did
not recognize any of Targon's losses after March 31, 1998 (see Note 1
to the Consolidated Financial Statements). In connection with the sale,
CYTOGEN will recognize a gain of approximately $2.6 million in its
statement of operations for the third quarter of 1998.
Selling and marketing expenses were $1.3 million and $1.4 million for
the second quarter of 1998 and 1997, respectively. The 1998 expenses
reflected the marketing efforts to increase ProstaScint sales and
expenses to establish and maintain PIE sites. The 1997 expenses included
expenses associated with ProstaScint launch and PIE program.
General and administrative expenses for the second quarter in 1998
were $1.2 million which is lower than the $1.4 million recorded in
the comparable period of 1997 due to cost containment efforts.
Interest Income/Expense. Interest income for the second quarter in
1998 was $222,000 compared to $181,000 realized in the same period of 1997.
The increase from the prior year period is due to the $171,000 interest
income realized in the second quarter of 1998 from the $10.0 million
note due to CYTOGEN from Targon, partially offset by lower investment
income due to lower cash and short term investment balances for the
periods. The $10.0 million note was canceled as a result of a sale
to Elan of CYTOGEN's ownership in Targon on August 12, 1998.
Interest expense for the second quarter of 1998 was $220,000
compared to $73,000 recorded in the same period of 1997. The
increase from the prior year period is due to the second quarter
1998 interest expense of $171,000 associated with the $10.0 million
note due to Elan, which was canceled as a result of a sale to Elan of CYTOGEN's
ownership in Targon on August 12, 1998.
12
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
Net Loss. Net loss to common stockholders for the second
quarter in 1998 was $4.7 million compared to a net loss of $6.4
million incurred in the same period of 1997. The loss per common
share was $0.08 on 55.3 million average common shares outstanding
compared to $0.13 on 51.1 million average common shares outstanding
for the same period in 1997. The 1998 net loss to common stockholders
included $37,000 of accrued dividends on the Series B Preferred Stock.
Year-to-date periods ended June 30, 1998 and 1997
Revenues. Total revenues for the year-to-date periods of
1998 and 1997 were $6.6 million and $6.0 million, respectively.
The product related revenues accounted for 81% of total revenues in
1998 versus 37% from the same period of the prior year. License
and contract revenues accounted for the remainder of revenues with
19% and 63% of total revenues recorded in the year-to-date periods
of 1998 and 1997, respectively.
Product related revenues for the year-to-date periods in
1998 and 1997 were $5.3 million and $2.2 million, respectively.
ProstaScint accounted for 56% and 73% of product related revenues
in 1998 and 1997, respectively, while Quadramet royalty and sales
revenue accounted for 35% and 1% of product related revenues in
1998 and 1997, respectively (see Note 2 to The Consolidated
Financial Statements). Sales from ProstaScint were $3.0 million in
the year-to-date period of 1998 compared to $1.6 million in the
comparable period of 1997. Royalty and sales revenues from
Quadramet were $1.9 million and $21,000 in 1998 and 1997, respectively.
Revenues from Others including sales from OncoScint and
ALT treatments were $468,000 in 1998 compared to $579,000 recorded
in the comparable period of 1997.
License and contract revenues for the year-to-date periods
in 1998 and 1997 were $1.2 million and $3.8 million, respectively.
The 1998 license and contract revenues included $912,000 in
contract manufacturing revenues from nine customers, $176,000 from
Boston Life Sciences for clinical services and $75,000 in a
milestone payment from Faulding (Canada), Inc. The 1997 revenues
included a $2.0 million milestone payment from DuPont Merck,
$729,000 and $532,000 in research revenues from DuPont Merck for
continued clinical development of Quadramet and from Elan,
respectively, and $410,000 in contract manufacturing revenues from
eight customers.
Operating Expenses. As mentioned above, the current year
operating expenses reflect the Company's continued efforts to
control spending. For the year-to-date period in 1998, operating
expenses were $15.6 million compared to $20.5 million recorded in
the same period of 1997. The decrease from the prior year period
is due to a one-time $4.0 million milestone payment to Dow recorded
in the first quarter of 1997 upon the approval of Quadramet by FDA
and the overall savings from cost containing efforts in 1998,
partially offset by increased costs in 1998 from royalty expenses
and manufacturing costs associated with higher product related and
contract manufacturing revenues.
Cost of product related and contract manufacturing revenues
for the year-to-date period in 1998 were $3.8 million compared to
$3.0 million recorded in the same period of 1997. The increase
from the prior period is due primarily to increased manufacturing
13
Item 2 - Management's Discussion and Anlaysis of Financial
Condition and Results of Operations (Cont'd)
costs associated with increased revenues in 1998, and royalty
expenses related to Quadramet (see Note 2 to the Consolidated
Financial Statements).
Research and development expenses for the year-to-date period
in 1998 were $5.8 million compared to $11.3 million recorded in
the same period of 1997. These expenses principally reflect
product development efforts and support of clinical trials. The
decrease from the prior year period is due to the aforementioned
$4.0 million milestone payment to Dow in the first quarter of 1997
combined with various savings from the Company's product development
efforts in 1998.
Equity loss in subsidiary (Targon) for the year-to date periods
in 1998 and 1997 was $1.0 million and $740,000, respectively. Targon's
expenses reflected product development and clinical trials programs.
During the first quarter of 1998, Targon's program costs and
commitments had increased due to the financial support of the Duke
University research agreement, the addition of costs related to new
products acquired by Targon and the acceleration of clinical programs.
Targon's losses were not recorded after March 31, 1998 as a result of
the sale of CYTOGEN's ownership interest in Targon to Elan (see Note 1
to the Consolidated Financial Statements). In addition, CYTOGEN will
record a gain of approximately $2.6 million in its statement of
operations in the third quarter 1998 for this transaction.
Selling and marketing expenses were $2.3 million and $2.6
million for the year-to-date periods of 1998 and 1997, respectively.
The 1998 expenses reflected the marketing efforts to increase ProstaScint
sales and expenses to establish and maintain PIE sites. The 1997 expenses
included expenses associated with ProstaScint launch and PIE program.
General and administrative expenses for year-to-date period
in 1998 were $2.6 million which is slightly lower than the $2.9
million recorded in the comparable period of 1997.
Interest Income/Expense. Interest income for the year-to-date
period in 1998 was $428,000 compared to $445,000 realized in
the same period in 1997. The increase from the prior year period
is due to the $339,000 interest income realized in 1998 from the
$10.0 million note due to CYTOGEN from Targon, partially offset by
lower investment income due to lower cash and short term investment
balances for the periods. As mentioned above, the note was canceled as
a result of a sale of Targon to Elan.
Interest expense for the year-to-date period in 1998 was $437,000
compared to $146,000 recorded in the same period of 1997. The increase from
the prior year period is due to the 1998 interest expense of $339,000
associated with the $10.0 million note due to Elan which was canceled
as a result of a sale of Targon to Elan in August 1998.
Net Loss. Net loss to common stockholders for the year-to-date
period of 1998 was $9.1 million compared to a net loss of $14.2 million
incurred in the same period of 1997. The loss per common share was $0.17
on 54.1 million average common shares outstanding compared to $0.28
14
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
on 51.1 million average common shares outstanding for the same period in 1997.
The 1998 net loss to common stockholders included $119,000 of accrued
dividends on the Series B Preferred Stock.
Liquidity and Capital Resources
The Company's cash and cash equivalents were $3.0 million as of June 30,
1998, compared to $7.4 million as of December 31, 1997 and $2.5 million
as of March 31, 1998. The cash used for operating activities for the
year-to-date period ended June 30, 1998 was $4.3 million compared to
$14.4 million in the same period of 1997. The decrease in cash usage for
operating activities from the prior year period was primarily due to
lower research and development spendings and to the receipts of revenues
generated from Quadramet and ProstaScint.
Historically, the Company's primary sources of cash have been proceeds
from the issuance and sale of its stock through public offerings and
private placements, product related revenues, revenues from contract
manufacturing and research services, fees paid under its license agreements
and interest earned on its note receivable from Targon and its cash and
short term investments.
On August 14, 1998, CYTOGEN received $4.0 million from Elan, $2.0 million
for the purchase of CYTOGEN's remaining interest in Targon and $2.0 million
in exchange for a convertible promissory note. The note is convertible into
CYTOGEN common shares at $2.80 per share, subject to adjustments, and matures
in seven years. The note bears interest of 7% compounded semi-annually,
however, such interest shall not be payable in cash but shall be added
to the principal for the first 24 months; thereafter, interest shall be payable
in cash.
In 1997, the Company completed $7.5 million of a $20.0 million financing
commitment with a group of private investors, whereby the Company, on
satisfaction of certain conditions, has the option to draw down the balance
of the commitment or $12.5 million over the course of 1998. The financing is
in the form of a 6% convertible preferred stock which is convertible by the
investors at any time and convertible or redeemable by the Company, at
its option, in three years. The dividend is payable in cash or common stock of
CYTOGEN at the Company's option at the earlier of the conversion date or
when and as declared by the Board of Directors (see Note 4 to the Consolidated
Financial Statements). Currently, the Company does not meet all of the
conditions to draw down the additional funds.
Quadramet. Quadramet was launched by DuPont Merck in June 1997. An
agreement in 1994 between CYTOGEN and DuPont Merck provided for CYTOGEN to
receive from DuPont Merck royalty revenues based on a percentage of sales of
Quadramet or guaranteed contractual minimum royalty payments, whichever was
greater. Actual sales were substantially less than the minimum royalties.
For the year-to-date periods ended June 30, 1998 and 1997, CYTOGEN recorded
$1.7 million and $21,000, respectively, in royalty revenues for Quadramet.
The minimum royalty arrangement was discontinued on June 3, 1998 (see
Note 2 to the Consolidated Financial Statements). As a result, near-term
15
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
royalty revenues are affected adversely. CYTOGEN reclaims
the marketing rights to Quadramet from DuPont Merck and beginning on
June 3, 1998, Quadramet revenues are recorded based on actual sales.
CYTOGEN recorded $220,000 of Quadramet sales for 1998.
CYTOGEN acquired from Dow an exclusive license to Quadramet in the U.S.,
Canada and Latin America. The agreement requires the Company to pay Dow
royalties based on a percentage of net sales of Quadramet, or guaranteed
contractual minimum payments, whichever is greater, and future payments
upon achievement of certain milestones. Minimum royalties due Dow for 1998
are $500,000. For the year-to-date periods ended June 30, 1998 and 1997, the
Company recorded $250,000 and $27,000 in royalty expenses for Quadramet.
ProstaScint. ProstaScint was launched in February 1997. Significant
cash will be required to support the Company's marketing program and
expansion and maintenance of the PIE program.
In 1996, CYTOGEN entered into an agreement with Bard
(the "Co-Promotion Agreement") to market and promote ProstaScint, pursuant
to which Bard will make payments upon the occurrence of certain milestones,
which include expansion of co-marketing rights in selected countries outside
the U.S. During the term of the Co-Promotion Agreement, Bard will receive
performance-based compensation for its services. For the year-to-date
periods in 1998 and 1997, the Company recorded $300,000 and $217,000,
respectively, for Bard commissions.
OncoScint CR/OV. To date, sales of OncoScint CR/OV have not been
material and are not expected to become a significant source of cash flow
in the future. In 1994, the Company reacquired all U.S. marketing rights
to OncoScint from Knoll Pharmaceuticals Company ("Knoll") and is required
to pay Knoll $1.7 million on or before December 15, 1998 in addition to accrued
interest from July 1, 1998 (the original due date) through the date of
payment at the prevailing prime rate of interest as of such date. The
Company will fund this payment from product related revenues and other sources.
In July 1997, the Company obtained a $10.0 million loan from Elan.
The funds were used by CYTOGEN to provide funding to Targon. The note was
canceled as a result of a sale of Targon to Elan (see Note 3 to the
Consolidated Financial Statements). For the year-to-date period in 1998,
the Company recorded $339,000 of interest expense in connection with this
note.
The Company's capital and operating requirements may change depending
upon various factors, including: (i) the ability of DuPont Merck, with
CYTOGEN's collaboration, to successfully identify and engage a third party
to market Quadramet and achieve its full market potential; (ii) the
success of the Company and its strategic partners in manufacturing, marketing
and commercialization of its products; (iii) the amount of resources which
the Company devotes to clinical evaluations and the expansion of marketing
and sales capabilities; (iv) results of preclinical testing, clinical trials
and research and development activities; and (v) competitive and technological
developments.
16
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
The Company's financial objectives are to meet its capital and
operating requirements through revenues from existing products, contract
manufacturing, license and research contracts, and from control of spending.
To achieve its strategic objectives, the Company 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 the Company in either cash or stock in addition to
the costs associated with developing and marketing a product or technology.
The Company currently has no commitments or specific plans for acquisitions
or strategic alliances. However, the Company believes 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. To fund these strategic and operating
activities, the Company may sell equity and debt securities as market
conditions permit or enter into credit facilities.
The Company has incurred negative cash flows from operations since
its inception, and has expended, and expects to continue to expend in the
future, substantial funds to complete its planned product development
efforts, including acquisition of products and complementary technologies,
research and development, clinical studies and regulatory activities, and
to further expand its marketing, sales, manufacturing and distribution
activities. The Company expects that its existing capital resources and
other available sources of financing will be adequate, together with decreased
operating costs, to fund the Company's operations into 1999. No assurance
can be given that the Company will not consume a significant amount of its
available resources before that time. In addition, the Company expects
that it will have additional requirements for debt or equity capital,
irrespective of whether and when it reaches profitability, for further
development of products, product and technology acquisition costs, and
working capital. The Company's future capital requirements and the
adequacy of available funds will depend on numerous factors, including the
successful commercialization of its products, the costs associated with the
acquisition of complementary products and technologies, progress in its
product development efforts, the magnitude and scope of such efforts,
progress with preclinical studies and clinical trials, progress
with regulatory affairs activities, the cost of filing, prosecuting, defending
and enforcing patent claims and other intellectual property rights,
competing technological and market developments, and the expansion of
strategic alliances for the sales, marketing, manufacturing and distribution
of its products. To the extent that funds generated from the Company's
product-related and license and contract revenues, together with its
existing capital resources are insufficient to meet current or
planned operating requirements, the Company will be required to obtain
additional funds through equity or debt financing, strategic alliances
with corporate partners and others, or through other sources. The Company
has a commitment pursuant to which it may issue up to $12.5 million in
additional series of convertible preferred stock, under certain conditions.
Currently, the Company does not meet all of the conditions to draw down the
additional funds. Based on the Company's historical ability to raise capital
and current market conditions, the Company believes other financing
alternatives are available. There can be no assurance that the financing
commitment described above or other financial alternatives will be available
when needed or at terms commercially acceptable to the Company. If
adequate funds are not available, the Company may be required to delay, scale
17
back or eliminate certain aspects of its operations or attempt to obtain funds
through arrangements with collaborative partners or others that may require
the Company to relinquish rights to certain of its technologies, product
candidates, products or potential markets. If adequate funds are not
available, the Company's business, financial condition and results of
operations will be materially and adversely affected. However, the Company
believes that it has the ability to reduce its operating expenses so that
it will have adequate cash flow to sustain operations into 1999.
======================
Cautionary Statement
The foregoing discussion contains historical information as well as
forward looking statements that involve a number of risks and uncertainties.
In addition to the risks discussed above, among other factors that could cause
actual results to differ materially from expected results are the following:
(i) the Company's ability to continue as a going concern if the Company is
unable to raise sufficient funds or generate sufficient cash flows from
operations to cover the cost of its operations; (ii) the Company's ability
to access the capital markets in the near term and in the future for
continued funding of existing projects and for the pursuit of new projects;
(iii) the timing and results of clinical studies; (iv) market acceptance of
the Company's products, including programs designed to facilitate use of
the products, such as the PIE Program; (v) the decision by the majority
of public and private insurance carriers on whether to reimburse patients
for the Company's products; (vi) the profitability of its products; (vii) the
ability to attract, and the ultimate success of strategic partnering
arrangements, collaborations, and acquisition candidates; (viii) the ability
to attract additional contract manufacturing customers; (ix) the ability of the
Company and its partners to identify new products as a result of those
collaborations that are capable of achieving FDA approval, that are
cost-effective alternatives to existing products and that are ultimately
accepted by the key users of the product; (x) the success of the Company's
marketing partners in obtaining marketing approvals in Canada and in European
countries, in achieving milestones and achieving sales of products resulting
in royalties; and (xi) the engagement by the Company of a new partner for the
marketing of Quadramet.
PART II - OTHER INFORMATION
- ------- -----------------
Item 3 - Legal Proceedings
During March 1998, a lawsuit was instituted against the Company in the
Federal District Court for the Eastern District of Pennsylvania by
Quaker Capital Group ("Quaker"), claiming rights to fees in connection
with a financing concluded by the Company in December 1997, based on a
financing engagement entered with Quaker during 1997. During July,
1998, the Company entered into a settlement with Quaker dismissing the
lawsuit and terminating the financing agreement. Although the Company
believes it had substantial defense to the claim and meritorious
claims against Quaker, it settled the case for an amount it believed
appropriate in order to avoid the costs and distractions of
litigation. The amount of the settlement was not material.
Item 4 - Submission of Matters to the Vote of Security Holders
On June 17, 1998, the Company held its annual meeting of
stockholders to elect directors and transact such other
business as might be brought before the meeting.
The following tables set forth information regarding the
number of votes cast for, against or withheld, abstentions
and broker non-votes, with respect to each matter presented
at the meeting. Under the rules of the Nasdaq National
Market, brokers who hold shares in street name for customers
who are beneficial owners of those shares may be prohibited
from giving a proxy to vote shares held for such customers on
certain matters without specific instructions from such
customers ("broker non-votes"). Under Delaware law, abstentions
and broker non-votes are counted as shares represented
at the meeting for purposes of determining the presence or
absence of a quorum at a stockholders' meeting. The election
of directors is decided by a plurality of the votes cast.
Therefore, votes that are withheld have no effect on the
outcome of the vote. Brokers generally have discretionary
authority with respect to the election of directors.
(i) Election of Directors:
Broker
Nominee For Withheld Abstentions Non-Votes
------- --- -------- ----------- ---------
John E. Bagalay Jr. 46,045,347 2,366,208 N/A N/A
Ronald J.Brenner 46,464,040 1,947,515 N/A N/A
James A. Grigsby 46,437,845 1,973,710 N/A N/A
Robert F. Hendrickson 46,426,800 1,984,755 N/A N/A
(ii) No other business was transacted at the meeting.
19
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
1. Rights Agreement, dated as of June 19, 1998, between CYTOGEN
Corporation and Chase Mellon Shareholder Services, L.L.C., as Rights
Agent. The Rights Agreement includes the Form of Certificate of
Designations of Series C Junior Preferred Stock as Exhibit A, the
form of Rights Certificate as Exhibit B and the Summary of Rights as
Exhibit C. Filed as an exhibit to Form 8-K dated June 17, 1998
(Commission File No. 333-020015) and incorporated herein by reference.
10.1 Letter Agreement dated as of June 3, 1998 between CYTOGEN
Corporation and The DuPont Merck Pharmaceutical Company.
Filed herewith.*
10.2 Agreement to Amend the Agreement to Terminate License, Supply
and Marketing Agreement and Letter Agreement by and between
CYTOGEN Corporation and Knoll Pharmaceutical Company, dated as
of July 23, 1998. Filed herewith.
10.3 Reorganization Agreement dated as of August 12, 1998 among CYTOGEN
Corporation, Targon Corporation, Elan, plc. and Elan International
Services, Ltd. Filed herewith.
10.4 Convertible Promissory Note dated as of August 12, 1998 between
CYTOGEN Corporation and Elan International Services, Ltd.
Filed herewith.
27 Financial Data Schedule (Submitted to SEC only in electronic
format).
* CYTOGEN Corporation has requested confidential treatment of certain
provisions contained in this exhibit. The copy filed as an exhibit
omits the information subject to the confidentiality request.
(b) Reports on Form 8-K:
The Company filed three reports on Form 8-K during the three months
ended June 30, 1998 and the dates of such reports were May 22, 1998,
June 8, 1998 and June 17, 1998. The Form 8-K dated May 22, 1998
reported on "Item 5. Other Events" with respect to a press release
announcing a lawsuit instituted by CYTOGEN Corporation against The
DuPont Merck Pharmaceutical Company for breaching the Quadramet
license agreement. The Form 8-K dated June 8, 1998 reported on
"Item 5. Other Events" with respect to a press release announcing
plans for the next phase of marketing for Quadramet. The Form 8-K
dated June 17, 1998 reported on "Item 5. Other Events" regarding the
adoption of Stockholder Rights Plan and the declaration of a dividend
of one preferred share purchase right for each outstanding share of
CYTOGEN's common stock.
20
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 August 14, 1998 By /s/ Jane M. Maida
--------------------- ------------------------
Jane M. Maida
Chief Accounting Officer
21