SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
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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 No. 0-16132
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CELGENE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2711928
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification)
7 Powder Horn Drive
Warren, New Jersey 07059
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(Address of principal (Zip Code)
executive offices)
(732) 271-1001
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_}
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of registrant as
of March 1, 1998: $138,720,510
Number of shares of Common Stock outstanding as of March 1, 1998: 15,991,950
CELGENE CORPORATION
ANNUAL REPORT ON FORM 10-K
This Form 10-KA amends Celgene Corporation's 10-K for the fiscal year ended
December 31, 1997 in the following respects: (1) The headings in the Selected
Financial Data chart in Item 6 have been reversed so as to read from left to
right: 1993, 1994, 1995, 1996 and 1997; (2) The information to be provided
pursuant to Items 10-13 hereof has been included; and (3) On page F-5, the
figure "(2,777,777)" has been moved from the "Treasury Stock-Shares" column in
the "Deemed dividend for preferred stock conversion discount" row to the
"Preferred Stock-Amount" column of the same row.
TABLE OF CONTENTS
Item No. Page
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Part I
1. Business ............................................................................... 1
2. Properties ............................................................................. 18
3. Legal Proceedings ...................................................................... 18
4. Submission of Matters to a Vote of Security Holders .................................... 18
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters .................. 19
6. Selected Financial Data ................................................................ 20
7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 21
8. Financial Statements and Supplementary Data ............................................ 24
9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.... 24
Part III
10. Directors and Executive Officers of the Registrant ..................................... 25
11. Executive Compensation ................................................................. 27
12. Security Ownership of Certain Beneficial Owners and Management ......................... 33
13. Certain Relationships and Related Transactions ......................................... 34
Part IV
14. Exhibits, Financial Statements, and Reports on Form 8-K ................................ F-1
PART I
ITEM 1. BUSINESS
Celgene Corporation ("Celgene" or the "Company") is a specialty
pharmaceutical company engaged in the development and commercialization of
human pharmaceuticals and agrochemicals, and employs two broad technology
platforms: (i) small molecule immunotherapeutic compound development and (ii)
biocatalytic chiral chemistry. The initial therapeutic focus of the immunology
program is the development of small molecule pharmaceuticals that have the
potential to selectively regulate Tumor Necrosis Factor alpha ("TNF-[alpha]"),
a protein whose overproduction has been linked to many chronic inflammatory and
immunological diseases. The Company's lead compound in immunology is
THALOMIDTM, its formulation of thalidomide, a potent yet selective inhibitor of
TNF-[alpha]. On September 19, 1997, the Company received an approvable letter
from the U.S. Food and Drug Administration ("FDA") for THALOMID for the
treatment of erythema nodosum leprosum ("ENL"), an inflammatory complication of
leprosy. The Company expects to submit an additional New Drug Application
("NDA") in 1998 to market THALOMID in the treatment of cachexia (wasting) in
patients with Acquired Immune Deficiency Syndrome ("AIDS"). Celgene has further
applied its expertise in small molecule chemistry to develop novel and
proprietary thalidomide analogues, called IMiDs[TM] (Immunomodulatory Drugs) as
well as a class of proprietary immunotherapeutic pharmaceutical compounds
called SelCIDs[TM] ("Selective Cytokine Inhibitory Drugs"). These two classes
of compounds are orally administered small molecules that are highly specific
for the suppression of TNF-[alpha] and are intended to treat chronic
inflammatory diseases and other disorders.
The initial therapeutic focus of the biocatalytic chiral chemistry program
is the development of chirally pure pharmaceuticals designed to have greater
efficacy and fewer side effects than existing racemic versions. The Company's
lead compound in this area is a chirally pure version of dl-methylphenidate
(currently marketed under the trade name Ritalin[RegTM]). The Company completed
a Phase I/II trial in Fall 1997 and announced that its chirally pure version
demonstrated statistically significant efficacy versus placebo and preliminary
indications of longer duration of action relative to the racemic version. The
Company is also employing its biocatalytic chiral chemistry technology to
develop chirally pure agrochemicals with superior attributes and/or lower
manufacturing costs than the conventional, non-chirally pure equivalent.
The Company is currently developing THALOMID for the treatment of a
variety of serious disease states for which there are currently no adequate
approved therapies. The Company received an approvable letter from the FDA to
market THALOMID to treat ENL. In April 1997, the Company announced that data
from its Phase II/III trial of thalidomide for the treatment of cachexia
(wasting) in patients with AIDS showed a statistically significant positive
result in its primary endpoint, weight gain. The Company expects to submit an
NDA for this indication in 1998. Celgene is also studying thalidomide in
clinical trials for the treatment of Recurrent Aphthous Stomatitis ("RAS"), in
a Phase II/III trial and AIDS--Chronic Diarrhea, in a Phase II trial. In
addition, the Company expects to commence clinical trials in 1998 to study
thalidomide for the treatment of Behcet's disease/Complex Aphthosis, in a Phase
II/III trial, and various oncological applications.
Working with the FDA, Celgene has developed a comprehensive education
program and distribution system designed to support the safe and appropriate
use of thalidomide due to the drug's history of teratogenicity (capacity to
cause birth defects).
Celgene is employing its small molecule immunotherapeutics platform to
develop compounds with the objective of producing an array of novel, highly
potent, selective, safe, orally administered drugs that have the potential to
regulate the overproduction of TNF-[alpha]. Overproduction of TNF-[alpha] has
been implicated in symptoms associated with certain chronic inflammatory
diseases. Chronic inflammatory and immunological diseases collectively afflict
millions of patients, and are inadequately treated with existing therapies. The
Company has developed two classes of compounds, IMiDs and SelCIDs, which have
been demonstrated in in vitro tests using human cells to be significantly more
capable than thalidomide at suppressing TNF-[alpha] production and, in
preclinical tests, have not demonstrated teratogenicity. The initial
therapeutic indications targeted for the IMiDs and the SelCIDs include
inflammatory bowel disease, rheumatoid arthritis and oncological applications.
The Company's first SelCID was found to be well tolerated in a single dose
Phase I clinical trial in the United Kingdom, and a multiple dosing trial was
recently initiated. The United States Patent and Trademark Office ("U.S. PTO")
has issued composition of matter patents to the Company relating to certain of
its novel IMiDs and SelCIDs.
1
Celgene's core chiral technology involves a biocatalytic process.
Biocatalysis involves the identification and manipulation of enzymes to perform
specialized chemical reactions to produce chirally pure compounds. Chirality
refers to the property of many chemical compounds to exist in two or more
different conformations that are mirror images of each other. While one
conformation may have beneficial effects, the other or others may be inactive
or produce undesirable effects. Chirally pure compounds contain only one of
these conformations, and thus may have attributes superior to those of the
racemic mixture.
The Company is employing its biocatalytic chiral chemistry technology to
develop its own chirally pure versions of existing pharmaceutical products that
may demonstrate greater efficacy and/or fewer side effects than existing
racemic products. The Company filed Investigational New Drug applications
("INDs") in the United States and Canada for a chirally pure version of
dl-methylphenidate, which has been used for decades in formulations such as
Ritalin[RegTM], for the treatment of Attention Deficit Hyperactivity Disorder
("ADHD") in children. The Company completed its Phase I/II clinical trial of
the drug and announced that its chirally pure version demonstrated
statistically significant efficacy versus placebo and preliminary indications
of longer duration of action relative to the racemic version. The Company is
also developing a chirally pure formulation of mexiletine for the treatment of
neuropathic pain, a chronic pain state frequently associated with trauma,
spinal cord injury, and complications of diabetes. Celgene recently reported
that its chirally pure formulation of mexiletine substantially reduced severe
neuropathic pain in established animal models.
Celgene, through its CelgroTM subsidiary, is also applying its chiral
technology to the production of chirally pure agrochemicals, in which the
Company's biocatalytic process can add significant value by substantially
lowering manufacturing costs and reducing environmental impact. Since 1994, the
Company has been developing a process to manufacture a chirally pure version of
a currently marketed crop protection agent under a research and development
agreement, initially with Sandoz and subsequently with BASF, which acquired
Sandoz' agrochemical business. The Company has successfully scaled up its
process technology to demonstrate ability to produce commercial quantities of
the BASF product.
Celgene has established a sales and marketing organization to
commercialize THALOMID and initially intends to employ approximately 25 persons
in this capacity. The Company intends to develop and market its own
pharmaceuticals for indications with smaller patient populations. With drugs
for indications with larger patient populations, the Company anticipates
partnering with pharmaceutical companies. The Company also anticipates
partnering with companies for the development and commercialization of the
Company's chirally pure pharmaceutical and agrochemical products. Celgene
expects that these arrangements typically will include milestone payments,
reimbursement of research and development expenses and royalty arrangements.
2
PRODUCTS UNDER DEVELOPMENT
The Company has exploited its expertise in both small molecule
immunotherapeutic and biocatalytic chiral chemistry to develop a series of
products that the Company believes are approaching commercialization either by
the Company or through partnering arrangements. Celgene's portfolio of product
candidates currently under development is set forth in the following table and
further described below:
Product Indication/Intended Use Status(1)
IMMUNOTHERAPEUTIC PLATFORM
THALOMID(TM) Erythema Nodosum Leprosum Approvable letter received 9/97
("ENL") in leprosy
AIDS--Cachexia Phase II/III Trial completed
AIDS--Recurrent Aphthous Phase II/III Trial
Stomatitis ("RAS")
AIDS--Chronic diarrhea Phase II Trial
Behcet's disease/Complex Phase II/III trial to be
aphthosis commenced
Graft versus host disease Protocol in development
Various oncological applications Protocols in development
IMiDs Inflammatory disease and Preclinical development
oncological applications
SelCIDs(TM)(Selective Cytokine Inflammatory disease and Initial Human Safety Trial
Inhibitory Drugs) oncological applications completed. Expanded Human
Safety trial ongoing. Pilot Phase
II studies to be initiated 1998
CHIRAL PLATFORM
d-MPH (Chirally pure version of Attention Deficit Hyperactivity Phase I/II Trial completed
dl-methylphenidate)(2) Disorder ("ADHD") Pivotal trials to be initiated in
1998
Chirally pure version of Neuropathic pain Preclinical Testing
mexiletine
Chiral biocatalytic technology Reduced manufacturing costs and Discussions ongoing with several
reduced environmental impact companies
(1) See "Government Regulation" for a description of the meaning of terms used
to describe the status of the Company's product development activities.
(2) One commercial formulation of dl-methylphenidate is Ritalin[RegTM].
IMMUNOLOGY
General
Celgene is applying its small molecule immunotherapeutics platform to
develop compounds with the objective of producing an array of novel, highly
potent, selective, safe, orally administered drugs that have the potential to
regulate the overproduction of TNF-[alpha], which has been implicated in
certain chronic inflammatory and immunological diseases. The Company is also
developing two new classes (novel IMiDs and SelCIDs) of orally available small
molecule TNF-[alpha] modulators that are intended to treat chronic inflammatory
diseases and other disorders.
TNF-[alpha], produced primarily by certain white blood cells, is one of a
number of proteins called cytokines, which act as chemical messengers
throughout the body to regulate many aspects of the immune system. TNF-[alpha]
is essential
3
to the mounting of an inflammatory response, which is the normal immune system
reaction to infection or injury, and rids the body of foreign agents and
promotes tissue repair. However, chronic or excessive production of TNF-[alpha]
has been implicated in the pathophysiology of a number of acute and chronic
inflammatory diseases. These disease states which are inadequately treated with
existing therapies, include diabetes (non-insulin dependent), Alzheimer's
Disease, inflammatory bowel disease, rheumatoid arthritis, cancer cachexia,
Parkinson's Disease, multiple sclerosis, and lupus.
Traditional therapies for these disease states include anti-inflammatory
drugs and immunosuppressive agents. These therapies, however, often fail to
achieve significant clinical benefits and can cause serious side effects such
as severe drops in certain blood counts, liver toxicity, osteoporosis,
teratogenicity, and various endocrine abnormalities. Newer therapies, which
include monoclonal antibodies and receptor-based therapies, also have not
adequately addressed these diseases. It is widely believed that selective
inhibition of TNF-[alpha] represents a promising new strategy for treating
chronic inflammatory diseases. In pursuit of this strategy, two broad classes
of compounds have been investigated: proteins and small synthetic molecules.
Investigational anti-TNF-[alpha] proteins, including anti-TNF-[alpha]
antibodies and TNF-[alpha] receptors, have demonstrated efficacy in such
chronic inflammatory diseases as rheumatoid arthritis, inflammatory bowel
disease, and Crohns' disease (a severe manifestation of inflammatory bowel
disease). While initial doses of these anti-TNF-[alpha] proteins have been well
tolerated and reduced disease activity has been observed in clinical studies,
they do exhibit certain shortcomings linked to their nature as proteins. First,
they are relatively larger molecules that must be injected. Second, the period
of efficacy of a given dosage of a protein-based drug often declines with
repeated administration, rendering protein-based drugs more suitable for
treatment of acute pathological conditions rather than chronic disease states.
This limitation is due in part to increasing production by the patient's immune
system of antibodies that neutralize administered proteins. Varying degrees of
this immunogenic response have been observed in clinical trials of
anti-TNF-[alpha] antibodies for the treatment of rheumatoid arthritis and
Crohn's disease.
There are a number of large protein based therapeutic products under
development for TNF-[alpha] modulation. Several pharmaceutical and
biotechnology companies have either antibody or receptor-based products under
development for rheumatoid arthritis, Crohn's disease, and asthma. However,
small molecule drugs exhibit important advantages in the treatment of chronic
inflammatory diseases, including oral dosing versus injection, avoiding the
undesirable immune response leading to side effects and reduced efficacy, and
lower cost of therapy. The Company believes its small molecule
immunotherapeutic compounds have the potential to selectively modulate
TNF-[alpha] while affording these benefits.
In addition, preliminary research has indicated that Celgene's small
molecule immunotherapeutic compounds may be anti-angiogenic. Angiogenesis is
the fundamental biological process by which new blood vessels are formed.
Cancer cells require oxygen and nutrients which they receive from the body's
blood supply. Cancer cells initiate a biochemical mechanism that stimulates
angiogenesis, which in turn provides the cancerous cells with the blood supply
that they need. Celgene's small molecule immunotherapeutic compounds appear to
have the potential to inhibit such angiogenesis.
Thalidomide
The Company is currently developing THALOMID, its formulation of
thalidomide, a potent yet selective inhibitor of TNF-[alpha], for the treatment
of a variety of serious disease states for which there are currently no
adequate therapies. The Company's work with thalidomide is based on a
scientific collaboration with The Rockefeller University's Laboratory of
Cellular Physiology and Immunology ("Rockefeller"). In the early 1990s,
researchers at Rockefeller discovered that thalidomide is a selective modulator
of TNF-[alpha], and therefore could be of potential benefit in many serious
immune related disease states, including AIDS-related conditions. The Company
believes that, in serious and debilitating disease states, the risk of
thalidomide's teratogenicity and other potential side effects is outweighed by
the gravity of the disease and the drug's potential clinical benefits.
Rockefeller has granted Celgene certain exclusive rights and licenses to
manufacture, use and sell thalidomide for treating the toxicity associated with
high concentrations of TNF-[alpha] in septic shock, cachexia and HIV infection.
Thalidomide was developed initially as a sedative, and was also widely
prescribed by doctors in Europe in the late 1950s and early 1960s to pregnant
women for relief of morning sickness. After severe birth defects were later
observed with use of the drug, it was virtually removed from the world market.
Thalidomide was later discovered to have therapeutic effects in the treatment
of ENL in leprosy, a disease that is rare in the United States but common in
many parts
4
of the developing world. Although the FDA has never approved the marketing of
thalidomide, the U.S. Public Health Service has been dispensing the drug for
the treatment of ENL for the past 25 years.
STEPS Program
Working with the FDA and other governmental agencies as well as certain
advocacy groups, the Company has taken measures to institute a program, known
as System for Thalidomide Education and Prescription Safety ("STEPS") for the
safe and effective dispensing of thalidomide. This program will include
comprehensive physician, pharmacist, and patient education. No patient should
be prescribed the drug unless the patient is fully participating in the system,
which includes pregnancy testing and contraception for women, as well as
informed consent and participation in a mandatory and confidential outcomes
registry managed by an academic epidemiology research group. No physician will
be able to prescribe thalidomide unless they agree to comply with the
educational, contraception counseling, informed consent, and pregnancy testing
requirements. No pharmacy will be able to purchase the drug unless the pharmacy
has agreed to confirm that the physician is a registered participant in the
program, and that the patient has signed an informed consent. The program does
not allow automatic refills, and no prescription will be filled for more than
four weeks dosing. Every prescription will be recorded to promote complete
compliance.
5
Target Disease States for Thalidomide
The primary indications for which the Company is currently testing or
about to commence testing THALOMID are set forth below. The table summarizes
the completed, ongoing and planned clinical trials for THALOMID. There can be
no assurance that the Company will eventually commercialize or pursue
regulatory approval for THALOMID for any of these indications.
Indication Status Trial Endpoint
AIDS-related
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Cachexia Phase II/III trial completed; NDA Increase in body weight after 8
expected to file 1998 weeks of dosing
Recurrent aphthous stomatitis Phase II/III trial commenced first Complete healing of all ulcers
("RAS") half 1997
Chronic diarrhea Phase II/III trial commenced 1996 Reduction in frequency of bowel
movements (50%)
Non AIDS-related
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Erythema nodosum leprosum in Approvable letter received
leprosy ("ENL") September 1997
Behcet's disease/complex Phase II/III expected to commence Reduction in existing ulcers;
aphthosis 1998 inhibition of new ulcerations
Graft versus host disease Phase II/III trial protocol in Under discussion with FDA
development
Various oncological applications Protocols in design
AIDS-Related Conditions
The Company is studying thalidomide in the treatment of several
AIDS-related conditions, including cachexia, RAS and chronic diarrhea.
Competing therapies have demonstrated beneficial effects in some of these
conditions, but only thalidomide has shown indications of efficacy in each of
these indications. The Company believes that thalidomide's broad applicability
may result in patients taking fewer pharmaceuticals each day, thus reducing
side effects and potential drug interaction problems.
Cachexia. Cachexia is clinically defined as the involuntary loss of more
than 10% of baseline body weight in the previous six months. Based on available
information, the Company believes that an estimated 50% of AIDS patients (or
approximately 50,000 to 100,000 persons in the United States) suffer from
cachexia at some point in the progression of AIDS. The condition can result
from HIV infection itself, or as a consequence of AIDS-related illnesses.
Cachexia markedly diminishes a patient's quality of life, may contribute
directly to disease progression, the continuing loss of immune function, and to
the development of opportunistic infections and even death. The Company
announced in April 1997 that data from its Phase II/III trial of THALOMID in
HIV-associated weight loss showed "a statistically significant positive result"
in reaching the trial's primary endpoint, i.e. increase in body weight after
eight weeks of therapy. The double-blind placebo-controlled trial evaluated 102
AIDS patients who had lost an average of more than 10 percent of their body
weight. The Company is in advanced discussions with the FDA regarding the
submission of an NDA for this indication which is expected in 1998. In December
1995, the FDA permitted the Company to commence an expanded-access program to
dispense thalidomide for the treatment of cachexia. This program is still
ongoing and permits persons with AIDS cachexia access to the drug.
Recurrent Aphthous Stomatitis. RAS is characterized by lesions of the oral
cavity, esophagus, and gastrointestinal tract and may interfere with normal
eating. The Company believes RAS afflicts an estimated 10,000 AIDS patients.
Positive results have been reported in a study conducted by the AIDS Clinical
Trials Group of the National Institutes of Health using a formulation of
thalidomide manufactured by a third party. In mid-1997, the Company began a
pivotal clinical trial involving 84 patients for the evaluation of thalidomide
in the treatment of RAS, using the same principal investigator as the AIDS
Clinical Trials Group study.
6
Chronic Diarrhea. Frequent intractable diarrhea is a clinically important
condition in AIDS patients. There currently is no effective treatment for this
condition, which results in restricted lifestyle and significant morbidity,
such as weight loss, and which the Company believes may afflict as many as
50,000 patients in the United States. The Company is currently sponsoring a
double-blind, placebo controlled Phase II/III clinical trial involving 120 AIDS
patients at three centers in London, the U.S. and Mexico, for 28 days of
therapy, to determine the safety and efficacy of a single dose of 100 mg of
thalidomide in the symptomatic treatment of AIDS patients with severe diarrhea
in the presence of two common bowel pathogens.
Effect of Protease Inhibitors and Triple Combination Therapy on Need for
THALOMID. Triple combination therapy, which involves the use of a protease
inhibitor in conjunction with two reverse transcriptase inhibitors, has proven
effective at reducing the HIV viral load in HIV+ or AIDS patients and may also
reduce the number of complications per patient. However, the Company believes
there will be continuing need for THALOMID among AIDS patients because: (i)
triple combination therapy does not lead to a short-term restoration of the
immune system, and thus many patients receiving triple combination therapy,
especially those who have suffered from AIDS for an extended period of time,
continue to be prone to opportunistic infections, and (ii) there is growing
evidence that mutations of the AIDS virus may render protease inhibitors less
effective. This is supported by empirical evidence recently presented at
scientific conferences which suggest that protease inhibitors may become less
effective over an extended period of time.
Non AIDS-Related Conditions
Erythema Nodosum Leprosum. ENL, a complication of leprosy, is a chronic
bacterial disease. Leprosy afflicts millions worldwide, although the disease is
relatively rare in the United States. Celgene does not plan to market THALOMID
outside the United States and Canada in the near term. ENL occurs in about 30%
of leprosy patients, and is characterized by cutaneous lesions, acute
inflammation, fever, and anorexia. On September 19, 1997, the Company received
an approvable letter from the FDA with respect to the Company's NDA for
THALOMID in the treatment of ENL.
Behcet's Disease and Complex Aphthosis. In September 1997, the Company
filed an IND with the FDA for the study of thalidomide for potential use in the
treatment of Behcet's disease and complex aphthosis, which are chronic
autoimmune disorders that together affect approximately 15,000 people in the
United States, and are characterized by eye inflammation, oral and genital
ulcers and other skin lesions. The disease can also damage joints, blood
vessels, the central nervous system and the gastrointestinal tract.
Investigators at the Bowman Gray School of Medicine and the Mayo Clinic will
conduct the two-phase, double-blind study, to determine whether there is a
statistically significant reduction in existing ulcers and whether the drug
inhibits the formation of new ulcerations. Thalidomide is generally regarded as
the treatment of choice for severe Behcet's disease and complex aphthosis.
Graft Versus Host Disease. Graft versus host disease is a disorder of the
immune system that is the most common complication and cause of death following
bone marrow transplants. There have been individual cases in which
comprehensive and intensive thalidomide therapy at high doses has successfully
reversed this disease. The Company is developing a protocol for a study of
thalidomide in the treatment of graft versus host disease.
Various Oncological Applications. Cachexia is a prevalent complication of
late stage cancer and is often associated with the after-effects of
chemotherapy. The Company is currently evaluating a number of protocols for
studying the effects of thalidomide on wasting associated with several cancer
conditions.
Compassionate Use Programs. Since 1995, the Company has been providing
thalidomide under physician-directed compassionate use programs in the U.S. and
Canada. The Company has fulfilled over 700 separate requests (each of which may
represent a multiple number of patients being treated) for supplies of
thalidomide to treat more than 30 different indications.
IMiDs
Celgene has designed and synthesized a number of novel structural
analogues of thalidomide which have demonstrated in in vitro tests to be
substantially more potent than thalidomide, including some with equivalent
ability to inhibit TNF-[alpha] overproduction but in a dose as low as 1/100,000
of the dose of thalidomide. There can be no assurance, however, that the same
effect can be duplicated in in vivo tests. Research on these compounds is now
focused on increasing the immunological and anti-angiogenic activity and the
potential elimination of thalidomide's
7
side effects including teratogenicity. Certain analogues are now being
evaluated in preclinical toxicology. The Company anticipates filing IND
applications for novel thalidomide analogues to treat selected inflammatory and
oncological disease states in 1998.
SelCIDs
The Company has designed, synthesized and tested several hundred SelCIDs
("Selective Cytokine Inhibitory Drugs"). These compounds have demonstrated the
ability to be highly specific suppressors of TNF-[alpha] in in vitro bioassays
of human cells. In April 1997, the Company announced that its SelCIDs appear to
have a highly specific inhibitory effect on the phosphodiesterase type 4 enzyme
(PDE-4), which is linked to the overproduction of TNF-[alpha]. Studies have
determined that many of the SelCIDs decrease synthesis of TNF-[alpha] through
selective inhibition of PDE-4. The Company believes that control of TNF-[alpha]
at its source, versus simple removal of circulating levels of the cytokine, may
facilitate more effective therapy without immune suppression. There can be no
assurance, however, that the same effect can be duplicated in in vivo tests.
The Company's first SelCID was found to be well tolerated in a recently
completed small human safety trial in the United Kingdom. An expanded safety
trial has recently commenced in the UK. The Company aims to file an IND for the
treatment of inflammatory bowel disease in the United States in 1998. Unlike
existing drugs which inhibit PDE-4, SelCIDs have not shown any evidence of
acute emesis (nausea and vomiting) in animal tests. If confirmed in humans,
this would indicate that they are a unique class of PDE-4 inhibitors. The U.S.
Patent and Trademark Office has issued composition of matter patents to the
Company relating to certain of its novel thalidomide analogues and SelCIDs.
CHIRAL CHEMISTRY
Celgene is applying its biocatalytic synthesis technology and seven years
of experience in developing chirally pure intermediates towards the development
of substantial business opportunities in human pharmaceuticals and
agrochemicals. The Company believes it has made significant progress over the
past two years towards the development of two principal opportunities: (i) the
development of chirally pure versions of existing racemic drugs whose
performance and/or safety profiles may be enhanced by eliminating chiral
impurities; and (ii) the development and production of chirally pure
agrochemicals.
Chirality
Many human pharmaceuticals and agrochemicals exist in two or more
different three dimensional configurations that are identical in chemical
structure but are mirror images of each other. These conformations, known as
stereoisomers, generally interact differently with biological targets. In
clinical applications, one isomer may result in the desired therapeutic effect
by stimulating or inhibiting a targeted biological function, while the other
isomer may be inactive or cause undesirable side effects. In contrast to
racemic pharmaceuticals, the use of chirally pure pharmaceuticals may result in
significant clinical benefits such as reduced toxicity and increased efficacy.
In agrochemical applications, the use of chirally pure chemicals can result in
a substantially reduced volume of product required to achieve the desired
benefit, thereby lowering manufacturing costs and reducing the environmental
burden as compared with racemic chemicals.
The worldwide market value of drugs marketed in their chirally pure form
increased from approximately $7 billion in 1985 to approximately $50 billion in
1995. This increase was driven, in large part, by the FDA's movement towards
requiring applicants, in connection with the submission of NDAs for racemic
compounds, to evaluate the racemic mixture as well as each stereoisomer. In
addition, in February 1997 the FDA requested public comment on whether and how
it should create incentives, including periods of market exclusivity, for the
development of chirally pure drugs. Similarly, agrochemicals are subject to
complex and evolving environmental regulation in the United States and abroad,
including regulations establishing usage levels. The Company believes that such
regulatory constraints increase the commercial opportunity for chirally pure
agrochemicals which cause less environmental impact, in terms of both their
manufacture and use.
Celgene's Core Chiral Technology: Biocatalysis
Celgene's biocatalytic process enables the efficient production of
chirally pure compounds. The Company's biocatalytic process is based primarily
on the use of enzymes called aminotransaminases, which are optimized by the
Company through genetic engineering techniques. These enzymes catalyze the
production of only the desired stereoisomer of a chiral compound, and can be
used in conventional chemical synthesis reactors at room temperature.
8
The Company's biocatalytic process for producing chirally pure compounds
differs from the more common approach of producing racemic mixtures followed by
separation of the desired stereoisomer through resolution techniques such as
crystallization or chromatography. These traditional approaches to producing
chirally pure compounds can be cumbersome, result in low yields, use more raw
materials, and are generally less economical than the Company's process. The
Company believes that its biocatalytic process can be applied to the
manufacture of a wide variety of organic chemicals.
Chirally Pure Pharmaceuticals
Celgene believes there is a significant opportunity in developing chirally
pure versions of approved drugs currently sold in racemic form. Compounds that
have been approved and marketed have a significant body of information
regarding their safety and efficacy, and consequently: (i) the cost and
duration of clinical trials may be reduced if reference may be made to data
used in the course of obtaining regulatory approval for the racemic parent
compound; (ii) the risk of not obtaining regulatory approval may be reduced,
and (iii) marketing risks may be reduced due to the established market for the
parent compound.
The Company is developing chirally pure versions of currently marketed
racemic drugs as potentially improved pharmaceuticals with reduced side
effects, lower dosage requirements, enhanced specificity, and applications in
new indications. The Company filed IND applications with the FDA and the Health
Protection Branch of Canada and initiated a Phase I/II clinical trial for a
chirally pure version of dl-methylphenidate ("dl-MPH"), which has been used for
decades in formulations such as Ritalin for the treatment of ADHD in children.
One million American children are estimated to be treated with dl-MPH in its
racemic form. Total U.S. sales in 1997 of the racemic version of the drug were
approximately $400 million. The Company's study was designed to evaluate the
pharmacokinetics and potential benefits of its chirally pure version of dl-MPH.
The Company completed this trial in the fall of 1997 and announced that its
chirally pure version of dl-MPH demonstrated statistically significant efficacy
versus a placebo and preliminary indications of longer duration of action
relative to the racemic version. In addition, the Company has commenced
development of a controlled release version of its chirally pure version of
dl-MPH, which may substantially improve administration of the drug. The Company
has applied for use and process patents for both its chirally pure and
controlled release versions of dl-MPH.
The Company is also developing a chirally pure formulation of mexiletine
for the treatment of neuropathic pain, a chronic pain state frequently
associated with trauma, spinal cord injury, and complications of diabetes.
Neuropathic pain generally arises from injury to the peripheral or central
nervous tissue. In most cases, chronic neuropathic pain responds poorly to
treatment with opiates or nonsteroidal anti-inflammatory analgesics. Mexilitine
is used primarily for the treatment of cardiac arrhythmia. However, high doses
of racemic oral mexiletine are sometimes used by physicians as an adjuvant
treatment for neuropathic pain, presumably due to its ability to block sodium
channels that communicate pain signals through the nervous system. However,
this off-label use has been limited, due to the racemate's effect on sodium
channels in the heart and the central nervous system that can lead to
significant side effects.
Celgene reported that its chirally pure formulation of mexiletine
substantially reduced severe neuropathic pain in established animal models. The
study examined the effect of each of the two isomers of mexiletine, racemic
mexiletine, and lidocaine, a prototypical sodium channel blocker, on allodynia
(pain response elicited by light touch stimuli), in two established preclinical
models. Celgene, in collaboration with researchers at the Anesthesiology
Research Laboratory at the University of California in San Diego, determined
that one isomer of mexiletine is active in the reduction of neuropathic pain.
Formulation of a pharmaceutical with this single, selective isomer may help
avoid adverse effects on cardiac and other tissues. A racemic formulation of
mexiletine is marketed by several companies as an anti-arrhythmic agent.
Celgene's preliminary research indicates that the anti-arrhythmic effect is
resident in one isomer and the pain suppression capability in the other. The
Company has filed for appropriate patent coverage for chirally pure mexiletine
for neuropathic pain.
Chirally Pure Agrochemicals
The Company's Celgro subsidiary is applying the Company's proprietary
biocatalytic synthesis technology to agrochemicals. Celgro's approach is to
work with agrochemical companies to adapt the Company's biocatalytic technology
to the manufacture of chirally pure versions of these companies' crop
protection agents, and then license
9
the technology to these companies in exchange for royalties. Celgro will also
seek to develop chirally pure versions of existing agrochemicals on its own,
and then enter into license agreements with third parties, who would
manufacture and sell the agrochemicals and pay the Company royalties. The
Company believes that the agrochemical market presents a substantial
opportunity because many agrochemicals produced in racemic form, with annual
worldwide sales totaling $5 billion, could be manufactured in chirally pure
form.
Since 1994, the Company has been developing a process to manufacture a
chirally pure version of a currently marketed racemic crop protection agent
under a research and development agreement with BASF, and has successfully
scaled up the process. The Company has received milestone research and
development payments in excess of $2 million under this agreement. The Company
is also actively pursuing several similar arrangements with other major
agrochemical companies.
The Company also believes that its chiral technology can be enabling in
agrochemical applications because it has the potential to significantly lower
manufacturing costs compared to conventional technologies and other chiral
technologies. Compared to the Company's biocatalytic process, conventional
technologies require more raw materials and greater plant capacity to produce
the same effective quantity of product, while other chiral technologies require
specialized equipment, more expensive chiral agents, more raw material, and
greater capacity for handling hazardous wastes produced in the separation
process. In addition, it is anticipated that the required application amount of
a chirally pure form of an agrochemical is substantially less than the racemic
form, thereby reducing environmental burden. Agrochemicals are highly price
sensitive, and, therefore, a process that produces chirally pure products at
significant cost savings could be in substantial demand.
PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to the Company's
business. It is the Company's policy to seek patent protection for its
inventions, and also to rely upon trade secrets, know-how, continuing
technological innovations, and licensing opportunities to develop and maintain
its competitive position.
Under an agreement with The Rockefeller University ("Rockefeller"), the
Company has obtained certain exclusive rights and licenses to manufacture, use,
and sell products that are based on compounds identified in research carried
out by Rockefeller and the Company that can be used for treating toxicity
associated with high concentrations of TNF-[alpha] (the "Rockefeller License").
Rockefeller has identified a method of using thalidomide and certain
thalidomide-like compounds to treat certain symptoms associated with abnormal
concentrations of TNF-[alpha], including those manifested in septic shock,
cachexia and HIV infection, and in 1995 was issued U.S. Patent No. 5,385,901
which claims such methods. This U.S. Patent expires in 2012 and is included in
the patent rights licensed to the Company under the Rockefeller License.
However, Rockefeller did not seek corresponding patents in any other countries
in respect of this invention. Under the Rockefeller License, the Company is
obligated to pay certain specified royalties to Rockefeller on net sales of
licensed products for covered indications. The Rockefeller License is
coterminous with the last to expire of the licensed patents and is terminable
by Rockefeller only in the event of a breach of the agreement's terms. Any
termination of the Rockefeller License could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company has been issued 28 U.S. Patents and has filed 15 U.S. Patent
applications. Of the issued U.S. Patents, 15 relate to immunotherapeutic and
chiral amine processes, compounds and uses. The Company's U.S. Patents expire
between 2001 and 2016. The Company has obtained patents in certain other
countries which correspond to some, but not all, of the Company's U.S. Patents.
The Company expects to continue to file patent applications covering the use of
its proprietary inventions.
Prior to the enactment in the United States of new laws adopting certain
changes mandated by the General Agreement on Tariffs and Trade ("GATT"), the
exclusive rights afforded by a U.S. Patent were for a period of 17 years
measured from the date of grant. Under these new laws, the term of any U.S.
Patent granted on an application filed subsequent to June 8, 1995, would
terminate 20 years from the date on which the patent application was filed in
the United States or the first priority date, whichever occurs first. Future
patents granted on an application filed before June 8, 1995, will have a term
that terminates 20 years from such date, or 17 years from the date of grant,
whichever date is later.
Under the Drug Price Competition and Patent Term Restoration Act of 1984,
a U.S. Product patent or use patent may be extended for up to five years under
certain circumstances to compensate the patent holder for the time
10
required for FDA regulatory review of the product. The benefits of this act are
available only to the first approved use of the active ingredient in the drug
product and may be applied only to one patent per drug product. There can be no
assurance that the Company will be able to take advantage of this law.
The Company's success will depend, in part, on its ability to obtain and
enforce patents, protect trade secrets, obtain licenses to technology owned by
third parties when necessary, and conduct its business without infringing the
proprietary rights of others. The patent positions of pharmaceutical and
biotechnology firms, including the Company, can be uncertain and involve
complex legal and factual questions. In addition, the coverage sought in a
patent application can be significantly reduced before the patent is issued.
Consequently, the Company does not know whether any of its pending applications
will result in the issuance of patents or, if any patents are issued, whether
they will provide significant proprietary protection or commercial advantage,
or will be circumvented by others. Since patent applications in the United
States are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, the Company cannot be certain that it was the first to make the
inventions covered by each of its pending patent applications, or that it was
the first to file patent applications for such inventions. In the event a third
party has also filed a patent for any of its inventions, the Company may have
to participate in interference proceedings declared by the U.S. PTO to
determine priority of invention, which could result in the loss of any
opportunity to secure patent protection for the invention and the loss of any
right to use the invention, and even if the eventual outcome is favorable to
the Company, such interference proceedings could result in substantial cost to
the Company. Protection of patent applications and litigation to establish the
validity and scope of patents, to assert patent infringement claims against
others and to defend against patent infringement claims by others can be
expensive and time-consuming. There can be no assurance that in the event that
any claims with respect to any of the Company's patents, if issued, are
challenged by one or more third parties, that any court or patent authority
ruling on such challenge will determine that such patent claims are valid and
enforceable. An adverse outcome in such litigation could cause the Company to
lose exclusivity relating to such patent claims. If a third party is found to
have rights covering products or processes used by the Company, then the
Company could be forced to cease using the technologies covered by the disputed
rights, could be subject to significant liabilities to such third party, and
could be required to license technologies from such third party. Also,
different countries have different procedures for obtaining patents, and
patents issued by different countries provide different degrees of protection
against the use of a patented invention by others. There can be no assurance,
therefore, that the issuance to the Company in one country of a patent covering
an invention will be followed by the issuance in other countries of patents
covering the same invention, or that any judicial interpretation of the
validity, enforceability, or scope of the claims in a patent issued in one
country will be similar to the judicial interpretation given to a corresponding
patent issued in another country. Furthermore, even if the Company's patents
are determined to be valid, enforceable, and broad in scope, there can be no
assurance that competitors will not be able to design around such patents and
compete with the Company using the resulting alternative technology. The
Company does not currently have, nor does it intend to seek, patent protection
relating to the use of THALOMID to treat erythema nodosum leprosum, an
inflammatory complication of leprosy.
The Company also relies upon unpatented proprietary and trade secret
technology that it seeks to protect, in part, by confidentiality agreements
with its collaborative partners, employees, consultants, outside scientific
collaborators, sponsored researchers, and other advisors. There can be no
assurance that these agreements provide meaningful protection or that they will
not be breached, that the Company would have adequate remedies for any such
breach, or that the Company's trade secrets, proprietary know-how, and
technological advances will not otherwise become known to others. In addition,
there can be no assurance that, despite precautions taken by the Company,
others have not and will not obtain access to the Company's proprietary
technology.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacture and marketing of
pharmaceuticals and in the Company's ongoing research and development
activities. All of the Company's therapeutic products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic products are subject to rigorous preclinical testing and
clinical trials and other pre-market approval requirements by the FDA and
regulatory authorities in other countries. In the United States, various
federal, and in some cases state, statutes and regulations also govern or
impact upon the manufacturing, safety, labeling, storage, record keeping, and
marketing of such products. The lengthy process of seeking required approvals,
and the continuing need for compliance with applicable statutes and regulations
require the
11
expenditure of substantial resources. Even if regulatory approval is obtained
for any of the pharmaceutical products manufactured by or for the Company, or
using the Company's biocatalytic chiral processes, the scope of the approval
may significantly limit the indicated uses for which such products may be
marketed. Further, approved drugs, as well as their manufacturers, are subject
to ongoing review, and discovery of previously unknown problems with such
products may result in restrictions on their manufacture, sale or use or in
their withdrawal from the market. Any failure by the Company or its
collaborators or licensees to obtain or maintain, or any delay in obtaining
regulatory approvals could adversely affect the marketing of any products
developed by the Company, and its ability to receive product revenue, royalty
revenue, or profit sharing payments.
The activities required before a pharmaceutical may be marketed in the
United States begin with preclinical testing not involving human subjects.
Preclinical tests include laboratory evaluation of product chemistry and animal
studies to assess the potential safety and efficacy of product and its
formulations. The results of these studies must be submitted to the FDA as part
of an Investigational New Drug Application ("IND"), which must be reviewed by
the FDA primarily for safety considerations before proposed clinical trials in
humans can begin. Typically, clinical trials involve a three-phase process.
In Phase I, clinical trials are conducted with a small number of
individuals to determine the early safety and tolerability profile and the
pattern of drug distribution and metabolism within the body. In Phase II,
clinical trials are conducted with groups of patients in order to determine
preliminary efficacy, dosing regimes, and expanded evidence of safety. In Phase
III, larger-scale, multi-center, adequate and well-controlled, comparative
clinical trials are conducted with patients in order to provide enough data for
the statistical proof of efficacy and safety required by the FDA and others,
however in some limited circumstances Phase III trials may be modified to allow
evaluation of safety and efficacy in a less regimented manner, which may allow
the Company to rely on historical data relating to the previous use of certain
pharmaceuticals. In Phase IV, confirmatory trials are conducted after the FDA's
approval of an NDA or issuance of an approvable letter in order to resolve any
open issues. Monitoring of all aspects of the study to minimize risks is a
continuing process. Reports of all adverse events must be made to the FDA. The
results of the preclinical testing and clinical trials are then submitted to
the FDA in the form of an NDA for approval to commence commercial sales. In
responding to an NDA, the FDA may grant marketing approval, request additional
information, or deny the application if it determines that the application does
not satisfy its regulatory approval criteria. If an NDA is approved, the
Company will have to establish a system for obtaining reports of experience and
side effects that are associated with the drug and make appropriate submissions
to the FDA.
Pursuant to the Orphan Drug Act, a sponsor may request the FDA to
designate a drug intended to treat a "rare disease or condition" as an "orphan
drug." A "rare disease or condition" is defined as one which affects less than
200,000 people in the United States, or which affects more than 200,000 people,
but for which the cost of development and making available the drug is not
expected to be recovered from sales of the drug in the United States. Upon the
approval of the first NDA for a drug designated as an orphan drug for a
specified indication, the sponsor of the NDA is entitled to exclusive marketing
rights in the United States for such drug for that indication for seven years.
Orphan drugs may also be eligible for federal income tax credits for costs
associated with the drug's development. Possible amendment of the Orphan Drug
Act by the United States Congress and possible reinterpretation by the FDA are
the subject of frequent discussion. FDA regulations reflecting certain
definitions, limitations and procedures went into effect in January 1993.
Therefore, there is no assurance as to the precise scope of protection that may
be afforded by orphan drug status in the future, or that the current level of
exclusivity and tax credits will remain in effect. The Company has received
from the FDA orphan drug designation for thalidomide for the treatment of ENL,
AIDS cachexia, mycobacterial infections and RAS. However, there can be no
assurance that another company also holding orphan drug designation will not
receive approval prior to Celgene for the use of thalidomide for the treatment
of one or more of these indications. If such were to happen, Celgene's
applications for that indication could not be approved until the competing
company's seven year period of exclusivity expired.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures
continually conform with the FDA's current Good Manufacturing Practice
regulations and guidelines ("GMP"). In complying with GMP, manufacturers must
devote extensive time, money, and effort in the area of production and quality
control and quality assurance to maintain full technical compliance.
Manufacturing facilities and company records are subject to periodic
inspections by the FDA to ensure compliance.
Steps similar to those in the United States must be undertaken in
virtually every other country comprising the market for the Company's products
before any such product can be commercialized in those countries. The approval
12
procedure and the time required for approval varies from country to country and
may involve additional testing. There can be no assurance that approvals will
be granted on a timely basis, or at all. In addition, regulatory approval of
prices is required in most countries other than the United States. There can be
no assurance that the resulting prices would be sufficient to generate an
acceptable return to the Company.
COMPETITION
The pharmaceutical and agrochemical businesses in which the Company
competes are each highly competitive. The Company's competitors include major
pharmaceutical and chemical companies, many of which have considerably greater
financial, technical, and marketing resources than the Company. The Company
also experiences competition in the development of its products and processes
from universities and other research institutions and, in some instances,
competes with others in acquiring technology from such sources.
Competition in the pharmaceutical industry, and specifically in the
immunotherapeutic areas being addressed by the Company, is particularly
intense. Numerous companies, including Immunex Corp., and Centocor Corp., are
pursuing techniques to modulate TNF-[alpha] production through various
combinations of monoclonal antibodies, TNF-[alpha] receptors, and small
molecule approaches. In addition, a number of other companies are attempting to
address, with other technologies and products, the disease states currently
being targeted by the Company. Other companies are attempting to develop
thalidomide for AIDS-related and non AIDS-related indications. EntreMed, Inc.
is researching the effectiveness of thalidomide and its own thalidomide
analogues as anti-angiogenic agents in the treatment of retinal disease and
cancer. EntreMed has advised the Company that EntreMed has an exclusive license
under several issued patents and patent applications covering these uses.
Andrulis Pharmaceuticals Corp., a small privately held company, is attempting
to develop thalidomide for the treatment of AIDS-related complications.
Several companies have established chiral products and chiral
technologies. Sepracor and Chiroscience are actively developing chirally pure
versions of pharmaceuticals currently marketed in racemic form. Chiroscience
has completed Phase I trials in the United Kingdom for a chirally pure version
of dl-MPH and is working with Medeva Plc, a leading supplier of dl-MPH in the
United States, towards full clinical development. Chiroscience has also taken
certain steps to assert patent and proprietary rights with respect to its
formulation of a chirally pure version of dl-MPH. The agrochemical market is
large and, within this market, efforts are underway by the in-house development
staffs of agrochemical companies to produce chirally pure versions of their
existing racemic crop protection agents.
The pharmaceutical and agrochemical industries have undergone, and are
expected to continue to undergo, rapid and significant technological change,
and competition is expected to intensify as technical advances in each field
are made and become more widely known. In order to compete effectively, the
Company will be required to continually upgrade its scientific expertise and
technology, identify and retain capable management, and pursue scientifically
feasible and commercially viable opportunities.
The Company's competition will be determined in part by the indications
for which the Company's products are developed and ultimately approved by
regulatory authorities. An important factor in competition will be the timing
of market introduction of the Company's or competitors' products. Accordingly,
the relative speed with which the Company can develop products, complete
clinical trials and approval processes, and supply commercial quantities of
products to the market will be expected to be important competitive factors.
Competition among products approved for sale will be based, among other things,
on product efficacy, safety, convenience, reliability, availability, price, and
patent position.
MANUFACTURING
THALOMID is formulated and encapsulated for the Company by Penn
Pharmaceuticals Ltd. of Great Britain ("Penn") in a special facility which has
been certified by the FDA, devoted exclusively to the production of THALOMID
capsules. Both the bulk manufacturing facility that produces the drug substance
for THALOMID and the Penn facility have been certified as GMP compliant. In
certain instances, the Company may be required to make substantial capital
expenditures to access additional manufacturing capacity.
SALES AND MARKETING
The Company intends to develop and market its own pharmaceuticals for
indications with smaller patient populations. For drugs with indications with
larger patient populations, the Company anticipates partnering with other
pharmaceutical companies. The Company also anticipates partnering with
companies for the development and com-
13
mercialization of the Company's chirally pure pharmaceutical and agrochemical
products. Celgene expects that these arrangements typically will include
milestone payments, reimbursement of research and development expenses and
royalty arrangements. Celgene has established a sales and marketing
organization to commercialize THALOMID (subject to regulatory approval), and
intends to initially employ approximately 25 people in this capacity. The
Company believes that a direct sales force for THALOMID can be effective
because of the relatively small, concentrated patient population, of which 70%
resides in 20 major metropolitan areas. Celgene has engaged a specialty
contract distributor to distribute THALOMID in strict accordance with the
Company's program to promote the safe and effective dispensing and use of the
product. This program will include comprehensive physician, pharmacist and
patient education, informed consent procedures, appropriate labeling, and
frequent pregnancy testing.
EMPLOYEES
At February 28, 1998, the Company had 94 full time employees, 41 of whom
were engaged primarily in research and development activities, 25 of whom were
engaged in sales and marketing activities, and the remainder of whom were
engaged in executive and administrative activities. Of the Company's employees,
47 have advanced degrees, including 22 who have Ph.D. degrees. The Company also
maintains consulting arrangements with a number of scientists at various
universities and other research institutions in Europe and the United States.
FORWARD-LOOKING STATEMENTS
This Annual Report includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. All statements, other
than statements of historical facts, included or incorporated by reference in
this Annual Report which address activities, events or developments which the
Company expects or anticipates will or may occur in the future, including such
things as the attainment of pharmaceutical development milestones or the
receipt of regulatory approval or the entering into of licensing or partnership
arrangements and other similar matters, are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions and expected future developments as well as other factors it
believes are appropriate in the circumstances. However, whether actual results
and developments will conform with the Company's expectations and predictions
is subject to a number of risks and uncertainties which could cause actual
results to differ materially from the Company's expectations, including the
risk factors discussed below and elsewhere in this Annual Report and other
factors, many of which are beyond the control of the Company. Consequently, all
of the forward-looking statements made in this Annual Report are qualified by
these cautionary statements and there can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations. The Company assumes no
obligation to update publicly any such forward-looking statements, whether as a
result of new information, future events or otherwise.
RISK FACTORS
Uncertainty of Product Development. Many of the Company's products and
processes are in the early or mid-stages of development and will require the
commitment of substantial resources, extensive research, development,
preclinical testing, clinical trials, manufacturing scale-up, and regulatory
approval prior to commercialization. The Company has not yet commercialized any
of its products. All of the products under development by the Company will
require further development, clinical testing, and regulatory approvals, and
there can be no assurance that commercially viable products will result from
these efforts.
Uncertainty Associated with Clinical Trials; Extensive Government
Regulation; No Assurance of Regulatory Approval. The preclinical development,
clinical trials, manufacturing, marketing, and labeling of pharmaceuticals are
all subject to extensive regulation by numerous governmental authorities and
agencies in the United States and other countries. There can be no assurance
that the Company will be able to obtain the necessary approvals required to
market its products in any of these markets. The testing, marketing, and
manufacturing of the Company's products, will require regulatory approval,
including approval from the FDA, and, in certain cases, from the U.S.
Environmental Protection Agency (the "EPA"), or governmental authorities
outside of the United States that perform roles similar to those of the FDA and
EPA. It is not possible to predict how long the approval processes for any of
the Company's products will take or whether any such approvals ultimately will
be granted. Positive results in preclinical testing and/or early phases of
clinical studies are no assurance of success in later phases of the approval
14
process. In general, preclinical tests and clinical trials can take many years,
and require the expenditure of substantial resources, and the data obtained
from such tests and trials can be susceptible to varying interpretation that
could delay, limit, or prevent regulatory approval. Also, delays or rejections
may be encountered during any stage of the regulatory approval process based
upon the failure of the clinical or other data to demonstrate compliance with,
or upon the failure of the product to meet, the regulatory agency's
requirements for safety, efficacy, and quality or, in the case of a product
seeking an orphan drug indication, because another designee received approval
first; and those requirements may become more stringent due to changes in
regulatory agency policy, or the adoption of new regulations. Clinical trials
may also be delayed due to unanticipated side effects, the inability to locate,
recruit and qualify sufficient numbers of patients, lack of funding, the
inability to locate or recruit scientists, the redesign of clinical trial
programs, the inability to manufacture or acquire sufficient quantities of the
particular product candidate or any other components required for clinical
trials, changes in focus of the Company's or its collaborative partner's
development focus, and the disclosure of trial results by competitors. Even if
regulatory approval is obtained for any of the Company's pharmaceutical
products or using the Company's biocatalytic chiral processes, the scope of the
approval may significantly limit the indicated uses for which such products may
be marketed. Approved drugs and agrochemicals, as well as their manufacturers,
are subject to on-going review, and discovery of previously unknown problems
with such products may result in restrictions on their manufacture, sale or use
or in their withdrawal from the market. Delays in obtaining, or the failure to
obtain and maintain, necessary approvals from the FDA, EPA, or other regulatory
agencies for the Company's proprietary products, would have a material adverse
effect on the Company's business, financial condition, and results of
operations.
No Assurance of Market Acceptance. There can be no assurance that those of
the Company's products which receive regulatory approval, including THALOMID,
or for which no regulatory approval is required, will achieve market
acceptance. A number of factors render the degree of market acceptance of the
Company's products uncertain, including the extent to which the Company can
demonstrate such products' efficacy, safety, and advantages over competing
products, as well as the reimbursement policies of third party payors, such as
government and private insurance plans. In addition, there can be no assurance
that the Company's Celgro subsidiary will be able to negotiate a licensing
agreement with BASF or any other agrochemical manufacturer on terms acceptable
to the Company, or at all. Failure of the Company's products to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition, and results of operations.
Risks of Product Liability and Availability of Insurance. The Company may
be subject to product liability or other claims based on allegations that the
use of its technology or products has resulted in adverse effects, whether by
participants in the Company's clinical trials or by patients (if and when such
products are approved). Thalidomide, when used by pregnant women, has resulted
in serious birth defects. Therefore, necessary and strict precautions must be
taken by physicians prescribing the drug to women with childbearing potential,
and there can be no assurance that such precautions will be observed in all
cases or, if observed, will be effective. Use of thalidomide has also been
associated, in a limited number of cases, with other side effects, including
nerve damage. Although the Company has product liability insurance in force
that it believes to be appropriate, there can be no assurance that it will be
able to obtain additional coverage as required, or that such coverage will be
adequate to protect the Company in the event claims are asserted against it.
The obligation to defend against or pay any product liability claim may have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Dependence on Patent and Proprietary Rights. The Company's success will
depend, in part, on its ability to obtain and enforce patents, protect trade
secrets, obtain licenses to technology owned by third parties when necessary,
and conduct its business without infringing the proprietary rights of others.
The patent positions of pharmaceutical and biotechnology firms, including the
Company, can be uncertain and involve complex legal and factual questions. In
addition, the coverage sought in a patent application can be significantly
reduced before the patent is issued. Consequently, the Company does not know
whether any of its pending applications will result in the issuance of patents
or, if any patents are issued, whether they will provide significant
proprietary protection or commercial advantage, or will be circumvented by
others. Since patent applications in the United States are maintained in
secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, the
Company cannot be certain that it was the first to make the inventions covered
by each of its pending patent applications, or that it was the first to file
patent applications for such inventions. In the event a third party has also
filed a patent for any of its inventions, the Company may have to participate
in interference proceedings declared by the U.S. Patent and Trademark Office to
determine priority of invention, which could result
15
in the loss of any opportunity to secure patent protection for the invention
and the loss of any right to use the invention, and even if the eventual
outcome is favorable to the Company, such interference proceedings could result
in substantial cost to the Company. Protection of patent applications and
litigation to establish the validity and scope of patents, to assert patent
infringement claims against others and to defend against patent infringement
claims by others can be expensive and time-consuming. There can be no assurance
that in the event that any claims with respect to any of the Company's patents,
if issued, are challenged by one or more third parties, that any court or
patent authority ruling on such challenge will determine that such patent
claims are valid and enforceable. An adverse outcome in such litigation could
cause the Company to lose exclusivity relating to such patent claims. If a
third party is found to have rights covering products or processes used by the
Company, then the Company could be forced to cease using the technologies
covered by the disputed rights, could be subject to significant liabilities to
such third party, and could be required to license technologies from such third
party. Also, different countries have different procedures for obtaining
patents, and patents issued by different countries provide different degrees of
protection against the use of a patented invention by others. There can be no
assurance, therefore, that the issuance to the Company in one country of a
patent covering an invention will be followed by the issuance in other
countries of patents covering the same invention, or that any judicial
interpretation of the validity, enforceability, or scope of the claims in a
patent issued in one country will be similar to the judicial interpretation
given to a corresponding patent issued in another country. Furthermore, even if
the Company's patents are determined to be valid, enforceable, and broad in
scope, there can be no assurance that competitors will not be able to design
around such patents and compete with the Company using the resulting
alternative technology. The Company does not currently have, nor does it intend
to seek, patent protection relating to the use of THALOMID to treat erythema
nodosum leprosum, an inflammatory complication of leprosy. The Company also
relies upon unpatented proprietary and trade secret technology that it seeks to
protect, in part, by confidentiality agreements with its collaborative
partners, employees, consultants, outside scientific collaborators, sponsored
researchers, and other advisors. There can be no assurance that these
agreements provide meaningful protection or that they will not be breached,
that the Company would have adequate remedies for any such breach, or that the
Company's trade secrets, proprietary know-how, and technological advances will
not otherwise become known to others. In addition, there can be no assurance
that, despite precautions taken by the Company, others have not and will not
obtain access to the Company's proprietary technology.
History of Operating Losses; Accumulated Deficit; Uncertainty of Future
Profitability; Capital Requirements; Uncertainty of Additional Funding. The
Company has sustained losses in each year since its incorporation in 1986. The
Company sustained a net loss of approximately $25.4 and 17.8 million for the
years ended December 31, 1997 and 1996, respectively, and had an accumulated
deficit of approximately $119.5 million at December 31, 1997. The Company
expects to make substantial expenditures to further develop its
immunotherapeutic and chiral products, and, based on these expenditures, it is
probable that losses will continue for at least the next 12 to 18 months. The
Company is currently utilizing its cash resources at a rate of approximately
$2.0 million per month. The Company expects that its rate of spending generally
will remain high as the result of increased clinical trial costs and expenses
associated with the regulatory approval process and commercialization of
products now in development. In order to assure funding for the Company's
future operations the Company is seeking additional capital resources. These
may include the sale of additional securities under appropriate market
conditions, alliances or other partnership agreements with entities interested
in and possessing resources to support the Company's immunotherapeutic or
chiral programs, or other business transactions which would generate sufficient
resources to assure continuation of the Company's operations and research
programs in the long-term. However, no assurances can be given that the Company
will be successful in raising such additional capital or entering into a
business alliance. Further, there can be no assurance, assuming the Company
successfully raises additional funds or enters into a business alliance, that
the Company will achieve profitability or positive cash flow.
If the Company is unable to raise additional funds, the Company believes
that its current financial resources, including its option to issue and sell
additional Series B Preferred Stock (which is subject to the satisfaction of
certain conditions and expires of June 9, 1998), could fund operations through
1998. The Company's actual cash requirements may vary materially from those now
planned and will depend upon numerous factors, including the results of the
Company's development and commercialization programs, the timing and results of
preclinical and clinical trials, the timing and costs of obtaining regulatory
approvals, the level of resources that the Company commits to the development
of manufacturing, marketing, and sales capabilities, the ability of the Company
to license
16
its biocatalytic chiral process technology to agrochemical companies, the
technological advances and activities of competitors, and other factors.
Intense Competition and Rapid Technological Change. The pharmaceutical and
agrochemical businesses in which the Company operates are highly competitive
and subject to rapid and profound technological change. The Company's present
and potential competitors include major chemical and pharmaceutical companies,
as well as specialized biotechnology firms in the United States and in other
countries. Most of these companies have considerably greater financial,
technical, and marketing resources than the Company. The Company also
experiences competition in the development of its products and processes from
universities and other research institutions and, in some instances, competes
with others in acquiring technology from such sources. The pharmaceutical and
agrochemical industries have undergone, and are expected to continue to
undergo, rapid and significant technological change, and the Company expects
competition to intensify as technical advances in each field are made and
become more widely known. There can be no assurance that others will not
develop products or processes with significant advantages over the products and
processes that the Company is seeking to develop. Any such development could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
Dependence on Sole Supplier of Raw Material and Sole Encapsulator for
THALOMID. The Company obtains all of its bulk drug material for THALOMID from a
single source. In addition, the Company currently relies on a single
manufacturer to encapsulate THALOMID. Because the FDA requires that all
suppliers of pharmaceutical bulk material and all manufacturers of
pharmaceuticals for sale in the United States achieve and maintain compliance
with current Good Manufacturing Practice regulations and guidelines ("GMP"), if
the operations of the sole supplier or the sole encapsulator were to become
unavailable for any reason, the required FDA review of the operations of a new
supplier or new encapsulator could cause a delay in the manufacture of
THALOMID. Such a delay could have a material adverse effect on the Company's
business, financial condition, and results of operations.
Dependence on Collaborations and Licenses with Third Parties. The
Company's ability to fully commercialize its proprietary products, if
developed, may depend to some extent upon the Company's ability to enter into
joint ventures or other arrangements with established pharmaceutical companies
with the requisite experience and financial and other resources to obtain
regulatory approval, and to manufacture and market such products. Accordingly,
the Company's success will depend, in part, upon the subsequent success of such
third parties in performing preclinical testing and clinical trials, obtaining
the requisite regulatory approvals, scaling up manufacturing, successfully
commercializing the licensed product candidates and otherwise performing their
obligations. There can be no assurance that the Company will be able to enter
into acceptable collaborative and licensing arrangements on acceptable terms,
if at all, that such arrangements will be successful, that the parties with
which the Company may establish arrangements will perform their obligations, or
that potential collaborators will not compete with the Company by seeking
alternative means of developing therapeutics for the diseases targeted by the
Company. There can be no assurance that the Company's existing or future
arrangements will lead to the development of product candidates or compounds
with commercial potential, that the Company will be able to obtain or maintain
proprietary rights or licenses for the proprietary rights with respect to any
technology or product candidates or compounds developed in connection with
these arrangements, or that the Company will be able to ensure the
confidentiality of any proprietary rights and information developed in such
arrangements or prevent the public disclosure thereof.
Under an agreement with The Rockefeller University ("Rockefeller"), the
Company has obtained certain exclusive rights and licenses to manufacture, use,
and sell products that are based on compounds identified in research carried
out by Rockefeller and the Company that can be used for treating toxicity
associated with high concentrations of TNF-[alpha] (the "Rockefeller License").
The Rockefeller License is terminable by Rockefeller in the event of a material
breach of the agreement's terms.
Lack of Manufacturing Capabilities. The manufacture of large quantities of
pharmaceuticals is a complex process, and all pharmaceutical manufacturing
facilities must comply with applicable regulations of the FDA. The Company
currently has no experience in, or its own facilities for, manufacturing any
products on a commercial scale. The Company currently utilizes an outside
manufacturer for the production of THALOMID, and currently intends to utilize
outside manufacturers if and when needed to produce the Company's other
products on a commercial scale. There can be no assurance that such
manufacturers will meet the Company's requirements for quality, quantity, or
timeliness, or that these manufacturers will achieve and maintain compliance
with all applicable regulations.
17
Limited Marketing Capabilities. The Company has established a sales and
marketing organization to commercialize THALOMID (subject to regulatory
approval of the product), and with respect to certain other products, it may
seek a corporate partner to provide such services. Any delay in developing
these resources for THALOMID may have an adverse impact on potential sales of
THALOMID. The Company has contracted with a specialty distributor to distribute
THALOMID if and when approved. Failure of such specialty distributor to
properly and continuously perform its obligations under such agreement could
have a material adverse effect on the Company.
Dependence on Third-Party Reimbursement; Uncertainty of Product Pricing.
Sales of the Company's pharmaceutical products will depend, in part, on the
extent to which the costs of such products will be paid by health maintenance,
managed care, pharmacy benefit and similar health care management
organizations, or reimbursed by government health administration authorities,
private health coverage insurers, and other third party payors. These health
care management organizations and third party payors are increasingly
challenging the prices charged for medical products and services. Additionally,
the containment of health care costs has become a priority, and the prices of
pharmaceutical and biotechnology drugs have been targeted in this effort. If
the Company succeeds in bringing any pharmaceutical products to market, there
can be no assurance that such products will be considered cost effective by
payors, that reimbursement will be available or, if available, that the level
of reimbursement will be sufficient to allow the Company to sell its products
on a profitable basis.
Dependence on Key Personnel. The success of the Company will depend, in
large part, on its ability to continue to attract and retain highly skilled
scientific and management personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to attract and
retain such persons. The loss of the Company's executive officers or scientific
personnel, or the failure of the Company to attract and retain other highly
skilled personnel would have a material adverse effect on the Company's
business, financial condition, and results of operations. The Company does not
maintain key man life insurance coverage on the lives of any of its officers or
key employees.
Environmental/Safety Hazards. The Company uses certain hazardous materials
in its research and development activities. While the Company believes it is
currently in substantial compliance with the federal, state, and local laws and
regulations governing such use, there can be no assurance that accidental
injury or contamination will not occur. Any such accident or contamination
could result in substantial liabilities, which could exceed the Company's
resources. Additionally, there can be no assurance that the cost of compliance
with environmental and safety laws and regulations will not be greater than
currently expected.
Shares Eligible for Future Sale. Future sales of substantial amounts of
Common Stock could adversely affect the prevailing market price of the
Company's Common Stock. As of December 31, 1997, there were outstanding stock
options for approximately 2,349,528 shares of Common Stock, of which
approximately 1,485,652 were currently exercisable, and warrants either
outstanding or issuable upon demand that are exercisable for 1,411,925 shares
of Common Stock. All shares of Common Stock referred to in this paragraph would
be freely tradable upon issuance.
Potential Fluctuations in Quarterly Operating Results. The Company has
historically experienced, and expects to continue for the foreseeable future to
experience, significant fluctuations in its quarterly operating results. This
fluctuation is due to a number of factors, many of which are outside the
Company's control, including the timing of receipt of certain research and
development payments. Future operating results will depend on many factors,
including demand for the Company's products, regulatory approvals, the timing
of the introduction and market acceptance of new products by the Company or
competing companies, the Company's ability to control costs and its ability to
attract and retain highly qualified scientific and management personnel. Such
quarterly fluctuations in operating results may result in increased volatility
of the Company's stock price.
Volatility of Stock Price. There has been significant volatility in the
market prices for publicly traded shares of specialty pharmaceuticals
companies, including those of the Company. There can be no assurance that the
price of the Common Stock will remain at or exceed current levels. Factors such
as announcements of technical or product developments by the Company or its
competitors, market conditions for specialty pharmaceuticals stocks in general,
governmental regulation, healthcare legislation, public announcements regarding
medical advances in the treatment of the disease states that the Company is
targeting, or patent or proprietary rights developments may have a significant
impact on the market price of the Common Stock.
Anti-Takeover Effects of Shareholder Rights Plan; Certain Charter and
By-law Provisions; Delaware Law. The Board of Directors has adopted a
shareholder rights plan (the "Rights Plan"), the purpose of which is to protect
18
stockholders against unsolicited attempts to acquire control of the Company
that do not offer a fair price to all stockholders. The Plan is not intended to
prevent, and should not prevent, an offer to acquire the Company at a price and
on terms that are in the best interests of all stockholders, or a negotiated
transaction to sell the Company for a purchase price determined by the Board to
be in the Company's and its stockholders' best interests, nor should it have a
material adverse affect on the ability of a person or group to obtain
representation on or control of the Board through a proxy contest. Nonetheless,
the Rights Plan may have the effect of dissuading a potential acquiror from
making an offer for all the outstanding shares of Common Stock at a price that
represents a premium to the then current trading price.
Moreover, the Board of Directors has the authority to issue, at any time,
without further stockholder approval, up to 5,000,000 shares of preferred
stock, and to determine the price, rights, privileges, and preferences of those
shares. Such issuance could adversely affect the holders of Common Stock, and
could discourage a third party from acquiring a majority of the Company's
outstanding voting stock.
Additionally, the Board of Directors of the Company has adopted certain
amendments to the Company's By-laws intended to strengthen the Board's position
in the event of a hostile takeover attempt. The By-law provisions have the
following effects: (1) they provide that only persons who are nominated in
accordance with the procedures set forth in the By-laws shall be eligible for
election as directors of the Corporation, except as may be otherwise provided
in the By-laws; (2) they provide that only business brought before the annual
meeting by the Board of Directors or by a stockholder who complies with the
procedures set forth in the By-laws may be transacted at an annual meeting of
stockholders; (3) they provide that only the Chairman of the Board, if any, the
Chief Executive Officer, the President, the Secretary, or a majority of the
Board of Directors may call special meetings of the stockholders of the
Company; (4) they establish a procedure for the Board of Directors to fix the
record date whenever stockholder action by written consent is undertaken, and
(5) they require a vote of holders of two-thirds of the outstanding shares of
Common Stock to amend certain By-law provisions. Furthermore, the Company is
subject to the provisions of Section 203 of the Delaware General Corporation
Law, an anti-takeover law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of
Section 203, a "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder, and
an "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
Absence of Cash Dividends on Common Stock. The Company has never declared
or paid cash dividends on its Common Stock, and does not anticipate doing so in
the foreseeable future.
ITEM 2. PROPERTIES
The Company leases a 44,500 square foot laboratory and office facility in
Warren, New Jersey under a lease with an unaffiliated party which has a term
ending in May 2002 with one five-year renewal option. Approximately 12,500
square feet on this facility are subleased, for a period not to exceed three
years, to Cambrex Corporation, which purchased the Company's chiral
intermediate business. The Company also sub-leases 17,500 square feet in a
facility located in Annandale, New Jersey that houses the Company's Celgro
unit. The facility consists of office and laboratory space and is leased under
a sub-lease which expires in February 1999. The Company believes that its
laboratory facilities are adequate for its research and development activities
for at least the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
The Company is not engaged in any legal proceedings. The Company believes
it is currently in substantial compliance with all federal, state and local
environmental laws.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of 1997.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "CELG." The following table sets forth, for the periods, indicated
the intra-day high and low sale prices per share of Common Stock on the Nasdaq
National Market:
High Low
1997
Fourth Quarter .................. $133/8 $ 73/4
Third Quarter ................... 121/2 63/4
Second Quarter .................. 77/8 47/8
First Quarter ................... 123/8 7
1996
Fourth Quarter .................. 121/4 77/8
Third Quarter ................... 117/8 6
Second Quarter .................. 181/8 111/8
First Quarter ................... 19 111/8
1995
Fourth Quarter .................. 131/2 81/4
Third Quarter ................... 111/4 71/4
Second Quarter .................. 111/2 47/8
First Quarter ................... 61/4 43/8
The last reported sales price per share for the Common Stock on the Nasdaq
National Market on March 17, 1998 was $9.00. As of March 17, 1998, there were
approximately 469 holders of record of the Company's Common Stock.
20
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data should be read in conjunction with
the Company's Financial Statements and the Notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included elsewhere in this Annual Report. The data
set forth below with respect to the Company's Statement of Operations for the
years ended December 31, 1995, 1996 and 1997 and the balance sheet data as of
December 31, 1996 and 1997 are derived from the Company's financial statements
which have been audited by KPMG Peat Marwick LLP, independent accountants, and
which are included elsewhere in this Annual Report and are qualified by
reference to such Financial Statements and Notes thereto. Other information has
been derived from other audited financial statements. The historical results
are not necessarily indicative of future results of operations.
Year ended December 31,
1993 1994 1995 1996 1997
---------------- --------------- ---------------- ---------------- ----------------
Operations Data:
Total Revenues $ -- $ 98,000 $ 472,000 $ 881,665 $ 1,122,193
Loss from continuing
operations (2,740,157) (5,710,781) (8,366,380) (17,057,521) (25,019,844)
Loss from discontinued
operations (7,585,629) (4,502,446) (2,150,143) (761,460) (427,183)
Net loss applicable to
common stockholders (10,325,786) (10,213,227) (10,516,523) (21,609,639) (26,921,501)
Per share of common
stock--basic and diluted
Loss from continuing
operations $ (0.35) $ (0.73) $ (1.04) $ (1.81) $ (2.05)
Loss from discontinued
operations ( 0.97) ( 0.57) ( 0.27) ( 0.08) ( 0.03)
Net loss applicable to
common shareholders ( 1.32) ( 1.30) ( 1.30) ( 2.29) ( 2.20)
Weighted average number of
shares outstanding 7,841,000 7,853,000 8,073,000 9,450,000 12,215,000
Dividends -- -- -- -- --
Balance Sheet Data
Cash and cash equivalents,
and marketable securities $ 17,899,946 $ 8,500,086 $ 11,712,905 $ 17,814,984 $ 13,583,445
Total Assets 21,822,225 11,547,930 14,211,218 20,937,862 18,217,456
Convertible debentures -- -- 4,592,366 2,026,043 --
Accumulated deficit (50,259,650) (60,472,877) (70,989,400) (92,599,039) (119,520,540)
Stockholder's equity 20,295,614 10,004,066 7,142,501 16,065,009 15,425,092
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The progenitor to Celgene was organized in 1980 as a unit of Celanese
Corporation, a major chemical Company. Celgene's initial mandate was to apply
biotechnology to the production of fine and specialty chemicals. Following the
1986 merger of Celanese Corporation with American Hoechst Corporation, Celgene
was spun out as a separate company. In 1987, Celgene completed an initial
public offering of its common stock, and commenced the development of chemical
and biotreatment processes for the chemical and pharmaceutical industry.
Celgene discontinued the biotreatment operations in 1994 to focus on its
targeted small molecule immunotherapeutic compound development and biocatalytic
chiral chemistry synthesis platforms.
Since 1990, the Company's revenues have been generated primarily through
the research and development relating to, and supply of, chirally pure
intermediates to pharmaceutical companies for use in new drug development and,
to a lesser degree, from agrochemical research and development contracts.
However, as the Company developed its immunotherapeutic program, sales of
chirally pure intermediates became a less integral part of the Company's
strategic focus. Accordingly, on November 18, 1997, the Company signed a letter
of intent with Cambrex Corporation to sell Celgene's Chiral Intermediate
business for $15.0 million. The sale was completed on January 9, 1998. The
terms provide for a payment of $7.5 million at closing and the present value
equivalent of $7.5 million in future royalties, with certain minimum royalty
payments in the third through the sixth years after closing.
The Company has sustained losses in each year since its incorporation in
1986. In 1997, the Company had a net loss from continuing operations of $25.0
million, and at December 31, 1997, had an accumulated deficit of $119.5
million. The net loss from discontinued operations (i.e. chiral intermediates)
for 1997 was $427,000. The Company expects to make substantial expenditures to
further its immunotherapeutic program, to commercialize THALOMID and to expand
the chiral crop protection business, and, based on these expenditures, it is
likely that losses will continue for at least the next 12 to 18 months.
Subject to the risks described elsewhere in this Annual Report the Company
believes that there are significant market opportunities for the products and
processes under development by the Company. To address these opportunities in a
timely and effective manner, the Company intends to seek out collaborations and
licensing arrangements with third parties. The Company has entered into
agreements covering the manufacture and distribution for the Company of certain
compounds, such as THALOMID, and research and development by the Company
covering processes for producing chirally pure crop protection agents for
license to agrochemical manufacturers.
Celgene has established a sales and marketing organization to
commercialize THALOMID (subject to regulatory approval of the product), and
currently employs 25 persons in this capacity. The Company intends to develop
and market its own pharmaceuticals for indications with smaller patient
populations. For drugs with indications for larger patient populations, the
Company anticipates partnering with other pharmaceutical companies. The Company
also anticipates partnering with companies for the development and
commercialization of the Company's chirally pure pharmaceutical and
agrochemical products. Celgene expects that these arrangements typically will
include milestone payments, reimbursement of research and development expenses
and royalty arrangements.
Future operating results will depend on many factors, including demand for
the Company's products, regulatory approvals, the timing of the introduction
and market acceptance of new products by the Company or competing companies,
partner support payments, the Company's ability to control costs, and its
ability to attract and retain highly qualified scientific and management
personnel.
Results of Operations
Fiscal Years Ended December 31, 1997,1996 and 1995
Total revenues. Total revenues increased by 27% to approximately $1.1
million from approximately $882,000 in 1996. The Company's revenues for 1996
represented an increase of 87% over 1995 revenues of approximately $472,000.
Revenues were primarily from research contracts for the years 1997, 1996 and
1995.
Research and development expenses. Research and development expenses for
1997 increased by 15% to approximately $17.4 million from approximately $15.2
million in 1996. This increase was due to an increase of
22
approximately $823,000 of expenses associated with the Company's chiral
pharmaceutical program primarily in clinical trials and $1.3 million of
expenses associated with the Company's Celgro subsidiary. The increase in
expenses for Celgro was primarily facility and personnel charges related to
establishing a separate location for the Chiral agrochemical business.
Research and development expenses for 1996 increased by 137% to
approximately $15.2 million from approximately $6.4 million in 1995. This
increase was due to an increase of approximately $6.5 million of expenses
associated with the Company's immunotherapeutic program, $1.7 million of
expenses associated with the initiation of the chiral pharmaceutical
development program and $655,000 of expenses associated with the formation of
the Chiral Agrochemical business. The major factors contributing to the
increased cost of the Company's immunotherapeutic programs resulted from
increases in the following expense categories: preclinical and clinical trial
expenses, approximately $2.9 million; regulatory and compliance expenses,
approximately $1.3 million; manufacturing costs for developmental quantities of
Thalomid, approximately $925,000, and other ongoing research expenses,
approximately $1.3 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses for 1997 increased by 143% to approximately $9.1
million from approximately $3.8 million in 1996. This was primarily due to the
formation of a sales and marketing organization in anticipation of the Thalomid
product launch as well as an increase in certain support functions resulting
from the anticipated transition to a commercial operation. Major increases were
as follows: sales and marketing expense of $3.4 million for sales force
recruiting and training and other pre-launch expenses; Medical Affairs and
Safety costs of $425,000; additional finance personnel and information systems
development costs of $366,000; executive and administrative costs for the new
Celgro subsidiary of $487,000 and other administrative expenses such as legal,
consulting and investor relations of approximately $600,000.
Selling, general and administrative expenses for 1996 increased by 46%
from approximately $2.6 million in 1995. This increase was due primarily to the
initial formation of a small sales and marketing organization in preparation
for the Thalomid product launch, the addition of product liability coverage to
the Company's insurance, recruiting expenses, and higher consulting and legal
expenses associated with the shareholder rights agreement adopted in September
1996.
Interest income and interest expense. Interest income for 1997 decreased
by 62% to $496,000 from approximately $1.3 million in 1996. The decrease was
due to lower average cash balances in 1997. Interest income for 1996 increased
by 128% from approximately $569,000 in 1995. This increase was attributable to
higher average cash balances in 1996 due to the $23.8 million of net proceeds
from the Series A Convertible Preferred Stock offering in March 1996. Interest
expense for 1997 decreased 65% to approximately $112,000 from $324,000 and for
1996 decreased 24% from approximately $425,000 in 1995. The decrease in both
years was due to the conversion to equity of the 8% Convertible Debentures
issued in 1995.
Net Loss from continuing operations. The net loss from continuing
operations increased 47% to approximately $25.0 million from approximately
$17.1 million in 1996. The increase was due primarily to spending related to
the anticipated launch of Thalomid and ongoing research programs in Chiral
Pharmaceuticals and the Company's Celgro subsidiary. The net loss from
continuing operations for 1996 increased by 104% from approximately $8.4
million in 1995 reflecting increased spending in immunotherapeutics, the start
of a Thalomid marketing organization and the start of the chiral pharmaceutical
development program.
Net Loss from discontinued operations. The net loss from discontinued
operations decreased by 44% to approximately $427,000 in 1997 from $761,000 in
1996. The reduced loss was primarily a result of an increase in revenues from
$1.4 million in 1996 to $2.1 million in 1997 offset by $.3 million of operating
expenses in 1997. The net loss from discontinued operations for 1996 decreased
by 65% from $2.1 million in 1995. The decreased loss was due to a $1.0 million
increase in revenues in 1996 and a decrease in expenses, primarily research and
development expenses, of approximately $.5 million.
Liquidity and Capital Resources
Since inception, the Company has financed its working capital requirements
primarily through private and public sales of its debt and equity securities,
income earned on the investment of the proceeds from the sale of such
securities, and revenues from research contracts and product sales. The Company
has raised approximately
23
$99.5 million in net proceeds from three public and three private offerings,
including its initial public offering in July 1987.
In July 1995, the Company issued and sold in a private placement offering
$12.0 million aggregate principal amount of 8% Convertible Debentures due July
31, 1997 for total net proceeds, after offering costs, of approximately $11.0
million. As of December 31, 1997, all of the 8% convertible Debentures had been
converted into Common Stock. In March 1996, the Company issued and sold in a
private placement offering 503 shares of Series a Convertible Preferred Stock
at $50,000 per share, for total gross proceeds of approximately $25.2 million
and net proceeds, after offering costs, of approximately $23.8 million. As of
December 31, 1997 all but 74 Series A shares ($3.7 million) had been converted
to Common Stock.
On June 9, 1997, in a private placement, the Company completed the sale of
5,000 shares of Series B Convertible Preferred Stock at an issue price of
$1,000 per share. The Company received net proceeds, after offering costs, of
$4.8 million. As of December 31, 1997, all shares of Series B Preferred had
been converted to common stock. On December 2, 1997 the Company completed the
sale of 2.2 million shares of common stock at a price of $9 per share, in a
public offering. Net proceeds after underwriting discounts and commissions were
$18.2 million. See Notes 5 and 6 to the Financial Statements.
The Company's net working capital at December 31, 1997 decreased by 18% to
approximately $13.4 million (primarily cash and cash equivalents) from
approximately $16.4 million at December 31, 1996. The decrease in working
capital was primarily due to the increased rate of spending as previously
discussed.
Cash and cash equivalents increased by $12.7 million in 1997 while
marketable securities decreased by $16.9 million from 1996. This reflects the
receipt in December 1997 of funds from the secondary public offering, which
were not yet invested in marketable securities. Current research commitments
for 1998 are approximately $750,000, primarily to Rockefeller University
($504,000) and Glasgow University ($200,000). In addition a contract with
Boston University was entered into for the prescription-monitoring program
associated with the anticipated sale of Thalomid. The commitment for 1998 is
$993,000.
The Company expects that its rate of spending will increase as the result
of increased clinical trial costs and expenses associated with the regulatory
approval process and commercialization of products now in development. In order
to assure funding for the Company's future operations, the Company may need to
seek additional capital resources. However, no assurances can be given that the
Company will be successful in raising additional capital. If the Company is
unable to raise additional funds, the Company believes that its current
financial resources including the proceeds of $7.5 million from the chiral
chemical intermediate business sale in January 1998 and right to sell another
$5 million of Series B Preferred stock by June 9, 1998 could fund operations
based on reduced levels of research and development and administrative
activities through 1998.
As of December 31, 1997, the Company had for federal income tax purposes a
net operating loss carryforward of approximately $110.0 million. If not
utilized to offset future taxable income, such loss carryforward will expire
between 2001 and 2012. Certain events, including any sales by the Company of
shares of its stock and/or transfers of a substantial number of shares of
Common Stock by the current stockholders, may restrict the ability of the
Company to utilize its net operating loss carryforward.
Market Risk
The Company does not use derivative financial instruments. The Company's
Series A Convertible Preferred Stock is subject to market risk due to its
conversion feature. As of December 31, 1997, 74 shares were issued and
outstanding along with accretion of $329,455 for a total value outstanding of
$4,029,455. The conversion feature provides for conversion into common stock at
the lesser of (i) $18.81 or (ii) 90% of the average closing price per share of
common stock for the seven trading days immediately prior to the date of
conversion, which at December 31, 1997 was $8.65. Based on a 10% reduction in
the average stock price the Company would have to issue approximately 57,500
additional shares of common stock upon conversion. If there was a 10% increase
in the average stock price the Company would issue approximately 47,000 less
shares of common stock upon conversion. The Company's Series B Preferred Stock
if it was to be issued in 1998 has a market adjustable defined conversion
price.
24
Year 2000 Computer Systems Compliance
Many older computer software programs refer to years in terms of their
final two digits only. such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures.
During 1997, the Company's senior management created and filled the
position of Chief Information Officer. Among other duties, the CIO has the
responsibility to have all systems and computers year 2000 compliant by mid-year
1999. To date, all personal computers, with the exception of several computers
connected to laboratory analytic equipment, have been replaced with Year 2000
compliant machines. All office applications and the Adverse Event Reporting
software are year 2000 compliant. A new financial system software package is
scheduled to be installed in the second quarter 1998 and is year 2000
compliant. The Company is confident that by year end 1998, all critical systems
and software will have been addressed and an assessment as to the date critical
nature of the laboratory computers will be complete with a plan to replace
those machines if necessary by early 1999. Additional costs to correct Year
2000 problems are not expected to be material. Based on current plans and
efforts to date, the Company expects that there will be no material adverse
effect on our operations. There is no guarantee, however, that all problems
will be foreseen and corrected, that Year 2000 problems at the Company's
suppliers, customers and at governmental agencies will not adversely affect the
Company, or that no material disruption of the Company's business will occur as
a result of Year 2000 problems.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income which becomes effective in 1998. SFAS No. 130 requires
disclosure of comprehensive income, which consists of all changes in equity
from nonshareholder sources. The adoption of this statement will not impact the
consolidated financial position, results of operations or cash flows, but will
be limited to the form and content of the disclosures. The Company does not
expect the adoption to materially change the current disclosures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Part IV, Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with the Company's auditors
on accounting principles or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Name Age Position
- ---- --- --------
John W. Jackson 53 Chairman of the Board and
Chief Executive Officer
Sol J. Barer, Ph.D. 50 President, Chief Operating Officer,
and a Director
Robert C. Butler 67 Senior Vice President and
Chief Financial Officer
Frank T. Cary 77 Director
Arthur Hull Hayes, Jr., M.D. 65 Director
Richard C.E. Morgan 53 Director
Walter L. Robb, Ph.D. 70 Director
Lee J. Schroeder 69 Director
Gilla Kaplan, Ph.D. 50 Director
Jack L. Bowman 65 Director
- ------------------
John W. Jackson has been Chairman of the Board and Chief Executive Officer
of the Company since January 1996. Mr. Jackson was founder and President of
Gemini Medical, a consulting firm which specialized in services and investment
advice to start-up medical device and biotechnology companies, from February
1991 to January 1996. Previously, Mr. Jackson had been President of the
worldwide Medical Device Division of American Cyanamid, a major pharmaceutical
company, from February 1986 to January 1991 and served in various international
positions, including Vice President-International for American Cyanamid from
1978 to 1986. Mr. Jackson served in several human health marketing positions at
Merck & Company, a major pharmaceutical company, from 1971 to 1978.
Sol J. Barer has been President of the Company since October 1993 and
Chief Operating Officer and a director of the Company since March 1994.
Dr. Barer was Senior Vice President--Science and Technology and Vice
President/General Manager--Chiral Products of the Company from October 1990 to
October 1993 and Vice President--Technology of the Company
25
from September 1987 to October 1990. Dr. Barer received a Ph.D. in organic and
physical chemistry from Rutgers University.
Robert C. Butler has been Chief Financial Officer of the Company since
July 1996. Mr. Butler plans to retire in July 1998. From 1988 to 1995, Mr.
Butler served as Senior Vice President and Chief Financial Officer of
International Paper Co., a manufacturer of paper, wood, and allied products.
From 1979 to 1987, Mr. Butler served as Group Executive Vice President of the
National Broadcasting Company. Mr. Butler is also a member of the Board of
Directors of Carter Holt Harvey Ltd., a major New Zealand forest products
company.
Frank T. Cary has been Chairman of the Executive Committee of the Board of
Directors of the Company since July 1990 and has been a director of the Company
since 1987. From 1973 to 1981, Mr. Cary was Chairman of the Board and Chief
Executive Officer of International Business Machines Corporation. Mr. Cary also
is a director of Cygnus Therapeutic Systems Inc., ICOS Corporation, Lincare
Inc., SPS Transaction Services, Inc., Lexmark International Inc., SEER
Technologies, Inc., Vion Pharmaceuticals Inc. and Teltrend, Inc.
Arthur Hull Hayes, Jr., a director of the Company since 1995, has been
President and chief operating officer of MediScience Associates, Inc., a
consulting organization that works with pharmaceutical firms, biomedical
companies and foreign governments, since July 1991. Dr. Hayes has also been a
partner in Issue Sphere, a public affairs firm that focuses on health science
issues, since November 1995, as well as a professor in medicine, pharmacology
and family and community medicine at New York Medical College and clinical
professor of medicine and pharmacology at the Pennsylvania State University
College of Medicine. From 1986 to 1990, Dr. Hayes was President and Chief
Executive Officer of E.M. Pharmaceuticals, a unit of E. Merck AG and from 1981
to 1983 was Commissioner of the U.S. Food and Drug Administration. Dr. Hayes
also is a director of Myriad Genetics, Inc., NaPro BioTherapeutics, Inc. and
Premier Research Worldwide.
Richard C.E. Morgan, a director of the Company since 1987 has been the
Managing Member of Amphion Partners LLC (formerly Wolfensohn Partners, L.P.),
since 1986. Between January 1996 and January 1998, Mr. Morgan was a partner of
Jackson Hole Management Company, Inc. Mr. Morgan also is Chairman of the Board
of Directors and Chief Executive Officer of AXCESS, Inc.; a director of SEQUUS
Pharmaceuticals, Inc.; Chairman of the Board of Directors of Quidel Corp.; a
director of ChromoVision Medical Systems, Inc.; and a director of Indigo, N.V.
Walter L. Robb, a director of the Company since 1992, has been a private
consultant and President of Vantage Management Inc., a consulting and investor
services company, since January 1993. Mr. Robb was Senior Vice President for
Corporate Research and Development of General Electric Company, and a member of
its Corporate Executive Council from 1986 to December 1992. Mr. Robb also is
Chairman of the Board of Directors of Neopath, Inc. and a director of Marquette
Electronics, Inc., Cree Research Inc., and Mechanical Technology, Inc.
Lee J. Schroeder, a director of the Company since 1995, has been President
of Lee Schroeder & Associates, Inc., pharmaceutical business consultants, since
1985. Mr. Schroeder was President of Fox Meyer Lincoln from 1983 to 1985, and
was an Executive Vice President of Sandoz, Inc. from 1981 to 1983. Mr. Schroeder
also is a director of Harris Technology Group, Inc., Bryan Memorial Hospital,
MGI Pharmaceutical, Inc., Ascent Pediatrics, Inc., and Interneuron
Pharmaceuticals, Inc.
Gilla Kaplan, Ph.D., a director of the Company since April 1998, is an
immunologist in the Laboratory of Cellular Physiology and Immunology at The
Rockefeller University in New York where she was appointed Assistant Professor
in 1985 and Associate Professor in 1990. Dr. Kaplan is a member of numerous
professional societies and has been the organizer of several major symposia on
tuberculosis. Dr. Kaplan has served as an advisor to the Global Program for
Vaccines and Immunization of the World Health Organization, has participated in
several NIH peer review panels, is on the Editorial Board of Microbial Drug
Resistances, since 1994, and Tubercle and Lung Disease, since 1997. Dr. Kaplan
is the author of more than 100 scientific publications and has received
international recognition for her work. In 1995, she gave the Special Honorary
Lecture at the American Society for Microbiology and in 1997 was appointed a
Fellow of the American Academy of Microbiology.
26
Jack L. Bowman, a director of the Company since April 1998, served as
Company Group Chairman of Johnson & Johnson from 1987 to 1994. From 1983 to 1987
Mr. Bowman served as Executive Vice President of American Cyanamid. Mr. Bowman
is also a director of NeoRx Corporation, Cell Therapeutics, Inc., CytRx
Corporation, Cellegy Pharmaceuticals and Targeted Genetics.
Election of Directors
Each director holds office (subject to the Company's By-Laws) until the
next annual meeting of stockholders and until such director's successor has been
elected and qualified. There are no family relationships between any of the
directors and executive officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth information about the compensation paid, or
payable, by the Company for services rendered in all capacities to the Chief
Executive Officer of the Company and each of the most highly paid executive
officers of the Company who earned more than $100,000, for each of the last
three fiscal years in which such officers were executive officers for all or
part of the year.
27
Annual Long Term
Compensation Compensation
----------------------------------------- -------------------------
Other Restricted
Annual Stock Securities All Other
Name and Compensation Award(s) Underlying Compen-
Principal Position Year Salary ($) Bonus ($) ($) ($) Options # sation ($)
- ---------------------------- ---- ---------- --------- ------------ ---------- ---------- ---------
John W. Jackson............. 1997 270,000 97,200 9,500(3) 0 0 13,390(4)
Chairman and 1996 243,429(1) 105,625(2) 4,750(3) 0 250,000 0
Chief Executive
Officer
- ---------------------------- ---- ---------- --------- ------------ ---------- ---------- ---------
Sol J. Barer, Ph.D.......... 1997 232,500 63,647 9,500(3) 0 0 0
President and Chief 1996 216,667 50,000 4,750(3) 0 72,500 0
Operating Officer 1995 200,000 0 0 0 54,080 0
(1) Mr. Jackson commenced his employment with the Company on January 11, 1996.
(2) Mr. Jackson's bonus consisted of $50,000 in cash and 5,000 shares of
unrestricted stock, valued at $55,625 on the date of grant.
(3) Reflects matching contributions under the Company's 401K plan.
(4) Reflects life insurance premiums for a life insurance policy for Mr.
Jackson.
Employment Agreements and Termination of Employment Arrangements
John W. Jackson and Sol J. Barer (each an "Executive") are employed
pursuant to substantially similar employment agreements (the "Employment
Agreements") providing for their continued employment until September 30, 2000
(the period during which Executive is employed is referred to as the "Employment
Period"). The Employment Period shall be automatically renewed for successive
one-year terms unless the Company or Executive gives written notice to the other
at least one year prior to the expiration of the Employment Period. The
Employment Agreements provide Messrs. Jackson and Barer with a base salary
(which may be increased by the Board of Directors, or a committee thereof) of
$270,000 and $235,000, respectively, per annum. In addition, each of the
Employment Agreements provides for an annual bonus in such amount as may be
determined by the Board of Directors, or a committee thereof. The Employment
Agreements also provide that Messrs. Jackson and Barer are entitled to continue
to participate in all group health and insurance programs and all other fringe
benefit or retirement plans which are generally available to the Company's
employees. Each of the Employment Agreements provides that if the Executive is
terminated by the Company without cause, he shall be entitled to receive a
lump-sum payment in an amount equal to the greater of (A) twelve months salary
at the rate being paid on the date of such termination or (B) salary at such
rate for the unexpired term of the Employment Agreement. Each Employment
Agreement also provides that if Executive is terminated without cause or if
Executive terminates his employment within 30 days of having actual knowledge of
the occurrence of any of the following events: (i) Executive not maintaining his
position with the Company as Chief Executive Officer (in the case of Mr.
Jackson) and Chief Operating Officer (in the case of Mr. Barer), (ii) a
significant change in the duties normally attached to such Executive's position,
(iii) a good faith determination by such Executive that, as a result of a change
in control, such Executive is unable to carry out the duties of such position
and (iv) a breach by the Company of any material term of such Executive's
Employment Agreement, the Executive shall be paid in a lump-sum an amount of
cash equal to 2.99 times Executive's "base amount," as defined in Section
280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code").
28
If during the two-year period following a change in control (as defined in
the Company's 1992 Long-Term Incentive Plan) of the Company, (i) there is a
change in an employee's title or a significant change in the nature or scope of
his employment or duties and such person terminates his employment within 90
days following such change or (ii) an employee's employment by the Company is
terminated without cause (as defined), then all of the options held by such
employee then outstanding will become immediately and fully exercisable, and all
restrictions applicable to restricted stock automatically will terminate.
Stock Options
No stock options or stock appreciation rights ("SARs") were granted in
fiscal 1997 to John W. Jackson or Sol J. Barer.
The following table sets forth information for each of the named executive
officers with respect to the value of options exercised during the year ended
December 31, 1997 and the value of outstanding and unexercised options held as
of December 31, 1997. There were no SARs exercised during 1997 and none were
outstanding as of December 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of
Securities Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired Value at December 31, 1997 at December 31, 1997(1)
on Exercise Realized -------------------- -----------------------
Name ($) ($) Exercisable Unexercisable Exercisable Unexercisable
---- --- --- ----------- ------------- ----------- -------------
John W. Jackson....... -- -- 166,667 83,333 $0 $0
Sol J. Barer.......... -- -- 190,986 48,334 $160,937 $0
- ----------------------------------------
(1) Represents the difference between the closing market price of the Common
Stock as reported by Nasdaq on December 31, 1997 of $8.438 per share and
the exercise price per share of in-the-money options multiplied by the
number of shares underlying the in-the-money options.
Compensation Committee Report
The Compensation Committee determines the Company's executive compensation
policies. The Compensation Committee determines the compensation of the
Company's executive officers and approves and oversees the administration of
incentive compensation programs for all employees including executive officers.
The Compensation Committee is composed solely of outside directors.
Executive Compensation Policies and Programs
The Company's executive compensation program is part of a company-wide
program covering all employees. The program's goals are to attract, retain, and
motivate employees, and it
29
utilizes incentives such that employees and stockholders share the same risks.
The compensation program is designed to link compensation to performance.
A portion of each employee's compensation relates to the grant of stock
options, and such grants are based on the successful attainment of strategic
corporate, business unit, and individual goals. As the Company has not as yet
attained significant commercial revenues, goals are set which relate to the
successful attainment of strategic events.
The Company does not have a pension plan or other capital accumulation
program. Grants of stock options are therefore of great importance to executives
as well as all employees. Any long-term value to be derived from such grants
will be consistent with stockholder gains.
Executive and employee compensation includes salary, employment-related
benefits, and long-term incentive compensation:
Salary. Salaries are set competitively relative to the biotechnology and
pharmaceutical industries--industries with which the Company competes for its
highly skilled personnel. Individual experience and performance is considered
when setting salaries within the range for each position. Annual reviews are
held and adjustments are made based on attainment of individual goals.
Benefits. All employees are eligible for similar benefits, such as health,
disability, and life insurance.
Long-Term Incentive Compensation. An incentive compensation program is
established annually. The purpose of this program is to provide financial
incentives to executives and employees to achieve annual corporate, business
unit, and individual goals. The incentive program also aligns executive and
employee interests with those of stockholders by using grants of stock options.
Such grants vest over time thereby encouraging continued employment with the
Company. The size of grants is tied to comparative biotechnology industry
practices. To determine such comparative data, the Company relies on outside
compensation consultants, the Company's auditors, and third party industry
surveys.
Under the Company's 1997 incentive program, it was agreed, subject to the
achievement of certain goals in 1997 by the Company, that the Company would
grant at a future date options to purchase shares of common stock. A similar
incentive program has been designed for 1998 based on attainment of corporate,
business unit, and individual goals. The program is open to all regular
full-time employees, other than the executive officers of the Company.
Chief Executive Officer Compensation. Pursuant to Mr. Jackson's contract
with the Company entered into on September 30, 1997, Mr. Jackson received base
salary of $270,000 for 1997. Mr. Jackson also received a bonus of $97,200 for
1997. Factors considered in determining
30
Mr. Jackson's bonus included the successful attainment of several important
milestones in the development of the Company's products, as well comparisons to
total compensation packages of chief executive officers at corporations within
the Company's industry that are of comparable size.
Members of the Compensation Committee
Richard C.E. Morgan, Chairman
Frank T. Cary
Walter L. Robb
Lee J. Schroeder
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee are Richard C. E.
Morgan, Chairman, Frank T. Cary, Walter L. Robb, and Lee J. Schroeder. Each is
an outside director of the Company.
31
Director Compensation
Directors do not receive salaries or cash fees for serving as directors
nor do they receive any cash compensation for serving on committees; however,
all members of the Board of Directors who are not employees of the Company
("Non-Employee Directors") are reimbursed for their expenses for each meeting
attended and are eligible to receive stock options pursuant to the 1995
Non-Employee Directors' Plan (the "1995 Directors' Plan").
The 1995 Directors' Plan was adopted by the Board of Directors on April 5,
1995, and approved by the Company's stockholders at the 1995 Annual Meeting of
Stockholders. The 1995 Directors' Plan provides for the granting to Non-Employee
Directors of non-qualified options to purchase an aggregate of not more than
250,000 shares (subject to adjustment in certain circumstances) of Common Stock.
Under the 1995 Directors' Plan, each Non-Employee Director as of April 5,
1995 was granted a non-qualified option to purchase 20,000 shares of Common
Stock, and each new Non-Employee Director upon the date of his election or
appointment will be granted a non-qualified option to purchase 20,000 shares of
Common Stock. These initial options vest in four equal annual installments
commencing on the first anniversary of the date of grant, assuming the
Non-Employee Director remains a director.
Upon the date of each Annual Meeting of Stockholders, each Non-Employee
Director is granted a non-qualified option to purchase 10,000 shares of Common
Stock (or a pro rata portion thereof if the director did not serve the entire
year since the date of the last annual meeting). These options vest in full on
the date of the first Annual Meeting of Stockholders held following the date of
the grant, assuming the Non-Employer Director is a director on that date.
All options granted pursuant to the 1995 Directors' Plan will expire no
later than 10 years from the date of grant and no options may be granted after
June 16, 2005. If a Non-Employee Director terminates his service on the Board of
Directors for any reason, options which were exercisable on the date of
termination and which have not expired may be exercised at any time until the
date of expiration of such options. In addition, if there is a change of control
and within two years thereafter a director is removed without cause (as
defined) or is not nominated for election by the Company's stockholders, all
unvested portions of a stock option will automatically vest.
In 1997, pursuant to the 1995 Directors' Plan, each of Messrs. Cary,
Hayes, Morgan, Robb and Schroeder received an option to purchase 10,000 shares
of Common Stock at an exercise price of $7.125 per share, the fair market value
of the stock on the date of the grant.
32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth the beneficial ownership of the Common Stock as
of April 27, 1998 (i) by each director, (ii) by each of the named executive
officers (iii) by all directors and executive officers of the Company as a
group, and (iv) by all persons known by the Board of Directors to be beneficial
owners of more than five percent of the outstanding shares of Common Stock.
Amount and Nature of Percent of
Name Beneficial Ownership Class
- -------------------------------------------- -------------------- ----------
John W. Jackson ............................ 272,400(1)(2) 1.7%
Sol J. Barer, Ph.D ......................... 209,928(2) 1.3%
Robert C. Butler ........................... 17,500(1) *
Frank T. Cary .............................. 106,000(1) *
Arthur Hull Hayes, Jr., M.D ................ 30,000(1) *
Richard C.E. Morgan ........................ 330,055(1)(3) 2.1%
Walter L. Robb, Ph.D ....................... 92,000(1) *
Lee J. Schroeder ........................... 41,000(1) *
Gilla Kaplan ............................... 0 *
Jack L. Bowman ............................. 0 *
All directors and current
executive officers of
the Company as a group
(eight persons) ........................... 1,098,883(4) 6.9%
Donald P. Moriarty and
William P. Scully(5) ...................... 1,355,500(5) 8.5%
c/o McGrath, Doyle & Phair
150 Broadway
New York, New York 10038
Frontier Capital Management
Company, Inc.(6) .......................... 806,960(6) 5.0%
99 Summer Street
Boston, MA 02110
33
Amount and Nature of Percent of
Name Beneficial Ownership Class
- -------------------------------------------- -------------------- ----------
Chancellor LGT Asset Management, Inc.,
Chancellor LGT Trust Company and
LGT Asset Management, Inc.
as a group (7) ............................ 1,067,700(8) 6.7%
1166 Avenue of the Americas
New York, New York 10036
- ------------------------
* Less than one percent (1%).
(1) Includes shares of Common Stock which the directors and executive officers
have the right to acquire through the exercise of options within 60 days
of April 27, 1998, as follows: John W. Jackson -- 250,000; Sol J. Barer --
209,913; Robert C. Butler -- 12,500; Frank T. Cary -- 76,000; Arthur Hull
Hayes, Jr. -- 30,000; Richard C.E. Morgan -- 71,000 shares; Walter L. Robb
-- 49,000, and Lee J. Schroeder -- 41,000. Does not include shares of
Common Stock which the directors and executive officers had the right to
acquire through the exercise of options not exercisable within 60 days of
April 27, 1998, as follows: John W. Jackson -- 100,000; Sol J. Barer --
74,167; Robert C. Butler -- 37,500; Frank T. Cary -- 5,000; Arthur Hull
Hayes, Jr. -- 10,000; Richard C.E. Morgan -- 5,000; Walter L. Robb --
5,000, and Lee J. Schroeder -- 5,000.
(2) Includes with respect to Mr. Jackson 400 shares owned by the son of Mr.
Jackson, as to which shares Mr. Jackson disclaims beneficial ownership;
includes with respect to Dr. Barer 15 shares owned by the daughter of Dr.
Barer, as to which shares Dr. Barer disclaims beneficial ownership.
(3) Includes 252,055 shares of Common Stock owned by Amphion Ventures, L.P. of
which Amphion Partners, LLC is the general partner. Mr. Morgan is a
managing member of Amphion Ventures, LLC. Mr. Morgan's indirect pecuniary
interest in these shares of Common Stock, within the meaning of Rule
16a-1(a)(2)(ii)(B) under the Securities Exchange Act of 1934, is
significantly less than the amount disclosed. Mr. Morgan otherwise
disclaims beneficial ownership of such shares of Common Stock owned by
Amphion Ventures, L.P.
(4) Includes or excludes, as the case may be, shares of Common Stock as
indicated in the preceding footnotes.
(5) Information regarding Donald P. Moriarty and William P. Scully was
obtained from a Schedule 13D, as amended, filed by them with the
Securities and Exchange Commission. Such Schedule 13D states that Messrs.
Moriarty and Scully are deemed to be the beneficial owners of and to have
shared dispositive power over all such shares of Common Stock, and that
such shares are held by Mr. Moriarty, Mr. Scully, their family members,
and Twin Oaks Partners, a partnership in which Messrs. Moriarty and Scully
are general partners.
(6) Information regarding Frontier Capital Management Company, Inc. was
obtained from a Schedule 13G, filed by it with the Securities and Exchange
Commission. Such Schedule 13G states that Frontier Capital Management
Company, Inc. is the beneficial owner of and has the sole dispositive
power over all such shares of Common Stock.
(7) Information regarding Chancellor LGT Asset Management, Inc., Chancellor
LGT Trust Company and LGT Asset Management, Inc. (the "Group") was
obtained from a Schedule 13G, filed by them with the Securities and
Exchange Commission. Such Schedule 13G states that the Group filed as a
group and as such it is the beneficial owner of and has sole dispositive
power over all such shares of Common Stock.
(8) Includes warrants to purchase 519,231 shares of Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(a) See Index to Financial Statements immediately following Exhibit
Index.
(b) Current Report on Form 8-K filed November 18, 1997 with respect to
Item 2.
(c) Exhibits
See Exhibit Index immediately following signature pages.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CELGENE CORPORATION
By: /s/ John W. Jackson
-------------------
John W. Jackson
Chairman of the Board and
Chief Executive Officer
Date: April 30, 1998
36
CELEGENE CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
-----
Independent Auditor's Report ............................... F-2
Balance Sheets as of December 31, 1996 and 1997 ............ F-3
Statements of Operations--Years Ended December 31, 1995,
1996, and 1997 ............................................ F-4
Statements of Stockholders' Equity--Years Ended December 31,
1995, 1996 and 1997 ....................................... F-5
Statements of Cash Flow--Years Ended December 31, 1995,
1996 and 1997 ............................................. F-7
Notes to Financial Statements .............................. F-9
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CELGENE CORPORATION:
We have audited the accompanying balance sheets of Celgene Corporation as
of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Celgene Corporation as of
December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
February 13, 1998
F-2
CELGENE CORPORATION
Balance Sheets
December 31,
1996 1997
--------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 922,961 $ 13,583,445
Marketable securities available for sale 16,892,023 --
Accounts receivable 378,595 1,430,384
Other current assets 635,841 353,266
Assets held for disposal -- 485,170
------------- --------------
Total current assets 18,829,420 15,852,265
------------- --------------
Plant and equipment, net 1,940,615 2,286,024
Other assets 41,250 79,167
Deferred debt costs 126,577 --
------------- --------------
Total assets $ 20,937,862 $ 18,217,456
============= ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,552,674 $ 842,262
Accrued expenses 881,604 1,388,933
Capitalized lease obligation -- 210,499
------------- --------------
Total current liabilities 2,434,278 2,441,694
Capitalized lease obligation-net of current portion -- 350,670
Convertible debentures 2,026,043 --
Convertible debentures-accrued interest 412,532 --
------------- --------------
Total liabilities 4,872,853 2,792,364
------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value per share
5,000,000 shares authorized; Series A convertible, redeemable,
cumulative preferred; 267 shares issued and outstanding at December
31, 1996; plus $533,416 accretion premium; 74 shares issued and
outstanding at December 31, 1997, plus $329,455 accretion 13,883,416 4,029,455
Series B Convertible, redeemable, 9% cumulative preferred, par value
$.01 per share. Authorized 20,000 shares; issued 5,000 shares; no
shares outstanding -- --
Common stock, $.01 par value per share
20,000,000 shares authorized; issued and outstanding 10,611,422 and
15,427,949 shares at December 31, 1996; and 1997, respectively 106,114 154,279
Common stock in treasury, at cost--29,985 and 22,888 shares at
December 31, 1996 and 1997, respectively (100,239) (76,535)
Additional paid-in capital 94,770,176 130,838,433
Unamortized deferred compensation--restricted stock (1,133) --
Accumulated deficit (92,599,039) (119,520,540)
Net unrealized gain on marketable securities 5,714 --
------------- --------------
Total stockholders' equity 16,065,009 15,425,092
============= ==============
Total liabilities and stockholders' equity $ 20,937,862 $ 18,217,456
============= ==============
See Accompanying Notes to Financial Statements
F-3
CELGENE CORPORATION
Statements of Operations
For Years Ended December 31,
1995 1996 1997
----------------- ---------------- ----------------
Revenues:
Chirally pure intermediates $ 32,000 $ 65,000 $ --
Research contracts 440,000 816,665 1,122,193
------------- ------------- -------------
Total revenues 472,000 881,665 1,122,193
Expenses:
Research and development 6,393,120 15,152,735 17,380,390
Selling, general and administrative 2,589,038 3,770,781 9,145,456
------------- ------------- -------------
Total expenses 8,982,158 18,923,516 26,525,846
------------- ------------- -------------
Operating loss (8,510,158) (18,041,851) (25,403,653)
Other Income and Expense:
Interest income 568,516 1,308,243 495,580
Interest expense 424,738 323,913 111,771
------------- ------------- -------------
Loss from continuing operations (8,366,380) (17,057,521) (25,019,844)
Discontinued operations (note 9)
Loss from operations (2,150,143) (761,460) (427,183)
------------- ------------- -------------
Net loss (10,516,523) (17,818,981) (25,447,027)
Accretion of premium payable on
preferred stock and warrants (note 6) -- 1,012,881 521,397
Deemed dividend for preferred stock
conversion discount (note 6) -- 2,777,777 953,077
------------- ------------- -------------
Net loss applicable to common
stockholders $ (10,516,523) $ (21,609,639) $ (26,921,501)
============= ============= =============
Per share basic and diluted (note 2):
Loss from continuing operation $ (1.04) $ (1.81) $ (2.05)
Loss from discontinued operation (0.27) (0.08) (0.03)
Net loss applicable to common
stockholders $ (1.30) $ (2.29) $ (2.20)
------------- ------------- -------------
Weighted average number of shares of common
stock outstanding 8,073,000 9,450,000 12,215,000
============= ============= =============
See Accompanying Notes to Financial Statements.
F-4
CELGENE CORPORATION
Statement of Stockholders' Equity
Years Ended December 31, 1995 and 1996
Common Stock Preferred Stock Treasury Stock
----------------------- ------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
------------ ---------- -------- ---------------- ------------ --------------
Balances at December 31, 1994 7,886,960 $ 78,870 -- -- (24,271) $ (243)
Exercised stock options 24,987 250
Amortization of deferred
compensation
Discount for convertible
debentures to adjust to market
yield
Conversion of convertible
debentures 895,916 8,959
Cost associated with conversion
of convertible debentures, net
Change in net unrealized gain
(loss) on marketable securities
Net loss
---------- -------- --- -------------- ------- ----------
Balances at December 31, 1995 8,807,863 88,079 -- -- (24,271) (243)
Exercised stock options 42,069 420
Repurchase of shares (5,714) (99,996)
Amortization of deferred
compensation
Conversion of convertible
debentures 372,681 3,727
Issuance of preferred stock, net 503 25,150,000
Conversion of preferred stock 1,388,809 13,888 (236) (12,141,309)
Preferred stock lock-up warrants
Accretion of premium on
preferred stock 874,725
Deemed dividend for preferred
stock conversion discount
Change in net unrealized gain
(loss) on marketable securities
Net loss
---------- -------- --- -------------- ------- ----------
Balances at December 31, 1996 10,611,422 $106,114 267 $ 13,883,416 (29,985) $ (100,239)
========== ======== ==== ============== ======= ==========
Net Unrealized
Additional Unamortized Gain (Loss) on
Paid-in Deferred Accumulated Marketable
Capital Compensation Deficit Securities Total
-------------- -------------- ----------------- --------------- ----------------
Balances at December 31, 1994 $ 70,684,768 $ (19,174) $ (60,472,877) $ (267,278) $ 10,004,066
Exercised stock options 170,638 170,888
Amortization of deferred
compensation 12,089 12,089
Discount for convertible
debentures to adjust to market
yield 1,194,434 1,194,434
Conversion of convertible
debentures 6,370,680 6,379,639
Cost associated with conversion
of convertible debentures, net (356,232) (356,232)
Change in net unrealized gain
(loss) on marketable securities 254,140 254,140
Net loss (10,516,523) (10,516,523)
------------ --------- ------------- ------------- --------------
Balances at December 31, 1995 78,064,288 (7,085) (70,989,400) (13,138) 7,142,501
Exercised stock options 337,521 337,941
Repurchase of shares (99,996)
Amortization of deferred
compensation 5,952 5,952
Conversion of convertible
debentures 2,645,388 2,649,115
Issuance of preferred stock, net (1,320,375) 23,829,625
Conversion of preferred stock 12,127,421 --
Preferred stock lock-up warrants 138,156 (138,156) --
Accretion of premium on
preferred stock (874,725) --
Deemed dividend for preferred
stock conversion discount 2,777,777 (2,777,777) --
Change in net unrealized gain
(loss) on marketable securities 18,852 18,852
Net loss (17,818,981) (17,818,981)
------------ --------- ------------- ------------- --------------
Balances at December 31, 1996 $ 94,770,176 $ (1,133) $ (92,599,039) $ 5,714 $ 16,065,009
============ ========= ============= ============= ==============
See Accompanying Notes to Financial Statements.
F-5
CELGENE CORPORATION
Statement of Stockholders' Equity (continued)
Year Ended December 31, 1997
Common Stock Preferred Stock Treasury Stock
------------------------- ---------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
------------- ----------- ----------- ---------------- ------------ -------------
Balances at December 31, 1996 10,611,422 $106,114 267 $ 13,883,416 (29,985) (100,239)
Exercised stock options 2,986 30
Shares issued in lieu of cash
bonus 5,000 50
Amortization of Deferred
Compensation
Conversion of Convertible
debenture 441,248 4,413
Issuance of Series B Preferred
Stock--net 5,000 4,046,923
Conversion of Preferred Stock 2,166,193 21,662 (5,180) (14,654,071)
Accretion of premium on
preferred stock 521,397
Redemption of Preferred Shares (13) (721,287)
Deemed dividend on Series B
Preferred and fair value of
warrants 953,077
Change in net unrealized gain
(loss) on marketable securities
Net Loss
Treasury Shares issued 7,097 23,704
Issuance of common Stock, net 2,201,100 22,011
---------- -------- ------ -------------- ------- ----------
Balances at December 31, 1997 15,427,949 $154,279 74 $ 4,029,455 (22,888) $ (76,535)
========== ======== ====== ============== ======= ==========
Net Unrealized
Additional Unamortized Gain (Loss) on
Paid-in Deferred Accumulated Marketable
Capital Compensation Deficit Securities Total
-------------- -------------- ----------------- --------------- ----------------
Balances at December 31, 1996 $ 94,770,176 $ (1,133) $ (92,599,039) $ 5,714 $ 16,065,009
Exercised stock options 20,187 20,217
Shares issued in lieu of cash
bonus 55,575 55,625
Amortization of Deferred
Compensation 1,133 1,133
Conversion of Convertible
debenture 2,326,892 2,331,304
Issuance of Series B Preferred
Stock--net 793,825 4,840,748
Conversion of Preferred Stock 14,632,409 --
Accretion of premium on
preferred stock (521,397) --
Redemption of Preferred Shares (721,287)
Deemed dividend on Series B
Preferred and fair value of
warrants (953,077) --
Change in net unrealized gain
(loss) on marketable securities (5,714) (5,714)
Net Loss (25,447,027) (25,447,027)
Treasury Shares issued 55,250 78,954
Issuance of common Stock, net 18,184,119 18,206,130
------------ -------- -------------- --------- --------------
Balances at December 31, 1997 $130,838,433 -- $ (119,520,540) -- $ 15,425,092
============ ======== ============== ========= ==============
See Accompanying Notes to Financial Statements.
F-6
CELGENE CORPORATION
Statements of Cash Flow
Years Ended December 31,
1995 1996 1997
---------------- ----------------- -----------------
Cash flows from operating activities:
Loss from Continuing Operations $ (8,366,380) $ (17,057,521) $ (25,019,844)
Adjustments to reconcile loss from continuing
operations to net cash used in operating
activities:
Depreciation 422,031 362,590 380,364
Amortization of convertible debt costs 173,192 234,540 126,577
Amortization of deferred compensation 12,089 5,952 1,133
Interest on convertible debentures 424,738 323,914 68,736
Issuance of stock for employee benefits -- -- 78,954
Issuance of stock award -- -- 55,625
Change in current assets and liabilities:
Accounts payable and accrued expenses 674,188 216,226 (379,091)
Accounts receivable 225,843 18,646 (1,051,789)
Other assets 30,702 (256,586) 150,304
------------- -------------- -------------
Net cash used in continuing operations (6,403,597) (16,152,239) (25,589,031)
Net cash used in discontinued operations (1,803,487) (491,872) (302,996)
------------- -------------- -------------
Net cash used in operating activities (8,207,084) (16,644,111) (25,892,027)
------------- -------------- -------------
Cash flows from investing activities:
Capital expenditures (27,695) (1,340,232) (1,240,775)
Proceeds from sales and maturities of
marketable securities 22,185,466 137,051,037 47,470,593
Purchases of marketable securities (25,099,905) (142,548,468) (30,584,284)
------------- -------------- -------------
Net cash (used in) provided by investing
activities (2,942,134) (6,837,663) 15,645,534
------------- -------------- -------------
Cash flows from financing activities:
Net proceeds from public offering -- -- 18,206,130
Net proceeds from exercise of common stock
options 170,888 237,946 20,217
Capital lease funding -- -- 561,169
Net proceeds from issuance of convertible
debentures 11,022,570 -- --
Redemption of preferred shares -- -- (721,287)
Net proceeds from issuance of preferred stock -- 23,829,625 4,840,748
------------- -------------- -------------
Net cash provided by financing activities 11,193,458 24,067,571 22,906,977
------------- -------------- -------------
Net increase in cash and cash equivalents 44,240 585,796 12,660,484
Cash and cash equivalents at beginning of
year 292,925 337,165 922,961
------------- -------------- -------------
Cash and cash equivalents at end of year $ 337,165 $ 922,961 $ 13,583,445
============= ============== =============
See Accompanying Notes to Financial Statements.
F-7
CELGENE CORPORATION
Statements of Cash Flow (continued)
Years ended December 31,
1995 1996 1997
------------- ------------- --------------
Non-cash investing activity:
Change in net unrealized gain (loss) on
marketable securities available for sale $ 254,140 $ 18,852 $ (5,714)
========== =========== ===========
Non-cash financing activities:
Issuance of common stock upon the
conversion of convertible debentures and
accrued interest thereon, net $5,928,907 $ 2,649,115 $ 2,331,304
========== =========== ===========
Accretion of premium payable on preferred
stock and warrants -- $ 1,012,881 $ 521,397
========== =========== ===========
Deemed dividend for preferred stock
conversion discount -- $ 2,777,777 $ 953,077
========== =========== ===========
Issuance of warrants for services rendered
in connection with the issuance of
convertible debentures $ 94,500 -- --
========== =========== ===========
Issuance of common stock upon the
conversion of convertible preferred stock
and accrued accretion thereon, net -- $12,141,309 $14,654,071
========== =========== ===========
Issuance of common stock upon exercise of
options through the return of common
stock previously outstanding $ -- $ 99,996 --
========== =========== ===========
See Accompanying Notes to Financial Statements.
F-8
CELGENE CORPORATION
Notes to Financial Statements
December 31, 1995, 1996 and 1997
(1) Nature of Business and Liquidity
Celgene Corporation ("Celgene" or the "Company") is a specialty
pharmaceutical company engaged in the development and commercialization of
human pharmaceuticals and agrochemicals, and employs two broad technology
platforms: (i) small molecule immunotherapeutic compound development and (ii)
biocatalytic chiral chemistry. The initial therapeutic focus of the immunology
program is the development of small molecule pharmaceuticals that have the
potential to selectively regulate Tumor Necrosis Factor Alpha ("TNF-[alpha]"),
a protein whose overproduction has been linked to many chronic inflammatory and
immunological diseases. The Company's lead compound in immunology is
THALOMID[TM], its formulation of thalidomide, a potent yet selective inhibitor
of TNF-[alpha]. On September 19, 1997, the Company received an approvable
letter from the U.S. Food and Drug Administration ("FDA") to market THALOMID
for the treatment of erythema nodosum leprosum ("ENL"), an inflammatory
complication of leprosy. The Company expects to submit an additional New Drug
Application ("NDA") in 1998 to market THALOMID in the treatment of cachexia
(wasting) in patients with Acquired Immune Deficiency Syndrome ("AIDS").
Celgene has further applied its expertise in small molecule chemistry to
develop novel and proprietary thalidomide analogues, called IMiDs[TM]
(Immunomodulatory Drugs) as well as a class of proprietary immunotherapeutic
pharmaceutical compounds called SelCIDs[TM] ("Selective Cytokine Inhibitory
Drugs"). These two classes of compounds are orally administered small molecules
that are highly specific for the suppression of TNF-[alpha] and are intended to
treat chronic inflammatory diseases and other disorders.
The Company expects that its rate of spending will increase as the result
of increased clinical trial costs and expenses associated with the regulatory
approval process and commercialization of products now in development. In order
to assure funding for the Company's future operations, the Company may need to
seek additional capital resources. However, no assurances can be given that the
Company will be successful in raising additional capital. If the Company is
unable to raise additional funds through these means, the Company believes that
its current financial resources including its option which expires on June 9,
1998 to issue and sell $5.0 million of Series B preferred stock at a second
closing (or, if FDA approval of Thalomid is received, a total of $15.0 million
of Series B preferred stock at three closings), subject to certain customary
conditions, and the $7.5 million of proceeds from the January 1998 sale of the
chiral chemical intermediate business could fund operations through 1998.
The preparation of the financial statements requires management to make
estimates and assumptions that affect reported amounts and disclosures in these
financial statements. Actual results could differ from those estimates. The
Company is subject to certain risks and uncertainties such as uncertainty of
product development, uncertainties regarding regulatory approval, no assurance
of market acceptance of products, risk of product liability, uncertain scope of
patent and proprietary rights, intense competition, and rapid technological
change.
(2) Summary of Significant Accounting Policies
(a) Cash Equivalents
At December 31, 1996 and 1997, cash equivalents consisted principally of
funds invested in overnight repurchase agreements, money market funds, and
United States government securities such as treasury bills and notes.
(b) Marketable Securities
The Company has classified all of its marketable securities as securities
available for sale at December 31, 1996. Such securities were to be held for an
indefinite period of time and were intended to be used to meet the ongoing
liquidity needs of the Company. Realized gains and losses are included in
operations and are measured using the specific cost identification method.
F-9
CELGENE CORPORATION
Notes to Financial Statements (continued)
December 31, 1995, 1996 and 1997
(2) Summary of Significant Accounting Policies (continued)
(c) Long-Lived Assets
Plant and equipment are stated at cost. Depreciation of plant and
equipment is provided using the straight-line method. The estimated useful
lives of fixed assets are as follows:
Laboratory equipment and machinery 5-10 years
Furniture and fixtures 5-10 years
Amortization of leasehold improvements is calculated using the
straight-line method over the term of the lease or the life of the asset,
whichever is shorter. Maintenance and repairs are charged to operations as
incurred, while renewals and improvements are capitalized.
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances occur that indicate that the carrying amount
of the assets may not be recoverable. The Company assesses the recoverability
of long-lived assets held and to be used based on undiscounted cash flows and
measures the impairment, if any, using discounted cash flows.
(d) Research and Development Costs
All research and development costs are expensed as incurred.
(e) Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect for all years in which the temporary differences are expected to
reverse.
Research and development tax credits will be recognized as a reduction of
the provision for income taxes when realized.
(f) Revenue Recognition
Revenue from the sale of products is recognized upon product shipment.
Revenue under research contracts is recorded as earned under the contracts,
generally as services are provided. Revenue is recognized immediately for
nonrefundable license fees when agreement terms require no additional
performance on the part of the Company.
(g) Stock Options
The Company generally does not record compensation cost for the issuance
of employee stock options since the options are generally issued with an
exercise price equal to the market price at the date of grant. For the fair
value of the employee stock options issued in 1996 and 1997, see note 7.
(h) Earnings per Share
Statement of financial Accounting Standards No. 128, "Earnings per Share",
became effective at the end of 1997 and requires presentation of two
calculations of earnings per common share. "Basic" earnings per common share
equals net income divided by weighted average common shares outstanding during
the period. "Diluted" earnings per common share equals net income divided by
the sum of weighted average common shares outstanding during the period plus
common stock equivalents. The Company's basic and diluted per share amounts are
the same since the assumed exercise of stock options, warrants, conversion of
convertible debentures and preferred stock are all anti-dilutive. The amount of
common stock equivalents excluded from the calculation were, 1,569,468 in 1995,
3,738,168 in 1996, and 3,761,453 in 1997.
F-10
CELGENE CORPORATION
Notes to Financial Statements (continued)
December 31, 1995, 1996 and 1997
(2) Summary of Significant Accounting Policies (continued)
(i) Presentation
Certain prior year amounts have been reclassified to conform with the
current year presentation. In connection with the disposition of the Company's
chiral intermediate operation (see note 9), the 1995, 1996, and 1997 financial
results applicable to continuing operations exclude amounts from the
discontinued operation.
(j) Deferred Debt Costs
Deferred debt costs are amortized over the life of the debt.
(k) Fair Value of Financial Instruments
The fair value, which is the carrying value, of marketable securities
available for sale is based on quoted market prices. The convertible debentures
approximate fair value due to interest rates approximating market rates. For
all other financial instruments their carrying value approximates fair value
due to the short maturity of these instruments.
(3) Plant and Equipment
Plant and equipment consists of the following:
December 31,
1996 1997
----------- -------------
Leasehold improvements $3,731,518 $3,957,366
Laboratory equipment and machinery 5,746,619 4,430,336
Furniture and fixtures 391,370 437,478
Leased Equipment -- 415,109
---------- ----------
9,869,507 9,240,289
Less: accumulated depreciation 7,928,892 6,954,265
---------- ----------
$1,940,615 $2,286,024
========== ==========
(4) Accrued Expenses
Accrued expenses consists of the following:
December 31,
1996 1997
----------- -------------
Professional and consulting fees $357,859 $ 235,000
Accrued compensation 457,849 1,041,772
Other 65,896 112,161
-------- ----------
$881,604 $1,388,933
======== ==========
(5) Convertible Debentures
During 1995, the Company issued and sold in an offering pursuant to
Regulation S, 8% Convertible Debentures due July 31, 1997 in the aggregate
principal amount of $12,000,000, and received net proceeds, after offering
costs, of $11,022,570. The recorded value of the debenture at the date of
issuance was discounted to produce a market interest rate of approximately
13.5%. Such debentures were convertible into Common Stock at the option of
either the holders thereof or the Company. The holders of the convertible
debentures were able to convert the debentures into Common Stock of the Company
at a conversion price that varies and is based upon the market price (as
defined) of Common Stock for the five trading days preceding the date of
conversion.
The Company could have required the conversion or redemption of the
convertible debentures but did not exercise these rights. The Company has
classified the debentures at December 31, 1996 as a long term liability since
it had the ability and intent to convert them into Common Stock.
F-11
CELGENE CORPORATION
Notes to Financial Statements (continued)
December 31, 1995, 1996 and 1997
(5) Convertible Debentures (continued)
As of December 31, 1997, all convertible debentures in the aggregate
principal amount of $12,000,000, plus accrued interest, had been converted into
a total of 1,709,845 shares of common stock. No interest was paid in cash.
(6) Convertible Preferred Stock
Series A
On March 13, 1996, in a private placement, the company completed the sale
of 503 shares of Series A Convertible Preferred Stock, par value $.01 per share
(the "Preferred Stock"), at an issue price of $50,000 per share. The Company
received net proceeds, after offering costs, of $23,829,625. The Preferred
Stock, plus accretion at a rate of 4.9% per year, is convertible into common
stock of the Company at the option of the holders thereof at a conversion price
per share of common stock equal, generally, to the lesser of (i) $18.81 or (ii)
90% of the average closing price per share of the common stock for the seven
trading days immediately prior to the date of conversion. As a result of the
issuance of securities with variable conversion features the Company recognized
the value of the discount to market conversion feature as a deemed dividend.
The average closing price per share of common stock for the seven trading days
immediately prior to December 31, 1997 was $8.65.
The Company may redeem the shares in increments of not less than $1.5
million plus accretion commencing December 13,1996, on thirty business days
written notice to the preferred stockholders, at a price that equals a
specified premium, ranging from 120% to 130%, of the purchase price plus
accretion premium. Under certain conditions, upon receipt of a conversion
notice from the holder, the Company has the right (i) to redeem shares
presented for conversion, or (ii) to defer conversion for 90 days in exchange
for warrants to purchase additional shares of common stock as specified in the
Certificate of Designation of Series A Convertible Preferred Stock. Any shares
of Series A Convertible Preferred Stock outstanding on March 13, 1998 shall be
converted automatically into common stock on such date at the conversion price
then in effect. The holders of Preferred Stock have no voting rights.
A registration statement with respect to investor resales of common shares
underlying the Preferred Stock was filed and declared effective on June 10,
1996. In connection with the private placement, the Company also granted to
certain executives and affiliates of the placement agent warrants, valued at
$60,168, to purchase an aggregate of 66,853 shares of common Stock at an
exercise price of $20.52, subject to proportional adjustment in the event that
the Company undertakes a stock split, stock dividend, recapitalization or
similar event. These warrants are exercisable for a period of five years from
the date of issuance.
As of December 31, 1997, 429 shares of the Series A Preferred Stock, with
their respective accrued accretion, had been converted or redeemed into
2,766,533 shares of common stock. Through December 31, 1997 the Company had
accrued $1,396,122 representing accretion of the premium on the Preferred Stock
of which $329,455 relates to preferred shares not yet tendered for conversion.
The company agreed to reduce the maximum conversion price of 58 shares to $8.50
per share of common stock from $18.81 for holders who agreed to a lock-up
ending on December 1, 1997. During 1996 the Company had also issued warrants
valued at $138,156, that entitle certain stockholders of the Series A Preferred
Stock to purchase 153,507 shares of common stock at an exercise price of
$11.50. The warrants were issued in exchange for the deferral of conversion for
90 days. These warrants are exercisable for a period of two years from the date
of issuance and are still outstanding at December 31, 1997. As of February 28,
1998, the remaining 74 shares of Series A Preferred stock were converted to
561,743 shares of common stock.
Series B
On June 9, 1997, in a private placement, the Company completed the sale of
5,000 shares of Series B Convertible Preferred Stock (the "Series B
Preferred"), par value $.01 per share, at an issue price of $1,000 per share. A
shelf registration statement with respect to holders' resales of Common Stock
issuable upon conversion of Series B Preferred was filed and declared effective
on August 6, 1997. The Company received net proceeds, after offering
F-12
CELGENE CORPORATION
Notes to Financial Statements (continued)
December 31, 1995, 1996 and 1997
(6) Convertible Preferred Stock (continued)
costs of $4,840,748. Subject to the satisfaction of certain conditions, the
Company may, at its option, during specified periods ending June 9, 1998, issue
and sell to such purchasers up to an additional 15,000 shares of Series B
Preferred Stock, at an aggregate purchase price of $15 million, in increments
of $5 million (5,000 shares). With respect to the third and fourth increments
($10 million) certain FDA approvals are necessary before the purchasing group
is obligated to buy the additional Series B Preferred Stock. Shares could be
converted at an initial conversion price of $6.50 per share subject to a
lock-up that expires as to 50% of the shares underlying the convertible
preferred stock and warrants as noted below owned or issuable upon the earlier
of 6/1/98, or FDA approval of Thalomid for any indication and 100% of such
underlying shares owned or issuable upon the earlier of 6/1/99 or any date that
the closing stock price for 15 consecutive days is above 150% of the conversion
price in effect. As of December 31, 1997, all shares of the initial issuance of
Series B Preferred had been converted into 788,469 shares Common Stock, as the
Company's stock traded above the specified conversion price level for 15
consecutive days.
Upon request of the purchasers of the Series B Preferred (but no later
than June 1, 1998) (in either case, the "Issuance Date"), the Company will
issue warrants to acquire a number of shares of Common Stock equal to (i)
1,500,000 divided by the Conversion Price in effect on the Issuance Date
(230,769 warrants as of December 31, 1997) plus (ii) 37.5% of the Conversion
Shares issuable on such Issuance Date upon conversion of all shares of Series B
Preferred Stock issued through the Issuance Date (288,461 warrants as of
December 31, 1997). All such warrants will have a term of four years from the
Issuance Date and an exercise price equal to 115% of the Conversion Price in
effect on the Issuance Date. The fair value of warrants at the issuance date
was $1.28 per warrant. As of December 31, 1997 no warrants have been issued.
Through December 31, 1997, the Company had recorded $953,077 representing
accretion of the deemed dividend on the Series B Preferred Stock. The deemed
dividend represents the difference between the Series B Preferred Stock
conversion price and the Company's Common Stock fair market value at the date
of issuance. The deemed dividend and the fair value of the warrants was
accreted over the lock-up period subject to acceleration contingencies. Such
contingencies were met and the full deemed dividend was recognized at that
time.
(7) Stock Based Compensation
(a) Stock Options
The Company has an Incentive Plan that provides for the granting of
options, restricted stock awards, stock appreciation rights, performance awards
and other stock-based awards to employees and officers of the Company to
purchase not more than an aggregate of 1,400,000 shares of common stock,
subject to adjustment under certain circumstances. The Management Compensation
and Development Committee of the Board of Directors (the "Committee")
determines the type, amount and terms, including vesting, of any awards made
under the Incentive Plan. This plan terminates in 2002.
With respect to options granted under the Incentive Plan, the exercise
price may not be less than the fair market value of the common stock on the
date of grant. In general, each option granted under the Plan vests evenly over
a three or four year period and expires 10 years from the date of grant,
subject to earlier expiration in case of termination of employment. The vesting
period for options and restricted stock awards granted under the Plans is
subject to certain acceleration provisions if a change in control, as defined
in the Plans, occurs.
On June 16, 1995, the stockholders of the Company approved the 1995
Non-Employee Directors' Incentive Plan, which provides for the granting of
non-qualified stock options to purchase an aggregate of not more than 350,000
shares of common stock (subject to adjustment under certain circumstances) to
directors of the Company who are not officers or employees of the Company
("Non-Employee Directors"). Each new Non-Employee Director, upon the date of
his election or appointment, receives an option to purhase 20,000 shares of
common stock. Addi-
F-13
CELGENE CORPORATION
Notes to Financial Statements (continued)
December 31, 1995, 1996 and 1997
(7) Stock Based Compensation (continued)
tionally, upon the date of each annual meeting of stockholders, each continuing
Non-Employee Director receives an option to purchase 10,000 shares of common
stock (or a pro rata portion thereof if he has served less than one year),
except that at the 1995 annual meeting of stockholders the Non-Employee
Directors received an option to purchase 6,000 shares of common stock. On April
5, 1995, each Non-Employee Director received an initial grant of a
non-qualified option to purchase 20,000 shares of common stock. The shares
subject to each non-employee director's option grant of 20,000 shares vest in
four equal annual installments com
mencing on the first anniversary of the date of grant. The shares subject to an
annual meeting option grant vest in full on the date of the first annual
meeting of stockholders held following the date of grant. All options are
granted at an exercise price that equals the fair market value of the Company's
common stock at the grant date and expire 10 years after the date of grant.
This plan terminates in 2005.
The weighted-average fair value per stock option granted was $3.93 for the
1997 options, $5.01 for the 1996 options and $2.88 for those granted in 1995.
The company estimated the fair values using the Black-Scholes option pricing
model and used the following assumptions:
1995 1996 1997
---------- ---------- ----------
Risk-free interest rate 6.15% 6.38% 6.37%
Expected stock price volatility 64% 62% 55%
Expected term until exercise (years) 2.91 2.22 3.09
Expected dividend yield 0% 0% 0%
The Company does not record compensation expense for stock option grants.
The following table summarizes results as if compensation expense was recorded
for the 1995, 1996 and 1997 option grants:
(thousands of dollars, except per share data) 1995 1996 1997
- --------------------------------------------------- ------------- ------------- -------------
Net loss applicable to common shareholders:
As reported $ (10,516) $ (21,610) $ (26,922)
Pro forma $ (10,714) $ (23,515) $ (28,770)
Per share basic and diluted:
As reported $ (1.30) $ (2.29) $ (2.20)
Pro forma $ (1.32) $ (2.49) $ (2.36)
The pro forma effects on net loss and loss per share for 1995, 1996 and
1997 may not be representative of the pro forma effects in future years since
compensation cost is allocated on a straight-line basis over the vesting
periods of the grants, which extends beyond the reported years.
F-14
CELGENE CORPORATION
Notes to Financial Statements (continued)
December 31, 1995, 1996 and 1997
(7) Stock Based Compensation (continued)
The following table summarizes the stock option activity for the Plans:
Options Outstanding
------------------------------------------
Shares Available Weighted Average Exercise
for Grant Shares Price per Share
------------------ ------------- --------------------------
Balance January 1, 1995 1,087,569 1,304,672 $ 7.98
Authorized 250,000 -- --
Granted (214,368) 214,368 6.49
Exercised -- (24,987) 6.84
Cancelled 78,712 (78,712) 9.24
--------- --------- ------
Balance December 31, 1995 1,201,913 1,415,341 7.70
Expired Plan (139,999) -- --
Granted (678,589) 678,589 13.25
Exercised -- (42,069) 8.03
Cancelled 46,095 (46,095) 6.40
--------- --------- ------
Balance December 31, 1996 429,420 2,005,766 9.60
Authorized 500,000 -- --
Expired Plan (61,372) -- --
Granted (492,775) 492,775 9.39
Exercised -- (6,986) 7.83
Cancelled 142,027 (142,027) 9.36
--------- --------- ------
Balance December 31, 1997 517,300 2,349,528 $ 9.59
========= ========= ======
The following table summarizes information concerning options outstanding
under the Plans at December 31, 1997:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------- -------------------------------
Weighted
Number Average Number Weighted
Range of Outstanding Remaining Exercisable Average
Exercise Price at 12/31/97 Term (yrs). Exercise Price at 12/31/97 Exercise Price
- ---------------- ------------- ------------- ---------------- ------------- ---------------
5.00-9.00 1,254,571 5.1 $ 7.09 999,378 $ 7.16
9.01-13.00 587,007 8.1 10.83 194,669 11.07
13.01-18.00 507,950 7.9 14.34 291,605 14.17
--------- --- ------ ------- -------
2,349,528 6.5 $ 9.59 1,485,652 $ 9.05
========= === ====== ========= =======
On January 30, 1998 the Company granted approximately 335,000 options to
certain members of management exercisable at $8.75 (market price at the date of
grant). These options vest evenly over three years and have a ten year term.
Also on January 30, 1998, the Company also granted approximately 120,000
options to certain employees at an exercise price of $8.75. The options vest
equally over four years and have a ten year term.
(b) Stock Awards
On January 1, 1997, the Company awarded 5,000 shares to the Company's
Chairman and CEO, which were immediately vested. the fair value of $55,625 for
this award was expensed.
(c) Warrants
In connection with the retention of an investor relations firm, the
Company in November 1994 granted to such firm a warrant to purchase until
September 1, 1999, 50,000 shares of common stock at a price of $6.50 per share.
This warrant was outstanding as of December 31, 1997.
F-15
CELGENE CORPORATION
Notes to Financial Statements (continued)
December 31, 1995, 1996 and 1997
(7) Stock Based Compensation (continued)
In connection with the retention of an investment firm to assist in the
sale and issuance of 8% Convertible Debentures, the Company in August, 1995
granted to such firm warrants to purchase until July 31, 2000, 105,000 shares
of common stock at a price of $9.60 per share. These warrants were outstanding
as of December 31, 1997.
In connection with the retention of an investment firm to assist in the
sale and issuance of the Series A Preferred Stock, the Company, in March, 1996
granted to such firm warrants to purchase until March 10, 2001, 66,853 shares
of common stock at a price of $20.52. These warrants were outstanding as of
December 31, 1997.
During 1996, the Company also issued warrants that entitled certain
stockholders of the Series A Convertible Preferred Stock Warrants valued at
$138,156, to purchase 153,507 shares of common stock at an exercise price of
$11.50. The warrants were issued in exchange for the deferral of conversion for
90 days. These warrants are exercisable for a period of two years from the date
of issuance. These warrants were outstanding as of December 31, 1997.
During 1997, the Company issued warrants to certain stockholders of the
Series A Convertible Preferred Stock Warrants valued at $7,826, to purchase
8,696 shares of common stock at an exercise price of $11.50. the warrants were
issued in exchange for the deferral of conversion for 90 days. These warrants
are exercisable for a period of two years from the date of issuance. These
warrants were outstanding as of December 31, 1997.
Upon request of the purchasers of the Series B Preferred (but no later
than June 1, 1998) (in either case, the "Issuance Date"), the Company will
issue warrants to acquire a number of shares of Common Stock equal to (i)
1,500,000 divided by the Conversion Price in effect on the Issuance Date
(230,769 warrants as of December 31, 1997) plus (ii) 37.5% of the Conversion
Shares issuable on such Issuance Date upon conversion of all shares of Series B
Preferred Stock issued through the Issuance Date (288,461 warrants as of
December 31, 1997). All such warrants will have a term of four years from the
Issuance Date and an exercise price equal to 115% of the Conversion Price in
effect on the Issuance Date. The fair value of warrants at the issuance date
was $1.28 per warrant. As of December 31, 1997 no warrants have been issued.
In connection with the retention of a consultant to provide strategic
development services, the Company, in December 1997 granted to such consultant
warrants to purchase until December 24, 1999, 5,000 shares of common stock at a
price of $12.00. these warrants were outstanding as of December 31, 1997.
(d) Rights Plan
During 1996, the Company adopted a shareholder rights plan ("Rights
Plan"). The Rights Plan involves the distribution of one "Right" as a dividend
on each outstanding share of the Company's common stock to all holders of
record on September 26, 1996. Each Right shall entitle the holder to purchase
one-tenth of a share of common stock. The Rights trade in tandem with the
common stock until, and exercisable upon, certain triggering events, and the
exercise price is based on the estimated long term value of the Company's
common stock.
F-16
CELGENE CORPORATION
Notes to Financial Statements (continued)
December 31, 1995, 1996 and 1997
(8) Income Taxes
At December 31, 1996 and 1997, the tax effects of temporary differences
that give rise to deferred tax assets are as follows:
1996 1997
---------------- ----------------
Deferred Assets:
Federal and state net operating loss carryforwards $ 33,998,000 $ 44,334,000
Research and experimentation tax credit carryforwards 2,050,000 2,735,000
Plant and equipment, principally due to differences in
depreciation 1,301,000 753,000
Patents, principally due to differences in amortization 75,000 68,000
Accrued expenses 165,000 385,000
------------- -------------
Total deferred tax assets 37,589,000 48,275,000
Valuation allowance (37,589,000) (48,275,000)
------------- -------------
Net deferred tax assets $ -- $ --
============= =============
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $110,000,000 that will expire in the years 2001 through 2012. The
Company also has research and experimentation credit carryforwards of
approximately $2,735,000 that expire in the years 2001 through 2012. Ultimate
utilization/availability of such net operating losses and credits may be
curtailed if a significant change in ownership occurs.
(9) Discontinued Operation
During December 1997 the Company reached an agreement with Cambrex
Corporation for Cambrex to acquire Celgene's chiral intermediate business for
approximately $15 million. The terms provide for a payment of $7.5 million upon
the closing of the transaction, which took place on January 9, 1998, plus
future royalties with a present value not exceeding $7.5 million, with certain
minimum royalty payments in the third through sixth year following the closing
of the transaction. Included in the transaction are the rights to Celgene's
enzymatic technology for the production of chirally pure intermediates for the
pharmaceutical industry, including the current pipeline of third party products
and the equipment and personnel associated with the business.
Revenues relative to the chiral intermediate business were approximately
$.6 million, $1.4 million, and $2.1 million for 1995, 1996, and 1997
respectively. Direct expenses related to the chiral intermediate business were
$2.7 million, $2.2 million and $2.5 million for 1995, 1996, and 1997
respectively.
F-17
CELGENE CORPORATION
Notes to Financial Statements (continued)
December 31, 1995, 1996 and 1997
(10) Marketable Securities Available for Sale
Marketable securities available for sale at December 31, 1996 include debt
securities with maturities ranging from January, 1997 to October, 1997. A
summary of marketable securities at December 31, 1996 is as follows:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gain Loss Value
-------------- ------------ ------------ --------------
Commercial Paper $ 8,369,006 $ -- $ (170) $ 8,368,836
Corporate Bonds 4,015,052 6,773 -- 4,021,825
Certificates of deposit 3,000,034 -- (424) 2,999,610
US Government and agency obligations 1,502,217 -- (465) 1,501,752
----------- ------ -------- -----------
$16,886,309 $6,773 $ (1,059) $16,892,023
=========== ====== ======== ===========
The net change in the unrealized gain (loss) for the year ended December
31, 1996 amounted to approximately $19,000. The proceeds from sales and
maturities of marketable securities available for sale included gross realized
gains and losses of approximately $359,000 and $32,000, respectively, for the
year ended December 31, 1996.
(11) Commitments and Contingencies
(a) Lease
Celgene leases its main laboratory and office facilities in Warren
Township, New Jersey. The current lease term for the main laboratory and office
space expires in 2002 and has one five-year renewal option. Annual payments are
$330,000. The lease provides that at the end of each five-year term, the rent
will be increased based upon the change in the consumer price index, but in no
case shall the increase be greater than 20%. Celgene is also required to pay
additional amounts for real estate taxes, utilities, and maintenance. Total
rental expense amounted to $448,000, $453,000, and $477,000 in 1995, 1996 and
1997, respectively. Celgene has subleased 12,500 square feet of this facility
to Cambrex Corporation for up to three years for the Chiral Intermediate
business which Cambrex purchased on January 9, 1998.
In January, 1997 the Company entered into a sub-lease agreement to lease
an additional 18,000 square feet of laboratory and office space in Annandale,
New Jersey. The sub-lease agreement is for a two year term, expiring in
February, 1999. Annual payments are $227,500.
In July, 1997, the Company entered into an equipment leasing agreement;
under the agreement, the Company can lease up to $1,000,000 of equipment for a
three year term after which the Company can purchase the equipment for a
nominal value. Through December 31, 1997, the Company has leased $631,000 of
laboratory equipment under this agreement. Under this capital lease, the
Company is committed to 36 monthly payments of approximately $19,000.
(b) Employment Agreements
Celgene has employment agreements with certain officers and employees. The
related outstanding commitments over the next four years are approximately $2.2
million, of which $1.1 million is due in 1998. Employment contracts provide for
an increase in compensation reflecting annual reviews and related salary
adjustments.
(c) Contracts
Pursuant to the terms of a research and development agreement with The
Rockefeller University, the Company has the world-wide exclusive license to
manufacture and market any drugs, including Thalomid, which may result from the
research performed at The University. Rockefeller is entitled to receive
royalties based on commercial sales of any such drugs. Under terms of the
current agreement extension, the Company is committed to pay the Rockefeller
University $504,000 annually.
F-18
CELGENE CORPORATION
Notes to Financial Statements (continued)
December 31, 1995, 1996 and 1997
(11) Commitments and Contingencies (continued)
In December 1995 the Company entered into an agreement with Penn
Pharmaceutical, Ltd. of Great Britain ("Penn") to build a facility devoted
exclusively to the production of Thalomid. Under the terms of the agreement,
the Company retains exclusivity of the facility for a three year period in
exchange for reimbursement of certain fixed overhead charges. Annual facility
payments are approximately $480,000, which commenced in December, 1996. Penn
will manufacture Thalomid and sell it exclusively to the Company.
In October 1997, the Company entered into a one year contract with Boston
University to manage the surveillance registry which is intended to monitor
compliance to the requirements of the Company's S.T.E.P.S. program
(prescription safety and education program) for all Thalomid patients. Under
the terms of the agreement quarterly payments of approximately $248,000 are
required. The contract is renewable for one year terms upon agreement of both
parties.
In December 1997, the Company entered into a research agreement with the
University of Glasgow for clinical testing and evaluation of certain of
Celgene's patented compounds. Under terms of the agreement, Celgene would pay
the University 123,000 pounds sterling in two annual installments
(approximately $200,000 at current exchange rates). The term of the agreement
is for two years.
The Company has various other research and consulting agreements totaling
approximately $336,000 for 1998.
(d) Contingencies
The Company believes it maintains insurance coverage adequate for its
current needs.
The Company's operations are subject to environmental laws and regulations
which impose limitations on the discharge of pollutants into the air and water
and establish standards for the treatment, storage and disposal of solid and
hazardous wastes. The Company reviews the effects of such laws and regulations
on its operation and modifies its operations as appropriate. The Company
believes that it is in substantial compliance with all applicable environmental
laws and regulations.
(e) Concentration of Market Risk
One customer accounted for 100% of the revenues in 1995, 1996 and 1997.
F-19
(c) Exhibit Index.
3.1 Certificate of Incorporation of the Company, as amended (Incorporated b y reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1, dated July 24, 1987).
3.2 By-laws of the Company (Incorporated by reference to the Company's Current Report on
Form 8-K, dated September 16, 1996).
10.1 Lease Agreement, dated January 16, 1987, between the Company and Powder Horn
Associates (incorporated by reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1, dated July 24, 1987).
10.2 1992 Long-Term Incentive Plan (Incorporated by reference to Exhibit A to the Company's
Proxy Statement, dated May 30, 1997).
10.3 1995 Non-Employee Directors' Incentive Plan (Incorporated by reference to Exhibit B to the
Company's Proxy Statement, dated May 30, 1997).
10.4 Agent's Warrant issued in connection with the placement of 8% Convertible Debentures
(Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995).
10.5 Agent's Warrant issued in connection with the placement of Series A Convertible Preferred
Stock (Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.6 Form of Lock-Up Warrant issued to certain holders of Series A Convertible Preferred Stock
(incorporated by reference to the Company's Registration Statement on Form S-3 dated
November 25, 1997 (No. 333-38891)).
10.7 Form of Warrant to be issued in connection with the issuance of Series B Convertible
Preferred Stock (Incorporated by reference to Exhibit 10.2 to the Company's Current Report
on Form 8-K dated June 10, 1997).
10.8 Rights Agreement, dated as of September 16, 1996, between Celgene Corporation and
American Stock Transfer & Trust Company (Incorporated by reference to the Company's
Registration Statement on Form 8-A, filed on September 16, 1996).
10.9 Form of indemnification agreement between the Company and each officer and director of
the Company (Incorporated by reference to Exhibit 10.12 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996).
10.10 Form of Employment Agreement dated September 30, 1997 between the Company and John
W. Jackson (incorporated by reference to the Company's Registration Statement on Form S-3
dated November 25, 1997 (No. 333-38891)).
10.11 Form of Employment Agreement dated September 30, 1997 between the Company and Sol
J. Barer (incorporated by reference to the Company's Registration Statement on Form S-3
dated November 25, 1997 (No. 333-38891)).
10.12 Manufacturing Agreement between Penn Pharmaceuticals Limited and the Company
(incorporated by reference to the Company's Registration Statement on Form S-3 dated
November 25, 1997 (No. 333-38891)).
23.1 Consent of KPMG Peat Marwick LLP
27. Financial Data Schedule