FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to _____________
Commission File Number 0-16132
CELGENE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2711928
- ---------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7 Powder Horn Drive, Warren, NJ 07059
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 732-271-1001.
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 ___
At April 30, 1999, 16,901,546 shares of Common Stock par value $.01 per share,
were outstanding.
CELGENE CORPORATION
INDEX TO FORM 10-Q
Page No.
PART I FINANCIAL INFORMATION
Item I Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 1999 (unaudited)
and December 31, 1998 3
Condensed Consolidated Statements of
Operations - Three-Month Periods Ended
March 31, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of
Cash Flows - Three-Month Periods Ended
March 31, 1999 and 1998 (unaudited) 5
Notes to Unaudited Condensed Consolidated
Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures
about Market Risk 12
PART II OTHER INFORMATION 13
Signatures 14
2
CELGENE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,1999 December 31,1998
ASSETS ------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 9,295,528 $ 3,066,953
Marketable securities available for sale 5,505,813 2,056,890
Accounts receivable, net of allowance of $60,960
at March 31, 1999 and $43,386 at December 31, 1998 3,222,317 2,662,389
Inventory 1,859,316 1,571,408
Other current assets 589,690 229,060
------------ ------------
Total current assets 20,472,664 9,586,700
Plant and equipment, net 2,109,851 2,262,130
Other assets 518,892 79,167
------------ ------------
Total assets $ 23,101,407 $ 11,927,997
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable $ 3,217,987 $ 3,848,853
Accrued expenses 4,319,365 3,041,859
Capitalized lease obligations 225,372 225,372
------------ ------------
Total current liabilities 7,762,724 7,116,084
Capitalized lease obligation-net of current portion 153,691 195,578
Long term convertible notes 23,385,418 8,348,959
------------ ------------
Total liabilities 31,301,833 15,660,621
------------ ------------
Stockholders' equity (deficit):
Common stock, $.01 par value per share 30,000,000 shares authorized at March
31,1999 and December 31,1998; issued and outstanding 16,863,488 and
16,612,973 shares at March 31, 1999 and
December 31, 1998, respectively 168,635 166,130
Additional paid-in capital 142,835,797 140,714,314
Accumulated deficit (151,204,858) (144,613,068)
------------ ------------
Total stockholders' (deficit) (8,200,426) (3,732,624)
------------ ------------
Total liabilities and stockholders' (deficit) $ 23,101,407 $ 11,927,997
============ ============
See accompanying notes to consolidated financial statements.
3
CELGENE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Period
Ended March 31,
---------------------------
1999 1998
------------ ------------
Revenues:
Product Sales $ 3,492,068 $ --
Research contracts 812,500 80,000
------------ ------------
Total Revenues 4,304,568 80,000
Expenses:
Cost of Goods Sold 655,850 --
Research and development 4,515,304 3,940,227
Selling, general and administrative 5,325,402 3,225,915
------------ ------------
Total Expenses 10,496,556 7,166,142
Operating Loss (6,191,988) (7,086,142)
Interest income 145,994 249,861
Interest expense 545,795 1,364
------------ ------------
Loss from continuing operations (6,591,789) (6,837,645)
Discontinued Operations: (Note 6)
Loss from operations -- (59,837)
Gain on sale of chiral assets -- 7,014,830
------------ ------------
Net income (loss) (6,591,789) 117,348
Accretion of premium payable on preferred
stock -- 24,648
Net income (loss) applicable to common ------------ ------------
shareholders $ (6,591,789) $ 92,700
============ ============
Per share basic and diluted :
Loss from continuing operations $ (0.39) $ (0.44)
Discontinued operations:
Loss from operations $ 0.00 $ (0.00)
Gain on sale of chiral assets 0.45
Net income (loss) applicable to common
shareholders per basic share of common stock $ (0.39) $ 0.01
============ ============
Weighted average number of shares of
common stock outstanding 16,755,000 15,673,000
============ ============
See accompanying notes to consolidated financial statements.
4
CELGENE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOW
(Unaudited)
Three Month Period
Ended March 31,
-------------------------
1999 1998
----------- -----------
Cash flows from operating activities:
Loss from continuing operations $(6,591,789) $(6,837,645)
Adjustments to reconcile loss from continuing
operations to net cash used in operating
activities:
Depreciation 205,322 206,927
Issuance of stock for employee benefits 799,823 --
Provision for doubtful accounts 17,574 --
Amortization of discount on convertible note 36,459 --
Amortization of debt issuance costs 62,500 --
Change in current assets & liabilities:
Increase in Inventory (287,908) --
Increase in accounts payable
and accrued expenses 646,640 544,012
(Increase) Decrease in accounts receivable (577,502) 1,250,097
Increase in other assets (112,855) (354,184)
----------- -----------
Net cash used in continuing operations (5,801,736) (5,190,793)
Net cash used in discontinued operations -- (59,835)
----------- -----------
Net cash used in operating activities (5,801,736) (5,250,628)
----------- -----------
Cash flows from investing activities:
Capital expenditures (53,043) (245,372)
Proceeds from sales and maturities of marketable
securities available for sale 1,046,570 --
Purchases of marketable securities
available for sale (4,495,493) (4,945,340)
Proceeds from sale of chiral assets -- 7,500,000
----------- -----------
Net cash provided by (used in) investing activities (3,501,966) 2,309,288
----------- -----------
Cash Flows from financing activities:
Costs related to secondary public offering -- (228,989)
Proceeds from exercise of common stock
options and warrants 1,324,165 362,348
Capital lease buyout (41,888) (236,861)
Debt issuance costs (750,000) --
Proceeds from convertible note 15,000,000 --
----------- -----------
Net cash provided by (used in) financing activities 15,532,277 (103,502)
----------- -----------
Net (decrease) increase in cash and cash
equivalents 6,228,575 (3,044,842)
Cash and cash equivalents at beginning of period 3,066,953 13,583,445
----------- -----------
Cash and cash equivalents at end of period $ 9,295,528 $10,538,603
=========== ===========
See accompanying notes to consolidated financial statements.
5
CELGENE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOW (continued)
(Unaudited)
Three Month Period
Ended March 31,
-----------------------
1999 1998
---------- ----------
Non - cash financing activities:
Issuance of common stock upon the conversion
of Series A convertible preferred stock and
accretion thereon, net $ -- $4,054,103
========== ==========
Accretion of premium payable on preferred
stock and warrants $ -- $ 24,648
========== ==========
Interest Paid $ 410,638 $ 1,364
========== ==========
See accompanying notes to consolidated financial statements.
6
CELGENE CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 1999
1. Basis of Presentation
The unaudited condensed consolidated financial statements have been
prepared from the books and records of Celgene Corporation (the "Company")
in accordance with generally accepted accounting principles for interim
financial information pursuant to Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Interim results may not be indicative of the results that may be
expected for the year.
The interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10K.
2. Series A. Convertible A Preferred Stock
The Series A Convertible Preferred Stock ("Preferred Stock"), was issued
on March 13, 1996 with accretion at a rate of 4.9% per year, convertible
into common stock of the Company. As of February 23, 1998, all 503 shares
of the Series A Preferred Stock, with their respective accretion, had been
converted or redeemed into 3,342,202 shares of common stock.
3. Warrants to Acquire Common Stock
Under the terms of a private placement of Series B Preferred Stock with
Chancellor LGT Asset Management, Inc. ("Chancellor") entered into on June
9, 1997, upon the request of the purchasers of the Series B Preferred, the
Company is obligated to issue warrants to Chancellor to acquire a number
of shares of Common Stock equal to (i) 1,500,000 divided by the Conversion
Price ($6.50 at March 31, 1999) in effect on the issuance date (230,769
warrants as of March 31, 1999) 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
March 31, 1999). 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. As of March 31, 1999 no warrants have been
issued.
4. Convertible Debt
On January 20, 1999, the Company issued to an institutional investor a
convertible note in the amount of $15,000,000. The note has a five year
term and a coupon rate of 9% with interest payable on a semi-annual basis.
The note contains a conversion feature that allows the note holder to
convert the note into common shares after one year at $18 per
7
share. The Company can redeem the note after three years at 103% of the
principal amount,(two years under certain conditions). The Company
received $14,250,000, net of debt issuance costs of $750,000 which are
being amortized over three years.
5. Marketable Securities Available for Sale
Marketable securities available for sale at March 31, 1999 include debt
securities with maturities ranging from June 1999 to August 2004. Cost
approximates fair market value. A summary of marketable securities at
March 31, 1999 is as follows:
Cost
----------
Commercial Paper $1,964,242
Government Bonds & Notes 1,008,280
Government Agencies 2,533,291
----------
Total $5,505,813
==========
6. Discontinued Operations
On January 9, 1998, the Company sold its chiral intermediates business to
Cambrex Corporation for approximately $15.0 million. The terms of the
agreement provided for the sale of chiral assets of approximately $485,000
for proceeds of $7.5 million on the contract date 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 the
Company'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.
7. Comprehensive Income
Three Months Ended
----------------------------------
March 31, 1999 March 31, 1998
-------------- --------------
Net Income(Loss) $(6,591,789) $ 117,348
Other Comprehensive Income(Loss) -- --
----------- -----------
Total Comprehensive Income(Loss) $(6,591,789) $ 117,348
=========== ===========
8. New Accounting Pronouncement
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued and is effective for financial statements
beginning January 1, 2000. SFAS No. 133 requires derivative instruments to
be recognized as Assets and Liabilities and be recorded at Fair Value. The
Company is currently not party to any Derivative Instruments. Any future
transactions involving Derivative Instruments will be evaluated based on
SFAS No.133.
8
Part 1 - Financial Information
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Three month period ended March 31, 1999 vs.
Three month period ended March 31,1998
Total Revenues. The Company's total revenues for the three months ended
March 31, 1999 increased significantly to $4.3 million compared with $80,000 in
the same period of 1998. Revenue in 1999 consisted of product sales of $3.5
million and research contract revenue of $813,000. In 1998 the revenue was all
from research contracts. The $3.5 million of product sales are sales of
THALOMID(R)(thalidomide) which was launched at the end of the third quarter
1998. The research contract revenue consists of a $500,000 milestone payment
from an agreement for the development of d-methylphenidate, and $313,000 for
quarterly payments received by Celgro, the Company's agrochemical subsidiary,
under two separate agreements.
Cost of Goods Sold. Cost of goods sold during the first quarter 1999 was
$656,000 and relates to THALOMID, the Company's first commercial product,
launched in late September 1998. The cost of goods sold is lower than expected
and reflects primarily packaging costs and excludes raw material and
encapsulation costs. Raw material, encapsulation and other inventory related
costs were expensed as research and development costs prior to FDA approval.
Research and development expenses. Research and development expenses
increased by 15% in the first quarter 1999 to $4.5 million from $3.9 million in
the same period last year. The increase was primarily in spending for
preclinical toxicology studies and clinical trials for both d-methylphenidate,
the Company's chirally pure version of Ritalin(R), and THALOMID.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended March 31, 1999 increased by
65% to approximately $5.3 million from $3.2 million in the same period of 1998.
The increase was due primarily to the expansion of the sales and marketing
organization and related expenses of approximately $700,000, approximately
$780,000 for warehousing and distribution, expansion of the medical affairs and
drug safety department
9
approximately $200,000, and other miscellaneous expenses of $400,000.
Interest income and expense. Interest income for the first quarter 1999
decreased 42% to approximately $146,000 from $250,000 in the same period of
1998. The decrease was due to lower average cash balances in 1999. Interest
expense increased to approximately $546,000 from $1,000 in 1998. The increase
was due primarily to the interest expense associated with the convertible notes.
Net loss from continuing operations. The net loss from continuing
operations for the period ended March 31, 1999 decreased by 4% to $6.6 million
from $6.8 million in the same period of 1998. The decrease was due to the gross
profit of $3.6 million on the THALOMID(R) sales and research contract revenue
offset by higher operating expenses of $2.7 million as described above and
higher interest expense.
Discontinued operations. The chiral intermediate business was sold in
early January 1998 with approximately $60,000 in operating expenses incurred
prior to the sale. There were no discontinued operations in 1999.
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 $99.5 million in net
proceeds from three public and three private offerings, including its initial
public offering in July 1987.
In September 1998, the Company issued a convertible note in the amount of
$8.75 million to an institutional investor. The note has a five year term and a
coupon rate of 9.25% with interest payable on a semi-annual basis. The debt
contains a conversion feature that allows the note holder to convert the debt
into common shares after one year at $11 per share, a 25% premium to the market
price at closing.
In January 1999, the Company issued a convertible note in the amount of
$15.0 million to an institutional investor. The note has a five year term and a
coupon rate of 9.0% with interest payable on a semi-annual basis. The debt
contains a
10
conversion feature that allows the note holder to convert the debt into common
shares after one year at $18 per share.
The Company's net working capital at March 31, 1999 increased
significantly to approximately $12.7 million (primarily cash and cash
equivalents) from approximately $2.5 million at December 31, 1998. The increase
in working capital was primarily due to the proceeds from the convertible note
issued in January 1999.
Cash and cash equivalents increased by $6.2 million in the first quarter
1999 and marketable securities increased by $3.4 million from December 31, 1998.
This reflects the receipt in January 1999 of funds from the issuance of the
convertible note.
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, commercialization of products now in development and increased
commercial costs related to the sales and marketing of THALOMID(R)(thalidomide).
In order to assure funding for the Company's future operations, the Company is
likely 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 as well as revenues from the sales of THALOMID could
fund operations based on budgeted levels of research and development, sales and
marketing, and administrative activities through 1999.
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 (Y2K) to mean
the year 1900 instead. If not corrected, those programs could cause date-related
transaction failures. The Company's Chief Information Officer, in conjunction
with outside consultants is in the process of assessing the Company's systems
with regard to Y2K compliance and to recommend and implement year 2000 compliant
systems.
Since the Company was transitioning from a research and development
company to a commercial operation, pending FDA approval of the Company's lead
product Thalomid, the Company had already begun an assessment of Information
Technology needs to support the evolving structure. During 1998, the Company
replaced all personal computers, with the exception of several computers
connected to laboratory analytic equipment, with Year 2000 compliant machines.
All applications other than those used in the laboratory equipment, are
11
Year 2000 Compliant. The Company is confident that by mid-year 1999, 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 year-end 1999.
The Company has spent less than $1.0 million on the systems upgrades to date.
Additional expenditures are expected to be less than $500,000. The Company uses
outside vendors to produce, encapsulate, package, process orders, invoice and
maintain accounts receivable records for THALOMID. The Company is in the process
of receiving certifications from such vendors that the systems utilized are or
will be Y2K compliant before the end of 1999. Based on current plans and efforts
to date, the Company expects that there will be no material adverse effect on
operations. There can be no assurance, however, that all problems will be
foreseen and corrected, that Year 2000 problems at the Company's vendors,
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. Accordingly, the Company is developing contingency plans
to address the possible occurrence of Year 2000 problems. Such plans are
expected to be in place well before the end of 1999.
The statements contained in the foregoing Year 2000 readiness disclosure
are subject to certain protection under the Year 2000 Information and Readiness
Disclosure Act.
Cautionary Statements for Forward-Looking Information
The Management's Discussion and Analysis of Financial Condition and
Results of Operations provided above contains certain forward-looking statements
which involve known and unknown risks, delays, uncertainties and other factors
not under the Company's control which may cause actual results, performance and
achievements of the Company to be materially different from the results,
performance or other expectations implied by these forward-looking statements.
These factors include results of current or pending clinical trials, actions by
the FDA and other factors detailed herein and in the Company's other filings
with the Securities and Exchange Commission.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company currently does not use derivative financial instruments. The
warrants associated with the issuance of the Company's Series B Preferred Stock
currently have a conversion price of $7.48 which is based on 115% of a defined
conversion price which is currently $6.50. The conversion price can be reset if
the stock price were to fall below $6.50. Once the warrants are issued, the
conversion price can no loner be reset.
12
PART II - OTHER INFORMATION
Item 1. - None
Item 2. - None
Item 3. - None
Item 4 - None
Item 5 - None
Item 6. Exhibits
A. 27 Financial Data Schedule - Article 5 for first quarter
Form 10-Q.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELGENE CORPORATION
DATE May 13, 1999 BY /S/John W. Jackson
--------------------------------- ----------------------------------
John W. Jackson
Chairman of the Board
Chief Executive Officer
DATE May 13, 1999 BY /s/James R. Swenson
--------------------------------- ----------------------------------
James R. Swenson
Controller
(Chief Accounting Officer)
14