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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee Required)
For the fiscal year ended December 31, 2001
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No Fee Required)
For the transition period from ___________ to ___________
Commission File No. 0-16132
CELGENE CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-2711928
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(State or other jurisdiction of (I.R.S. Employee Identification)
incorporation or organization)
7 Powder Horn Drive 07059
Warren, New Jersey ----------
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(Address of principal 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
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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
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Aggregate market value of voting stock held by non-affiliates of registrant
as of March 1, 2002: $1,914,630,044
Number of shares of Common Stock outstanding as of March 1, 2002:
75,648,728
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CELGENE CORPORATION ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM NO. PAGE
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Part I
1. Business ......................................................... 1
2. Properties ....................................................... 29
3. Legal Proceedings ................................................ 29
4. Submission of Matters to a Vote of Security Holders .............. 29
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters .............................................. 30
6. Selected Consolidated Financial Data ............................. 31
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 32
7a. Quantitative and Qualitative Disclosures About Market
Risk ............................................................. 37
8. Financial Statements and Supplementary Data ...................... 38
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .............................. 38
Part III
10. Directors and Executive Officers of the Registrant ............... 39
11. Executive Compensation ........................................... 39
12. Security Ownership of Certain Beneficial Owners and
Management ....................................................... 43
13. Certain Relationships and Related Transactions ................... 43
Part IV
14. Exhibits, Financial Statements, and Reports on Form 8-K .......... 44
Signatures and Power of Attorney ................................. 47
i
PART 1
ITEM 1. BUSINESS
We are a commercial-stage biopharmaceutical company, incorporated in 1986
as a Delaware corporation. We are primarily engaged in the discovery,
development and commercialization of small molecule drugs designed to treat
cancer and immunological diseases through gene and protein regulation. Small
molecule drugs are man-made, chemically synthesized drugs that, because of their
relatively small size, can typically be administered orally. Our drugs are
designed to modulate multiple disease-related genes, including cytokines (which
are proteins) such as Tumor Necrosis Factor alpha, or TNF(alpha), growth factor
genes such as those that control angiogenesis, blood vessel formation and
apoptosis genes. Because our drugs can be administered orally, they have the
potential to advance the standard of care beyond current injectible protein
drugs that inhibit TNF(alpha) and other disease-causing cytokines. We had total
revenues of $114.2 million in 2001 and a net loss of $1.9 million. We had an
accumulated deficit of $222.4 million at December 31, 2001 and have since our
inception in 1986 financed our working capital requirements primarily through
product sales, private and public sales of our debt and equity securities,
income earned on the investment of the proceeds from the sale of such securities
and revenues from research contracts and license payments.
TNF(alpha) is produced primarily by certain white blood cells, and 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.
Overproduction of TNF(alpha), however, has been linked to many chronic
inflammatory and immunological diseases. Angiogenesis is the fundamental
biological process by which new blood vessels are formed. Cancer cells initiate
a biochemical mechanism that stimulates angiogenesis, which in turn provides the
cancerous cells with their necessary blood supply. Our small molecule compounds
appear to have the potential to inhibit such angiogenesis. Apoptosis genes are
those genes which play a central role in regulating cell survival and cell
death.
The Food and Drug Administration approved our first commercialized product,
THALOMID(Reg. TM), (thalidomide), for sale in the United States in July 1998.
The approved indication for THALOMID(Reg. TM) is the treatment of acute
cutaneous manifestations of moderate to severe erythema nodosum leprosum, or
ENL, and as maintenance therapy to prevent and suppress cutaneous manifestation
recurrences. ENL, a complication of leprosy, is a chronic bacterial disease.
Leprosy afflicts millions worldwide, although the disease is relatively rare in
the United States. We distribute THALOMID(Reg. TM) in the United States through
our 128-person commercialization organization. Working with the FDA, we have
developed a novel comprehensive education and distribution program, the "System
for Thalidomide Education and Prescribing Safety," or S.T.E.P.S.(Reg. TM), that
is designed to support the safe and appropriate use of THALOMID(Reg. TM). We
also intend to seek marketing approval for THALOMID(Reg. TM) in the treatment of
early stage multiple myeloma patients.
On November 14, 2001, the FDA approved Focalin(TM) (d-MPH), our chirally
pure version of Ritalin(Reg. TM), for the treatment of attention deficit
disorder and attention deficit hyperactivity disorder, or ADD/ADHD, in
school-age children. The use of a chirally pure version, such as Focalin(TM),
can result in significant clinical benefits. Many non-chirally pure
pharmaceuticals contain two configurations, known as isomers, which are mirror
images of each other. Generally these isomers interact differently with their
biological targets causing one isomer to have a beneficial effect and the other
isomer to have either no effect or undesirable side effects. In April 2000, we
granted Novartis Pharma AG an exclusive worldwide license (except Canada) for
the development and marketing of Focalin(TM) in return for substantial milestone
payments and royalties on Focalin(TM) and the entire Ritalin(Reg. TM) family of
drugs. On January 21, 2002, Novartis launched Focalin(TM) in the United States.
We have retained the exclusive commercial rights to Focalin(TM) for
oncology-related disorders such as cognitive dysfunction associated with
chemotherapy.
We have built a highly integrated drug discovery, development and
commercialization platform that enables the company to both create and retain
significant value within its therapeutic franchise areas. This target-to-drug
platform spans key functions required to generate a large and diverse pipeline
of new drug candidates, including: (i) genomics, proteomics and informatics
technologies for identifying clinically important drug targets; (ii) high
throughput screening systems combined with diverse and focused
compound libraries for discovering new drug leads; (iii) computational and
medicinal chemistry for optimizing drug candidates; (iv) in vitro and in vivo
models of disease for preclinical evaluation of drug efficacy and safety; (v) a
clinical and regulatory organization highly experienced in the development of
pharmaceutical agents; and (vi) a 128-person sales and marketing organization.
Our clinical-stage pipeline of new drug candidates is highlighted by four
classes of orally administered therapeutic agents designed to selectively
regulate disease and associated genes, as described below: Immunomodulatory
Drugs, or IMiDs(TM), Selective Cytokine Inhibitory Drugs, or SelCIDs(TM),
Selective Estrogen Receptor Modulators, or SERMs, and kinase inhibitors which
include Jun kinase, or JNK, inhibitors and nuclear factor kappa beta, or
NF-(kappa)(beta), inhibitors. Each class is currently in either drug or
preclinical development, or undergoing clinical trials.
IMiDs(TM) are analogues (or derivatives) of thalidomide that are designed
to modulate TNF(alpha), demonstrate anti-cancer activity and inhibit (or halt)
angiogenesis without causing birth defects or sedation. In preclinical studies,
our IMiDs(TM) have demonstrated a higher level of modulating activity than
thalidomide. We currently have two IMiDs(TM), REVIMID(TM) and ACTIMID(TM), in
clinical trials for cancer and inflammatory diseases. REVIMID(TM), our lead
IMiD(TM), currently is being evaluated as a multiple myeloma and metastatic
malignant melanoma therapy in three Phase I/II clinical trials. Multiple myeloma
is a malignant proliferation of plasma cells and plasmacytoid cells. It is the
second most common blood borne malignancy and is invariably fatal. Metastastic
malignant melanoma is a severe form of skin cancer that has begun to spread (or
metastasize) throughout the body.
In December 2001, data was presented by investigators from the Dana-Farber
Cancer Institute at Harvard University and the Arkansas Cancer Research Center
at the American Society of Hematology meeting. The investigators reported that
in these studies REVIMID(TM) showed significant anti-tumor activity and was
generally well-tolerated in patients. In July 2001, at the British Cancer
Research Meeting, preliminary results were presented from a Phase I/II trial
evaluating REVIMID(TM) in 21 patients with solid tumor cancers. Thirteen of the
21 patients had metastatic melanoma, and eight of the 13 melanoma patients
experienced anti-disease activity. Based on these results, the trial is being
expanded to include approximately 60 additional patients. In addition, a Phase
I/II trial of REVIMID(TM) for the treatment of congestive heart failure was
initiated in July 2001. Extensive additional clinical testing of the compound is
planned to be initiated for both multiple myeloma and metastatic melanoma in
2002.
SelCIDs(TM) are compounds that have demonstrated the ability to modulate
the overproduction of TNF(alpha) and certain other disease-related cytokines
(proteins) by selectively inhibiting phosphodiesterase 4, or PDE 4. PDE 4 is a
type of enzyme which is linked to the overproduction of TNF(alpha). Our
SelCIDs(TM) are intended to control inflammation without broad suppression of
the immune system. Our lead SelCID(TM) compound, CC 1088, was well-tolerated in
human Phase I trials. Common side effects of known PDE 4 inhibitors such as
nausea or vomiting did not occur in these trials. CC 1088 currently is being
tested in a Phase II trial for Crohn's disease and the results are expected in
2002. A Phase I trial was completed for another SelCID(TM) compound, CC 7085,
which was significantly more potent than CC 1088 in preclinical studies.
Our first compound from the Signal Research Division to enter the clinic,
CC 8490, completed a Phase I safety trial and was well-tolerated in healthy
human volunteers. CC 8490 demonstrated the ability to induce cancer cell death
in preclinical models of cancer. We plan to initiate a Phase I/II clinical trial
of CC 8490 in cancer in 2002.
SERMs are compounds that are being developed to mimic the positive effects
of estrogen in the treatment of osteoporosis while blocking the negative
effects. Estrogen is a hormone that has a broad spectrum of effects on tissues
in both women and men. Although the hormone's biological effects are often
beneficial, estrogen is also a potent growth factor in breast and other
reproductive tissues that gives rise to cancer. For cancer indications, the
SERMs are designed to block certain harmful stimulatory effects of estrogen. In
treating osteoporosis, the SERMs are designed to mimic the positive effects of
estrogen by inhibiting bone loss and providing cardio-protection in pre- and
post-menopausal women, while avoiding some of estrogen's adverse effects such as
increasing the risk of breast and uterine cancer. In December 2000, we entered
into a Collaborative Research and License Agreement with Novartis Pharma AG to
discover and develop SERMs for the treatment and prevention of osteoporosis.
2
Our kinase inhibitors include JNK inhibitors and nuclear factor kappa beta,
or NF-(kappa)(beta), inhibitors. Kinases are regulatory proteins that control
key cellular activities by transmitting biological signals from the exterior
environment of a cell to the cell's nucleus, where genes that promote health and
genes that promote disease are turned on and off in response to these signals.
Kinase inhibitors are drugs that bind to and block the activity of
gene-regulating kinases, such as JNK and NF-(kappa)(beta), thereby inhibiting
the ability of kinase proteins to turn on those specific genes that cause or
contribute to disease. The JNK pathway controls the expression of specific sets
of cytokine, growth factor and cell death genes that play a fundamental role in
the onset and progression of immune and inflammatory diseases and cancer.
Preclinical studies support the therapeutic potential of our JNK inhibitors in
several disease models, including:
o rheumatoid arthritis, as reported by academic investigators in the July
1, 2001 edition of The Journal of Clinical Investigation;
o asthma, as presented by academic investigators at the 97th
International Conference of the American Thoracic Society in May 2001;
o ischemia reperfusion injury (an injury caused when blood flow to a
vital organ of the body is blocked), as reported by academic
investigators at the 52nd annual meeting of the American Association
for the Study of Liver Diseases in November 2001; and
o cancer, as presented by company researchers at the 2001 American
Association for Cancer Research -- National Cancer Institute --
European Organization for Research and Treatment of Cancer
International Conference held in November 2001.
We anticipate initiating a Phase I clinical trial for our lead JNK inhibitor in
2002.
The NF-(kappa)(beta) pathway is a critical regulator of genes such as
TNF(alpha), interleukin-1 and proteases. Interleukin-1 is a protein produced by
cells principally to maintain the body's immune defenses against disease and
injury. It serves as a biochemical signal for cells to multiply and then attack,
destroy and remove unwanted pathogens and diseased or damaged cells from the
body. Proteases are enzymes produced by various cells for the purpose of
degrading and eliminating the body's injured and diseased cells. Under normal
circumstances, proteases facilitate the prompt removal of abnormal cells, while
under disease conditions protease enzymes cause the destruction of healthy
tissue.
However, over-activation of the NF-(kappa)(beta) pathway can cause
continued tissue inflammation and destruction associated with a wide variety of
diseases such as rheumatoid arthritis and inflammatory bowel disease. Along with
our partner, Serono, S.A., we are evaluating SPC 839, a novel small molecule
inhibitor of the NF-(kappa)(beta) pathway. As a small molecule inhibitor, SPC
839 is designed to block the ability of the NF-(kappa)(beta) pathway to transmit
biochemical signals that activate or inactivate specific disease-causing genes.
In preclinical models we have found that SPC 839 significantly reduced joint
inflammation and destruction. NF-(kappa)(beta) inhibitors potentially represent
an important new class of disease-modifying drugs.
We also are identifying and validating a major new class of gene-regulating
drug targets, termed ligases, for oncology and inflammation drug discovery.
Ligases are enzymes in cells which selectively eliminate proteins that maintain
healthy cellular functions. We have established an early and leading position in
the ligase regulation field through (i) the identification and licensing of 38
potential ligase targets, for which several patent applications have been filed;
(ii) collaborations with several leading researchers in the ligase field; and
(iii) the initiation of drug discovery programs for two ligase targets. This
portfolio of ligase targets provides us with several new novel therapeutic
strategies for controlling cellular proteins that either cause or prevent
disease.
3
CELGENE PRODUCT OVERVIEW
The target disease indications and the development and commercial status of
THALOMID(Reg. TM), Focalin(TM) and our other drug candidates currently under
development are outlined in the following table:
PRODUCT DISEASE INDICATION COLLABORATOR STATUS
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THALOMID(Reg. TM) ENL Marketed.
Multiple Myeloma Phase II/III trials completed.
Additional trials ongoing and
planned.
Renal Cancer Phase III trials underway and
planned.
Myelodysplastic
Syndromes Phase III trial underway.
Colorectal Cancer Multiple trials underway and
planned.
IMiDs(TM)
REVIMID(TM) Multiple Myeloma Phase I/II trials completed.
Additional trials planned.
Solid Tumor Cancers Phase I/II trials underway and
expanded. Additional trials
planned.
Inflammatory Diseases Phase I/II trials underway and
planned.
ACTIMID(TM) Multiple Myeloma Phase I/II trial underway.
SelCIDs(TM)
CC 1088 Crohn's Disease Phase II trial underway.
Myelodysplastic
Syndromes Phase II trial underway.
CC 7085 Inflammatory Diseases Phase I trial completed.
SERMs
SERM(alpha) Osteoporosis Novartis Pharma AG Preclinical studies underway.
CC 8490 Cancer Phase I trial completed.
Kinase Inhibitors
JNK Cancer/Inflammatory
Diseases Preclinical studies underway.
NF-(kappa)(beta) Cancer/Inflammatory Serono A.G.
Diseases Preclinical studies underway.
P38/MEK Cancer/Inflammatory
Diseases Drug discovery underway.
Ligases Cancer/Inflammatory
Diseases Drug discovery underway.
Focalin(TM) ADD/ADHD Novartis Pharma AG Marketed.
Chemotherapy-related
Cognitive Dysfunction Trials to be initiated in 2002.
Ritalin(Reg. TM) LA ADD/ADHD Novartis Pharma AG Awaiting approval.
Focalin(TM) LA ADD/ADHD Novartis Pharma AG Trials planned.
4
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap.
o PHASE I CLINICAL TRIALS
If the FDA allows a request to initiate clinical investigations to become
effective, Phase I human clinical trials can begin. These tests usually involve
between 20 and 80 healthy volunteers or patients. The tests study a drug's
safety profile, and may include the safe dosage range. The Phase I clinical
studies also determine how a drug is absorbed, distributed, metabolized and
excreted by the body, and the duration of its action.
o PHASE II CLINICAL TRIALS
In Phase II clinical trials, controlled studies are conducted on a limited
number of patients with the targeted disease. An initial evaluation of the
drug's effectiveness on patients is performed and additional information on the
drug's safety is obtained.
o PHASE III CLINICAL TRIALS
This phase typically includes multi-center trials and involves a larger
patient population. During the Phase III clinical trials, physicians monitor
patients to determine efficacy and to gather further information on safety.
OVERVIEW OF GENES AND DISEASE
Genes control all cellular functions responsible for maintaining human
health. Gene regulation is a highly controlled process in which specific sets of
genes are activated and inactivated to maintain the body's essential functions,
as well as to combat disease. Genes are controlled by networks of proteins
inside cells that relay biologic information through pathways from a cell's
surface to its nucleus where genes are expressed in response to these signaling
events. These cell-signaling pathways consist of several large and distinct
classes of gene regulating proteins that include transcription factors, kinases
and ligases. Transcription factors are molecular switches that bind to the
regions of genes that control the level and duration of gene expression and
protein production. Kinases are enzymes that transmit information within cells
and selectively regulate gene expression. Ligases control the levels of gene
regulating proteins in cells. Each of these three classes of proteins controls
multiple genes that contribute to disease.
Recent advances in cellular and molecular biology have demonstrated that
malfunctions in gene regulation trigger cells to produce inappropriate amounts
or types of proteins that give rise to many complex human diseases. For example,
over-activation of certain genes and the proteins they produce can cause
uncontrolled proliferation of cells characteristic of cancer and inflammatory
diseases. Alternatively, under-activation of critical genes and their protein
products, such as tumor suppressors, also may give rise to diseases including
cancer and neurological disorders.
Genomics is the large-scale identification and characterization of the
genes that comprise the human genome, which is revolutionizing drug discovery
and development. The entire human genome has been sequenced and this information
is currently being compiled in databases. These genomic databases only provide a
starting point for understanding the role of genes in disease because the gene
sequence data by itself provides limited information about a gene's relationship
to a specific disease. To fully capitalize on the therapeutic potential of
genomics it is necessary to map critical gene regulating pathways and identify
key proteins as drug targets for disease therapy.
Many conventional drug discovery efforts have focused on identifying
compounds that have been directed toward extracellular targets -- either cell
surface receptors or proteins produced and secreted by cells -- that indirectly
regulate gene expression. Many of these drugs provide only symptomatic relief of
disease and do not treat the molecular causes of disease. For example, standard
rheumatoid arthritis therapies such as aspirin only relieve the symptoms of pain
and inflammation. These drugs do not address the destruction of arthritic joints
caused by rheumatoid arthritis. Drugs directed toward targets outside the cell
also have a number of potential limitations because they often do not control
the specific sets of
5
genes that are responsible for the onset and progression of disease and may even
cause detrimental side effects due to their non-specific action. An additional
limitation is that many current drugs must be injected and are not orally
available.
OVERVIEW OF OUR GENE-REGULATING TECHNOLOGY
We have developed and integrated a large set of proprietary drug targets
and drug discovery technologies to accelerate the application of genomics and
proteomics to the discovery of important new classes of gene-regulating drugs.
We first map the gene-regulating pathways to identify disease-associated
proteins that control specific genes. This information is then used to discover
novel gene-regulating drugs by applying our drug discovery engine. We believe
our discovery and development capabilities provide us with a highly advanced and
competitive technology platform for target and drug discovery. This engine
consists of:
o ADVANCED CELLULAR, MOLECULAR AND GENOMIC TECHNOLOGIES
We use information produced from human genomics initiatives to map
gene-regulating pathways and identify clinically important drug targets for
specific diseases. We have generated proprietary human cell lines, from multiple
tissues of the body, to create in vitro models of disease and to evaluate the
activity and selectivity of drug candidates. We also use functional genomics and
proteomics, which is the large-scale linking of genes and their protein products
to their biological functions, for mapping gene-regulating pathways and
identifying disease targets for use in drug discovery.
o PROPRIETARY HIGH THROUGHPUT SCREENING SYSTEMS AND DIVERSE COMPOUNDS
LIBRARIES
We have assembled a library of distinct small molecule compounds and
natural products that we screen using our proprietary biochemical and cell-based
screening technologies. Our screening systems include a screening technology
that simultaneously screens multiple kinases to provide drug activity and
specificity data across multiple drug targets.
o A PROPRIETARY, KINASE-FOCUSED COMPOUND LIBRARY
We have identified the active sites, or molecular locks on a number of
gene-regulating kinase targets using our extensive knowledge of the
three-dimensional structures of these targets. We believe gene-regulating
targets identified in the future will contain similar locks. Our kinase
inhibitor library is designed to contain compounds expected to fit, like
molecular keys, into these locks, enhancing our ability to identify effective
inhibitors of current as well as yet-undiscovered gene-regulating targets. In
addition, we design these compounds with attractive pharmaceutical properties,
such as solubility, chemical stability, non-reactivity and the ability to be
taken orally, which may accelerate the development of viable drug candidates.
o STRUCTURE-BASED DRUG DESIGN
We use our proprietary three-dimensional models of drug targets, combined
with advanced chemistry technologies, to generate drug leads and advance drug
candidates into preclinical and clinical development.
Our drug discovery and development programs are focused principally in
cancer and inflammatory diseases in which gene dysregulation plays a major role
in the onset and progression of these complex diseases.
OVERVIEW OF ONCOLOGY AND IMMUNOLOGY
Our clinical and commercial focus is to produce a portfolio of highly
potent and selective compounds that have the potential to regulate the
overproduction of TNF(alpha) and have anti-cancer and anti-angiogenic properties
via gene regulation.
TNF(alpha), produced primarily by certain white blood cells, is one of a
number of proteins called cytokines that act as chemical messengers throughout
the body to regulate many aspects of the immune system. TNF(alpha) is essential
to mounting an inflammatory response, which is the normal immune system
6
reaction to infection or injury that rids the body of foreign agents and
promotes tissue repair. However, chronic or excessive production of TNF(alpha)
has been implicated in a number of acute and chronic inflammatory diseases.
These disease states, which are inadequately treated with existing therapies,
include non-insulin dependent diabetes, Alzheimer's disease, congestive heart
failure, 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 often fail to achieve
significant clinical benefits and can cause serious side effects such as severe
drops in certain blood component counts, liver toxicity, osteoporosis,
teratogenicity and various endocrine abnormalities. We believe that selective
control and reduction 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.
Anti-TNF(alpha) proteins, including anti-TNF(alpha) antibodies and
TNF(alpha) soluble receptors, have demonstrated efficacy in the treatment of
such chronic inflammatory diseases as rheumatoid arthritis and Crohn's disease.
While initial doses of these anti-TNF(alpha) proteins have been well-tolerated
and have reduced disease activity in clinical studies, these proteins exhibit
certain shortcomings linked to their nature as proteins. First, they are large
molecules that must currently be injected or infused. Second, the period of
efficacy of a given dosage of a protein-based drug can decline 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 a patient's immune system
of antibodies that neutralize administered proteins.
There are a number of large molecule, protein-based therapeutic products
under development by other companies for TNF(alpha) modulation. One product has
received approval from the FDA for the treatment of Crohn's disease and
rheumatoid arthritis, and another has received approval for rheumatoid
arthritis. Synthetic small molecule drugs, however, if successfully developed,
may prove to be preferable in the treatment of chronic inflammatory diseases due
to factors such as oral dosing, lower cost of therapy and avoidance of
undesirable immune response that results in adverse side effects and reduced
efficacy. We believe that our small molecule immunotherapeutic compounds have
the potential to selectively modulate TNF(alpha) while affording these benefits.
In addition, research has indicated that our small molecule drug,
THALOMID(Reg. TM), is anti-angiogenic and demonstrates anti-cancer properties.
Angiogenesis is the fundamental biological process by which new blood vessels
are formed. Cancer cells require oxygen and nutrients and initiate a biochemical
mechanism that stimulates angiogenesis, which, in turn, provides the cancerous
cells with the blood supply they need to grow. Inhibition of angiogenesis could
adversely affect the graft of a tumor and be a potential anti-cancer therapy.
This therapy could also be used in conjunction with radiation or more
traditional chemotherapeutic agents. Currently, a number of anti-angiogenic
agents are being developed by a number of companies. However, we believe that
THALOMID(Reg. TM) is the only oral small molecule on the market that has an
anti-angiogenic effect. Moreover, preliminary research suggests that our two new
classes of small molecule immunotherapeutic compounds -- one of which is based
on thalidomide's activity -- may be anti-angiogenic.
THALOMID(Reg. TM)
In July 1998, we received FDA approval to market THALOMID(Reg. TM) for the
treatment of acute cutaneous manifestations of moderate to severe ENL and as
maintenance therapy for prevention and suppression of cutaneous manifestation
recurrences. ENL is an inflammatory complication of leprosy associated with
excess TNF(alpha) production. Although leprosy is relatively rare in the United
States, the disease afflicts millions worldwide. ENL occurs in about 30% of
leprosy patients and is characterized by cutaneous lesions, acute inflammation,
fever and anorexia. THALOMID(Reg. TM) is the first drug approved under a special
"Restricted Distribution for Safety" regulation and we launched THALOMID(Reg.
TM) in late September 1998 with our patented S.T.E.P.S.(Reg. TM) program.
S.T.E.P.S.(Reg. TM) is designed to support the safe and appropriate use of
THALOMID(Reg. TM) and is part of the approved labeling for THALOMID(Reg. TM).
We are currently developing THALOMID(Reg. TM) for the treatment of a
variety of serious diseases for which we believe there are no adequate approved
therapies. THALOMID(Reg. TM) has been evaluated or is being evaluated in more
than 200 clinical trials, some sponsored by the National Cancer Institute, as a
7
potential therapy for cancer and inflammatory diseases. Key investigations
include multiple myeloma, myelodysplastic syndromes, renal cell carcinoma and
colorectal cancer. Our current intent is to seek FDA approval for THALOMID(Reg.
TM) in early stage multiple myeloma patients. In addition to the data from the
four trials that have already been prepared for submission in this regard, we
intend to initiate and complete an additional clinical trial prior to submission
of a supplementary New Drug Application, or sNDA, to the FDA. The existing
analyzed data will not be submitted until the completion of the additional
trial, and the process is expected to take approximately 24 months. We also
intend to seek FDA approval for THALOMID(Reg. TM) for at least one solid tumor
cancer, such as renal cell carcinoma.
Our work with thalidomide was originally based on a scientific
collaboration with The Rockefeller University's Laboratory of Cellular
Physiology and Immunology. In the early 1990s, researchers at The Rockefeller
University discovered that thalidomide is a selective modulator of TNF(alpha),
and therefore, could be of potential benefit in many serious immunological
diseases, including cachexia and other AIDS-related conditions. We believe that
in serious and debilitating disease states, the risk of birth defects and other
potential side effects related to thalidomide is outweighed by the drug's
potential clinical benefits. The Rockefeller University has granted us 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-related disease states. Researchers at the
Children's Medical Center, which is affiliated with Harvard University,
discovered that thalidomide is anti-angiogenic and filed patents on this
utility. We were granted an exclusive license to these patents by Children's
Medical Center, some of which have not issued in the United States, in December
1998.
As a result of our own applications and designations acquired from the
Children's Medical Center, we now have Orphan Drug designations from the FDA for
THALOMID(Reg. TM) covering primary brain malignancies, HIV-associated wasting
syndrome, severe Recurrent Aphthous Stomatitis, or RAS, clinical manifestations
of mycobacterial infections caused by mycobacterium tuberculosis and
non-tuberculous mycobacteria, ENL, multiple myeloma, Crohn's disease and
Kaposi's sarcoma. If the FDA approves any of these indications for THALOMID(Reg.
TM), we will be granted a seven-year period of exclusivity during which time the
FDA is prohibited, except under certain conditions, from approving another
version of thalidomide for the approved indication. In November 2001, we were
also granted European Orphan Drug status for THALOMID(Reg. TM) in multiple
myeloma and ENL.
Thalidomide was developed initially as a sedative, and was 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 associated
with its use, thalidomide was virtually removed from the world market.
Thalidomide was later discovered to have therapeutic effects in the treatment of
ENL, a disease that is rare in the United States but common in many parts of the
developing world. Although the FDA had never, until 1998, approved the marketing
of thalidomide, the U.S. Public Health Service has dispensed the drug for the
treatment of ENL for the previous 25 years. We note that thalidomide's history
may limit market acceptance of THALOMID(Reg. TM).
ONCOLOGY
Cancer tissue stimulates the growth of blood vessels essential for tumor
growth, invasion and metastasis. Specifically, primary tumors are believed to
remain clinically insignificant unless they can obtain nourishment from their
host. Biochemically, an invasive tumor induces the production of several growth
factors that cause the formulation of new blood vessels. Almost three decades
ago, it was proposed that this process of tumor angiogenesis could be a
promising new target of cancer therapy. Anti-angiogenic compounds were believed
to be able to work by reducing or halting remaining tumor growth and could also
be used in conjunction with more traditional chemotherapeutic agents.
Thalidomide was discovered to be anti-angiogenic at the Children's Medical
Center in Boston.
We are currently working with the NCI and a number of clinical
investigators to assess the potential of THALOMID(Reg. TM) in the treatment of
various cancers. Currently we estimate that approximately 92% of THALOMID(Reg.
TM) prescriptions are in oncological indications.
Multiple Myeloma. Multiple myeloma is the second most common hematologic
malignancy diagnosed in the United States. It is a malignant disorder of plasma
cells residing in the bone marrow and
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is characterized by the prominent appearance of a certain monoclonal
immunoglobulin (M-protein) in the blood or urine of patients. There is a high
morbidity and mortality associated with multiple myeloma that includes bone
fractures, bone marrow failure and kidney failure.
According to the Multiple Myeloma Research Foundation and the American
Cancer Society, there are approximately 45,000 people in the United States
living with multiple myeloma with over 14,000 new cases and 11,000 deaths
expected this year. Current regimens have served to provide therapeutic benefit;
however multiple myeloma patient suffering remains very high and relapsing is
very common. Additionally, current treatments for multiple myeloma have
detrimental side effects and there is a great need for newer, safer and more
effective alternatives.
At the 43rd annual meeting of the American Society of Hematology, or ASH,
in December 2001, investigators from leading cancer research centers presented
new data from clinical trials of THALOMID(Reg. TM) in many hematological
malignancies. THALOMID(Reg. TM) is currently being evaluated as a potential
therapy of every disease stage of multiple myeloma including monoclonal
gammopatry of uncertain significance (MGUS), smoldering, newly diagnosed,
relapsed and refractory. Several investigators at ASH reported data on the
response rate, the median effective dose and the average duration of response
for multiple myeloma patients treated with THALOMID(Reg. TM) in clinical trials.
Newly Diagnosed Multiple Myeloma. Vincent Rajkumar, M.D., of the Mayo
Clinic presented data at ASH from a Phase II trial examining the use of
thalidomide in combination with dexamethasone for newly diagnosed multiple
myeloma patients. Fifty patients with previously untreated multiple myeloma were
administered a fixed dose of 200 mg of thalidomide, except in seven patients for
whom a dose escalation up to 800 mg was permitted as tolerated, in combination
with dexamethasone at a dose of 40 mg/day orally for four days three times a
month. Response was measured as a decrease in both serum and urine monoclonal
(M) protein by 50 percent or greater. Thirty-two (64 percent ) patients met the
criteria for reponse. Grade 3 or higher toxicity was seen in 16 patients,
including 5 patients experiencing venous thrombosis. Other adverse events
included constipation, rash and dyspnea.
Relapsed and Refractory Multiple Myeloma. The first data on THALOMID's(Reg.
TM) effect on long-term survival in multiple myeloma were published in the July
15, 2001 issue of Blood in an article entitled "Extended Survival in Advanced
and Refractory Multiple Myeloma After Single-agent Thalidomide: Identification
of Prognostic Factors in a Phase II Study of 169 Patients." The study is a
follow-up of a phase II trial of 169 advanced and refractory multiple myeloma
patients with progressive disease treated with THALOMID(Reg. TM), and it extends
results of 84 patients previously reported in The New England Journal of
Medicine (November 1999). The phase II study was initiated to evaluate the use
of THALOMID(Reg. TM) in multiple myeloma patients who relapsed after high dose
chemotherapy. Patients received a starting dose of 200 mg/day escalated by 200
mg/day every two weeks to 800 mg/day according to tolerance. THALOMID(Reg. TM)
was escalated to 400 mg, 600 mg and 800 mg in 87 percent, 68 percent and 56
percent of patients respectively. Of the study's 169 patients, 37 percent
demonstrated a (greater than or equal to)25 percent reduction in myeloma
protein, 30 percent demonstrated a (greater than or equal to)50 percent
reduction and 14 percent of patients achieved a complete or near complete
response.
The trial's principal investigator, Bart Barlogie, M.D., Ph.D., and
researchers at the Arkansas Cancer Research Center reported that high-risk
patients who received (greater than or equal to)42 grams of THALOMID(Reg. TM) in
a three-month period experienced higher response rates (63 percent vs. 45
percent) and longer survival time (54 percent vs. 21 percent). In addition, for
the entire patient cohort, event-free survival after two years of follow-up was
20 percent and overall survival is 48 percent.
The study's most commonly reported side effects included one or more grade
(greater than or equal to)3 toxicities. Twenty-five percent of patients
experienced events affecting the central nervous system, such as sedation and
somnolence, confusion, depression and tremor. Sixteen percent of patients
experienced gastrointestinal toxicities, mainly constipation. Neuropathy was
seen in 9 percent of patients. Less than two percent of patients developed deep
vein thrombosis. These toxicities were found to be dose related.
In 2001, prescribers reported on our S.T.E.P.S.(Reg. TM) program enrollment
surveys that approximately 63.5% of the oncology-related THALOMID(Reg. TM)
prescriptions were for multiple myeloma. Based on this information and on the
growing volume of clinical trial data, our plan is to pursue an sNDA for
THALOMID(Reg. TM) for the treatment of multiple myeloma.
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Myelodysplastic Syndromes. Myelodysplastic Syndromes, or MDS, are a group
of conditions caused by abnormalities of the blood-forming cells in the bone
marrow resulting in a shortage of blood cells and, ultimately, low blood counts.
The five types of MDS are refractory anemia, refractory anemia with ringed
sideroblasts, refractory anemia with excess blasts, refractory anemia with
excess blasts in formation and chronic myelomonocytic leukemia. According to the
American Cancer Society, 14,000 new cases of MDS are diagnosed each year in the
United States, with survival rates ranging from six months to five years for the
different types of MDS.
The first peer-reviewed study evaluating the potential use of THALOMID(Reg.
TM) to treat MDS was published in the August 15, 2001 issue of Blood. The study,
entitled "Thalidomide Produces Transfusion Independence in Long-standing
Refractory Anemias of Patients with Myelodysplastic Syndromes," reported on 83
MDS patients treated with THALOMID(Reg. TM). This pilot study was initiated to
evaluate the activity of THALOMID(Reg. TM) in either low- or high-risk patients
with MDS. Patients received an initial THALOMID(Reg. TM) dose of 100 mg/day and
were escalated as tolerated. Sixteen patients showed hematologic improvement
with 10 patients becoming transfusion independent. Hematologic improvement was
measured by increased platelets, decreased dependence on transfusions and
improved erythroid series. Less than five percent of patients had grade 4
toxicity with the most commonly reported side effects being fatigue,
constipation, shortness of breath, fluid retention, dizziness, rash, tingling in
fingers and/or toes, fever and headache, and nausea.
We have initiated a Phase III, multi-center, controlled study to further
evaluate THALOMID(Reg. TM) as a potential therapy of MDS.
Solid Tumor Cancers. Investigators from leading cancer research centers
presented data from clinical trials of THALOMID(Reg. TM) in solid tumor cancers
at major medical meetings in 2001. Most recently, at the Chemotherapy Foundation
Symposium in November 2001, Dr. Wen-Jen Hwu from Memorial Sloan-Kettering Cancer
Center presented clinical data from a trial of THALOMID(Reg. TM) in combination
with temozolomide in patients with melanoma with brain metastases. Dr. Robert
Amato from the Baylor College of Medicine reported on new data from a clinical
trial of THALOMID(Reg. TM) in combination with Interleukin-2 for the treatment
of renal cell carcinoma.
INFLAMMATORY DISEASES
THALOMID(Reg. TM) has been shown to modulate the immune system response
both in vitro and in vivo. Examples of such biological activities include the
inhibition of TNF(alpha), stimulation of the anti-inflammatory cytokine IL-10
and activation of T-cell function. These types of activities could prove to have
therapeutic benefit in a variety of inflammatory, infectious and autoimmune
diseases. The two key areas of investigation at present involve inflammatory
bowel disease and sarcoidosis, an inflammation of body tissue, which often
attacks the lungs and lymph nodes, and scleroderma, a chronic tissue disorder.
S.T.E.P.S.(Reg. TM)
Working with the FDA and other governmental agencies as well as certain
advocacy groups, we designed and implemented S.T.E.P.S.(Reg. TM), the objective
of which is the safe and appropriate use of THALOMID(Reg. TM). This proprietary
program includes comprehensive physician, pharmacist and patient education. All
patients are required to use contraception and female patients of child-bearing
potential are given pregnancy tests regularly. All patients are subject to other
requirements, including informed consent. Physicians are also required to comply
with the educational, contraception counseling, informed consent and pregnancy
testing and other elements of the program. Automatic refills are not permitted
under the program and each prescription may not exceed four weeks dosing. A new
prescription is required each month.
In July 2001, we implemented an enhanced version of S.T.E.P.S.(Reg. TM),
which utilizes innovative technology to ensure that THALOMID(Reg. TM) is safely
and effectively distributed. The new program permits real-time interventions and
maximizes compliance. It has also been streamlined to be more convenient for
physicians and patients.
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S.T.E.P.S.(Reg. TM) is protected by a method of business patent covering
controlled distribution systems that register pharmacists, patients and
physicians who have agreed to follow the safety program. It includes systems
that track compliance and authorize each prescription based on confirmation of
compliance. S.T.E.P.S.(Reg. TM) is designed as a blueprint for pharmaceutical
products that offer life-saving or other important therapeutic benefits but have
potentially problematic effects.
IMIDS(Reg. TM)
IMiDs(TM) are novel, small molecule analogs of THALOMID(Reg. TM) that are
based on THALOMID's(Reg. TM) ability to modulate the production of TNF(alpha).
Our scientists designed the IMiDs(TM) to be more potent and to have a different
safety profile than THALOMID(Reg. TM). Our IMiDs(TM) have significantly greater
immunological activity than thalidomide in in vitro studies. Data published by
our scientists and research collaborators in The Journal of Immunology
demonstrated that IMiDs(TM) potently inhibit the inflammatory cytokines,
TNF(alpha) and interleukin (IL)-1 beta, while stimulating the anti-inflammatory
cytokine IL-10. In addition, IMiDs(TM) were reported to enhance T-cell
proliferation and IL-2 production. In a study published in Blood, IMiDs(TM) were
found to inhibit the growth and proliferation of multiple myeloma cells. We are
developing the IMiDs(TM) in cancer and inflammatory diseases, and we currently
have two IMiD(Reg. TM) compounds in clinical trials: REVIMID(TM) and
ACTIMID(TM).
REVIMID(TM) is being evaluated in two Phase I/II clinical trials in
multiple myeloma. In December 2001, at the annual meeting of the American
Society of Hematology, clinical investigators from Dana-Farber Cancer Institute
at Harvard University and the Arkansas Cancer Research Center presented data
demonstrating that REVIMID(TM) has significant anti-tumor activity in multiple
myeloma and is generally well-tolerated.
PAUL G. RICHARDSON, M.D., presented data at ASH from an open-label safety
clinical trial conducted at Dana-Farber. The study included 24 evaluable
patients with rapidly advancing refractory multiple myeloma, 16 of whom had
failed thalidomide and all of whom had failed at least two prior regimens. 19
patients (79 percent) achieved stable disease or better and 15 patients (63
percent) of patients experienced a greater than 25 percent reduction in
paraprotein. No dose limiting toxicities were observed within 28 days at any
dose level. In the extension phase of the trial, dose reduction was required for
grade 3 thrombocytopenia and grade 3/4 neutropenia. Somnolence, constipation and
neuropathy, common side effects of thalidomide, were not observed.
MAURIZIO ZANGARI, M.D. from the Arkansas Cancer Research Center reported on
the treatment of 15 refractory multiple myeloma patients who participated in two
clinical trials: a four week, open-label safety trial and an extension trial.
Eight patients (53 percent) experienced a greater than 25 percent reduction in
paraprotein and one patient achieved a complete response. In the extension phase
of the trial at higher doses, clinically significant, but manageable, reductions
in both the granulocyte and platelet counts were observed.
REVIMID(TM) is also being evaluated in a Phase I/II clinical trial for the
treatment of solid tumor cancers. In July 2001, Angus Dalgleish, Ph.D.,
presented interim data from the 21-patient clinical trial being conducted at the
St. George's Medical School in London. Thirteen of the 21 patients had
metastatic melanoma and eight of the 13 melanoma patients experienced
anti-disease activity. Based on these data, the trial is being expanded to
include approximately 60 additional patients. A Phase I/II clinical trial of
REVIMID(TM) in congestive heart failure was initiated in July 2001 and is
currently ongoing. We plan to accelerate the development of REVIMID(TM) in 2002
with additional clinical programs in multiple myeloma and metastatic melanoma.
Our extensive intellectual property estate for the IMiD(Reg. TM) pipeline
includes composition of matter patents that cover the active ingredient of
REVIMID(TM) and therapeutic uses of this and other IMiDs(TM). Our patent
portfolio was expanded with two additional patents covering the use of
REVIMID(TM) and ACTIMID(TM) to treat cancer and inflammatory diseases, both as
single agents and in combination with other therapies. Our comprehensive IMiD
patent portfolio comprises several additional U.S. and foreign patents and
patent applications.
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SELCIDS(TM)
SelCIDs(TM) are novel, small molecule drugs that modulate TNF(alpha) and
other disease-causing cytokines by selectively and potently inhibiting PDE 4, an
enzyme whose selective inhibition has been shown to be effective in animal
models of asthma and inflammation. We believe 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. PDE 4 inhibitors,
although shown to have potential therapeutic benefit in the treatment of
inflammatory diseases, have also been found to have undesirable biological
activities including nausea and emesis. Phase I trials demonstrated that the
SelCIDs(TM) are well-tolerated, potent PDE 4 inhibitors that demonstrate
significant anti-inflammatory activity with minimal side effects. Importantly,
there were no signs of nausea or vomiting, side effects typically associated
with PDE 4 inhibitors. Our SelCIDs(TM) were evaluated in ferret models of asthma
and emesis in which they were found to be potent anti-inflammatory agents with
minimal side effects at therapeutic dosing levels. The U.S. Patent and Trademark
Office has issued to us composition of matter and use patents relating to our
SelCIDs(TM).
A Phase II, multi-center, double-blind, placebo-controlled clinical trial
in Crohn's disease for the lead SelCID(TM) compound, CC 1088, is ongoing and
results are expected mid-2002. An additional Phase II trial in MDS was initiated
in early 2002. A second-generation SelCID(TM), CC 7085, completed a Phase I
clinical trial and was found to be well-tolerated in healthy volunteers.
CC 8490
Our first compound from the Signal Research Division to enter the clinic,
CC 8490, completed a Phase I safety trial and was well-tolerated in healthy
human volunteers. CC 8490 demonstrated anti-proliferative effects and the
ability to induce apoptosis in preclinical models of cancer. We plan to initiate
a Phase I/II clinical trial of CC 8490 in cancer in 2002.
SERMS
Estrogen is a hormone that has a broad spectrum of effects on tissues in
both women and men. Many of these biological effects are beneficial, including
maintenance of bone density and cardiovascular and neurological protection. In
addition to estrogen's positive effects, however, the hormone is also a potent
growth factor in the breast and uterus that increases significantly the risk of
cancer in women. In addition, estrogen contributes to prostate cancer in men.
Two distinct estrogen receptors exist in the body, the estrogen
receptor-alpha, or ER-(alpha), and the estrogen receptor-beta, or ER-(alpha),
each of which has a distinct tissue distribution and biological role in the
body. ER-(alpha) is found predominately in bone and in cardiovascular, breast
and reproductive tissue, while ER-(alpha) is the predominately expressed
estrogen receptor in the prostate and hippocampus region of the brain. Given the
tissue-selective expression of ER-(alpha) and ER-(alpha), estrogen receptor
modulators potentially can be designed to mimic the positive effects and block
the negative effects of estrogen in different tissues. Drugs that modulate these
receptors are termed selective estrogen receptor modulators or SERMs.
APPLICATIONS OF SERMS IN OSTEOPOROSIS
Hormone replacement therapy (HRT) has been the standard anti-resorptive
therapy to prevent bone loss in post-menopausal women. However, HRT poses a
number of health risks that make it a poor choice for many women, including an
increased risk for breast and uterine cancer. SERMs have been developed to
overcome many of the risks associated with HRT. However, first and second
generation SERMs lack the efficacy of estrogen in preventing bone loss and are
also associated with several important risks and side effects that include
increased risk of endometrial cancer, hot flashes, deep vein thrombosis, vaginal
bleeding and liver toxicity. We have developed non-steroidal small molecules
with a novel core chemical structure compared to FDA-approved SERMs and other
known SERMs in clinical development.
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In December 2000, we signed an agreement with Novartis Pharma AG for joint
development of SERMs to treat and prevent osteoporosis, which is believed to
affect over 75 million people worldwide. The signing of the agreement triggered
an upfront payment to us. Under the terms of this agreement, we will receive
milestone payments for specific preclinical, clinical and regulatory endpoints,
as well as royalties. Novartis is currently evaluating our SERMs in preclinical
models for efficacy on bone tissue and safety on reproductive tissues and
expects to designate a clinical candidate in 2002.
APPLICATIONS OF SERMS IN CANCER
Unlike chemotherapeutic agents, which often cause significant toxic side
effects, SERMs act through different, primarily non-toxic mechanisms. Currently
two SERMs are marketed for treatment of breast cancer. One of these SERMs,
tamoxifen, is the most widely prescribed anti-hormonal therapy for cancer today.
ER-(alpha) MODULATORS
Using our drug discovery engine and expertise in estrogen gene regulating
pathways, we have discovered and are developing a series of SERMs with improved
efficacy and safety in animal models when compared with tamoxifen. In animal
studies, these drug leads were orally effective in preventing breast cancer and
demonstrated equal or superior efficacy to tamoxifen. Additionally, these
compounds displayed a superior safety profile on uterine tissue compared to
tamoxifen.
JNK INHIBITORS
The JNK cell-signaling pathway plays a pivotal role in the onset and
progression of several important human diseases. Over-activation of the JNK
pathway increases expression of a broad set of disease-causing genes, including
VEGF, TNF(alpha), interleukin-2, gamma interferon and matrix metalloproteinases.
Drugs designed to inhibit JNK have a number of potential advantages in treating
complex diseases such as inflammation and cancer because of their ability to
suppress a broad set of disease-causing cytokines, growth factors and
tissue-destructive enzymes. Importantly, JNK is an intracellular enzyme that can
be targeted with small molecule, orally administered drugs.
We have an extensive intellectual property estate covering JNK genes, JNK
polypeptides and proteins, expression systems for protein production, JNK
screening technology, JNK targets and therapeutic uses of molecules modulating
JNK activity. This patent estate includes ten issued U.S. patents and four
foreign patents through licenses with the University of California, the
University of Massachusetts and our own patents. Our comprehensive patent
portfolio is expected to expand further as we have various pending U.S. and
foreign patent applications. We have not licensed any rights to our JNK program
to date and retain exclusive worldwide rights for all disease indications.
INFLAMMATORY DISEASES AND ONCOLOGY
We have a major drug discovery program focused on developing small
molecules to control the JNK signaling pathway and have identified multiple
series of novel JNK inhibitors. We have completed high throughput screening for
JNK1, JNK2 and JNK3 inhibitors using proprietary biochemical and cell-based
screens. We also have developed additional high throughput drug screens for
several other drug targets in the JNK pathway, including JNKKl (MKK4) and JNKK2
(MKK7). Using our kinase-focused inhibitor library, we have identified several
potent compounds that inhibit JNK1, JNK2 and JNK3 activity. In addition to
significantly reducing inflammation in acute disease models, these drug leads
prevent the destruction of joints in an animal model of arthritis and also
demonstrate potent disease-modifying activity in an animal model of asthma. At
several scientific meetings in 2001, our scientists presented data demonstrating
significant therapeutic potential of our novel JNK inhibitors in a wide range of
in vivo models, including stroke, asthma, ischemia/reperfusion injury, seizure
and cancer. We currently are optimizing drug leads to improve their potency,
selectivity and other pharmaceutical properties. Our first JNK inhibitor drug is
expected to enter the clinic later this year and is currently completing
preclinical development studies. This drug is being developed initially for
intravenous administration for the treatment of acute organ failure caused by
cell death and acute inflammatory responses.
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We are also developing orally administered JNK inhibitors that may be
beneficial for long-term treatment of chronic rheumatologic, cardiovascular,
respiratory and neurodegenerative diseases, in addition to a variety of cancers.
At a recent scientific meeting we described the promising anti-cancer activity
of a JNK inhibitor when administered as a combination treatment with standard
chemotherapeutic drugs in an animal model of cancer. The JNK pathway controls
the expression of specific sets of genes involved in cancer, including:
cytokines and growth factors; cell cycle regulatory proteins and
apoptosis-inducing genes; genes involved in oncogenic transformation;
cell-to-cell adhesion molecules; tissue destructive enzymes involved in
metastasis; multi-drug resistance proteins; and angiogenic factors.
In summary, pharmacologic intervention of JNK represents a novel approach
to treating a variety of human diseases including those caused by excessive cell
proliferation and death and inflammation. We have identified different chemical
classes that act as potent JNK inhibitors and are actively optimizing these
compounds for clinical development.
NF-(kappa)(beta) INHIBITORS
INFLAMMATORY DISEASES
The NF-(kappa)(beta) cell-signaling pathway plays a pivotal role in
inflammatory disease processes by regulating cytokine genes, such as TNF(alpha),
IL-l, IL-2, IL-6, IL-8, along with genes that code for molecules on the surface
of cells and the cyclooxygenase-2, or COX-2, inflammatory enzyme. Our
researchers and collaborators have identified six drug targets that regulate
NF-(kappa)(beta) activation. Our discovery of three of these targets was
reported in the journals Science, Nature and Cell. We believe drugs that inhibit
NF-(kappa)(beta) and, correspondingly, the activation of select
disease-associated genes potentially will have significant disease-modifying
effects. We have been issued four U.S. patents and, along with our
collaborators, have filed related patent applications for targets in this
pathway.
We have conducted high throughput screening for NF-(kappa)(beta) inhibitors
using proprietary biochemical and cell-based screens. We also have developed
technology for profiling the effects of active compounds on a number of
immune-inflammatory genes and proteins in cells and animals. Using our
kinase-focused screening library, we have identified several small molecule drug
leads that selectively inhibit a specific kinase target in the NF-(kappa)(beta)
pathway. One of these drug leads potently inhibits expression of the TNF(alpha)
inflammatory response gene in an animal model.
Our scientists presented preclinical data in September 2001 at the 5th
World Congress on Inflammation on SPC 839, our small molecule NF-(kappa)(beta)
inhibitor. The data demonstrated that SPC 839 potently regulates the expression
of pro-inflammatory genes and therefore may have broad therapeutic benefit in
treating a variety of serious inflammatory diseases and cancer. Based on these
results, our partner, Serono, is advancing SPC 839 into preclinical development.
ONCOLOGY
The NF-(kappa)(beta) cell-signaling pathway controls the expression of
specific sets of genes involved in different stages of cancer development and
progression. These include specific cell survival factors that make cancer cells
resistant to radiation and chemotherapy. Using our gene regulating target
discovery expertise, we and our collaborators have mapped the NF-(kappa)(beta)
pathway extensively and have identified multiple targets in the NF-(kappa)(beta)
gene-regulating pathway for use in drug discovery. We also have demonstrated in
vitro that inhibiting key NF-(kappa)(beta) kinase targets significantly
increases the sensitivity of cancer cells to cancer chemotherapeutics. We have
identified small molecule inhibitors of a specific kinase target in the
NF-(kappa)(beta) gene-regulating pathway and have optimized certain
pharmaceutical properties of these drug leads. We plan to study these drug leads
further in animal models of cancer.
CELGRO
Many human pharmaceuticals and agrochemicals exist in two different
three-dimensional configurations that are identical in chemical structure but
are mirror images of each other. These conformations, known as enantiomers, or
isomers, generally interact differently with biological targets. In
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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
compositions, which contain both isomers, the use of chirally pure
pharmaceuticals can 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 potentially lowering
manufacturing costs and reducing the environmental burden as compared with
racemic chemicals.
Celgro, our wholly owned subsidiary, is applying our proprietary
biocatalytic synthesis technology to agrochemicals. Celgro's approach is to work
with agrochemical companies to adapt our biocatalytic technology to the
manufacture of chirally pure versions of their existing crop protection products
and then license 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 enter into license agreements with third parties to
manufacture and sell the agrochemicals. We anticipate that these arrangements
typically will include milestone payments, reimbursement of research and
development expenses and royalty arrangements. We have entered into research and
development arrangements with two leading agrochemical companies, and
initiatives are underway to secure additional collaborations.
We also believe that our 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 our 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, we anticipate
that the required application amount of a chirally pure form of an agrochemical
could be substantially less than the racemic form and achieve the same or better
results, thereby reducing the 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.
FOCALIN(TM)
We achieved a major milestone on November 14, 2001 when the FDA approved
Focalin(TM) (d-MPH), our refined version of Ritalin(Reg. TM), for the treatment
of ADD/ADHD. Focalin(TM), an advance in single-isomer therapy, was launched by
Novartis on January 21, 2002 and now affords physicians an important new option
for the treatment of ADD/ADHD.
On April 26, 2000, we announced that we had entered into an agreement with
Novartis Pharma AG wherein we granted to Novartis an exclusive worldwide license
(excluding Canada) for the development and marketing of d-MPH. We also granted
rights to all our related intellectual property and patents, including new
formulations of the currently marketed Ritalin(Reg. TM). We received an upfront
payment of $10 million in July 2000 and a milestone payment of $5 million in
December 2000. Upon FDA approval in November 2001, we received an additional
milestone payment of $12.5 million. We are entitled to receive substantial
milestone payments in addition to royalties on the entire family of Ritalin(Reg.
TM) drugs. We have retained the rights to develop Focalin(TM) for
cancer-associated disorders.
In Canada we have licensed d-MPH to Biovail Corporation, which purchased
$2.5 million dollars worth of our stock and will pay us licensing fees,
milestone payments and royalties. In July 2001, Biovail Corporation filed a new
drug submission with Canada's Therapeutic Products Program, or TPP, for d-MPH.
(TPP is the governmental agency in Canada responsible for reviewing and
approving or denying a New Drug Submission, which is an application filed with
TPP for the purpose of review and possible subsequent marketing approval.) We
have been issued patents for the use of d-MPH for the treatment of ADD/ADHD, and
for the once-a-day administration of methlyphenidate drugs in a controlled or
pulsed release formulation that includes both the chirally pure d-MPH and the
racemic form. In addition, we have been issued process patents covering the
manufacturing process for the active substance.
Focalin(TM) and Ritalin(Reg. TM) control the symptoms of ADD/ADHD in
school-age children. The Journal of the American Medical Association has
reported that three to six percent of school-age children (elementary to high
school) have ADD/ADHD. The condition is characterized by symptoms of
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inappropriate inattention, hyperactivity and impulsiveness. It is estimated that
between one and two million children in the United States are now being treated
for these conditions. North American sales of drugs treating the symptoms of
ADD/ADHD are estimated to exceed $750 million per year.
In November 2001, the FDA granted an approvable letter for Ritalin(Reg. TM)
LA, a longer-acting formulation of Ritalin(Reg. TM). We expect Ritalin(Reg. TM)
LA to be approved and launched by Novartis in 2002. Focalin(TM) LA, a
longer-acting formulation of Focalin(TM) is in development testing.
PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to our business. It is
our policy to seek patent protection for our inventions, and also to rely upon
trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
Under an agreement with The Rockefeller University, we have obtained
certain exclusive rights and licenses to manufacture, have manufactured, use and
sell products that are based on compounds identified in research carried out by
The Rockefeller University and us that have activity associated with TN-. The
Rockefeller University has identified a method of using thalidomide and certain
thalidomide-like compounds to treat certain symptoms associated with abnormal
concentrations of TN-, including those manifested in septic shock, cachexia and
HIV infection. In 1995, The Rockefeller University was issued a U.S. patent
which claims such methods. This U.S. patent expires in 2012 and is included in
the patent rights exclusively licensed to us under the license from The
Rockefeller University. However, The Rockefeller University did not seek
corresponding patents in any other country in respect of this invention. There
can be no assurance that this issued patent will provide us with proprietary
protection or commercial advantage. Nor can we guarantee that this patent will
not be either infringed or circumvented by others. Under the license from The
Rockefeller University, we were obligated to pay certain specified royalties to
The Rockefeller University on net sales of licensed products for covered
indications. In November 1999, we agreed with The Rockefeller University to
substitute a lump sum payment and issue stock options to The Rockefeller
University and the inventors in lieu of the royalties previously payable under
the license. The license from The Rockefeller University is coterminous with the
last to expire of the licensed patents and is terminable by The Rockefeller
University only in the event of a breach of the agreement's terms by us which
breach shall fail to be remedied for more than sixty days after notice thereof.
Any termination of the license from The Rockefeller University could have a
material adverse effect on our business, financial condition and results of
operations.
In August, 2001, Celgene, EntreMed, Inc. ("EntreMed"), Children's Medical
Center Corporation ("CMCC") and Bioventure Investments, KFT ("Bioventure")
entered into a new agreement ("New Thalidomide Agreement") relating to patents
and applications owned by CMCC. The patent rights licensed related to uses of
thalidomide. Several United States patents have already issued to CMCC in this
patent family, each of which is set to expire in 2014. Corresponding foreign
patent applications and additional U.S. patent applications are still pending.
In 1994, EntreMed had been granted an exclusive, worldwide license from
CMCC under the CMCC patents and patent applications, and, in 1998, Celgene and
EntreMed entered into an agreement granting Celgene an exclusive sublicense of
EntreMed's rights with respect to thalidomide. Pursuant to the New Thalidomide
Agreement, the 1994 agreement between EntreMed and CMCC was terminated, as was
the 1998 agreement between EntreMed and Celgene, and CMCC directly granted
Celgene an exclusive, worldwide license under the relevant patents and patent
applications relating to thalidomide, superceding and replacing in their
entirety both the 1994 and 1998 agreements.
The terms of the New Thalidomide Agreement, including the financial terms,
are substantially similar to those in the 1998 agreement between EntreMed and
Celgene. However, in connection with the New Thalidomide Agreement, EntreMed
sold to Bioventure all of EntreMed's right, title and interest to certain
payments otherwise due EntreMed under the 1998 agreement with Celgene, net of
any payments owed to CMCC by EntreMed pursuant to the 1994 agreement between
EntreMed and CMCC. Thus, the New Thalidomide Agreement provides that certain
payments that would have been due to EntreMed under the 1998 agreement with
Celgene shall be payable instead directly to CMCC and Bioventure.
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There can be no assurance that additional patents will issue to CMCC from
any of the pending applications included in the New Thalidomide Agreement or
that, if patents issue, such patents will provide us with significant
proprietary protection or commercial advantage. Moreover, there can be no
assurance that any of the existing licensed patents will provide us with
proprietary protection or commercial advantage. Nor can we guarantee that these
licensed patents will not be either infringed, invalidated or circumvented by
others. The license from CMCC is coterminous with the last to expire of the
licensed patents and we must pay royalties for at least 12 years from our first
commercial sales in the United States. The CMCC license is terminable in the
event of a breach by us, which breach shall fail to be remedied for 60 days
after notice thereof. Any termination of the license from CMCC could have a
material adverse effect on our business, financial condition and results of
operations.
We have been issued over 60 U.S. patents and we have filed over 40
additional U.S. patent applications. Of the issued patents, about half relate to
our oncologic or immunologic compounds and uses and 18 are directed to
methylphenidate therapeutic compositions and processes. We have filed patent
applications where appropriate, and in some instances have obtained patents in
certain other countries. Thus, we have foreign patent rights corresponding to
some, but not all, of our U.S. patents. We expect to continue to file patent
applications covering the use of our proprietary inventions. Our U.S. patents
include a patent for a method of delivering a teratogenic drug to a patient
without delivering the drug to pregnant patients. We have not filed for
corresponding foreign patents; however, we have obtained a U.S. patent, and have
patent applications pending which are directed to improvements of this method,
and are seeking worldwide protection for this improvement. We do not currently
have, nor do we intend to seek, patent protection relating to the use of
THALOMID(Reg. TM) to treat ENL.
Signal, which is our basic research division, seeks patent protection for
the molecular targets we discover, as well as therapeutic products and
processes, drug discovery technologies and other inventions. Specifically, our
research division has developed proprietary technology for use in molecular
target discovery, regulatory pathway identification, assay design and potential
product candidates. As of March 1, 2002, our research division owned, in whole
or in part, 16 issued U.S. patents, and had approximately 24 U.S. patent
applications pending. An increasing percentage of our recent patent applications
has been related to potential product candidates, or compounds, that our
research division has discovered. Our research division also holds licenses to
dozens of U.S. patents and pending U.S. patent applications. Some of our
research division's issued patents and pending applications are licensed
exclusively to third parties in connection with sponsored or collaborative
research relationships. There can be no assurance that additional patents will
issue to us from any of our pending applications or that, if patents issue, such
patents will provide us with significant proprietary protection or commercial
advantage. Moreover, there can be no assurance that any of our existing patents
will provide us with proprietary protection or commercial advantage. Nor can we
guarantee that these patents will not be either infringed, invalidated or
circumvented by others. Finally, we cannot guarantee that our patents or pending
applications will not be involved in any interference proceedings before the
United States Patent and Trademark Office.
We are also aware of U.S. patents, which have issued to a third party
claiming subject matter relating to the NF-(kappa)(beta) pathway which appears
to overlap with technology claimed in some of Signal's pending NF-(kappa)(beta)
patent applications. We believe that one or more interference proceedings may be
initiated by the U.S. Patent and Trademark Office to determine priority of
invention for this subject matter. While we cannot predict the outcome of any
such proceedings, in the event we do not prevail, we believe that we can use
alternative methods for our NF-(kappa)(beta) drug discovery program for which we
have issued U.S. patents that are not claimed by the subject matter of the third
party patents.
We are also aware of two additional issued U.S. patents relating to the
NF-(kappa)(beta) pathway. We believe that we have not infringed, and are not
currently infringing, the claims of the patents. Nonetheless, we may in the
future have to prove that we are not infringing these patents or we may be
required to obtain licenses to one or more of these patents. However, we do not
know whether such licenses will be available on commercially reasonable terms,
or at all.
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Prior to the enactment in the United States of new laws adopting certain
changes mandated by the General Agreement on Tariffs and Trade, 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 will 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 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 we will be able to take advantage of this law.
Our success will depend, in part, on our ability to obtain and enforce
patents, protect trade secrets, obtain licenses to technology owned by third
parties when necessary and conduct our business without infringing the
proprietary rights of others. The patent positions of pharmaceutical and
biotechnology firms, including ours, 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, we do not know whether any of our owned or licensed pending
patent 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 whether they will be circumvented or infringed upon by
others.
Since patent applications filed in the United States on or before November
28, 2000 are maintained in secrecy until patents issue and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, we cannot be certain that we, or our licensors, were the first to
make the inventions covered by each of the issued patents or pending patent
applications or that we, or our licensors, were 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, we, or our licensors, may have to participate
in interference proceedings declared by the U.S. Patent and Trademark Office to
determine priority of invention, which could result in the loss of a U.S. patent
or loss of any opportunity to secure U.S. patent protection for the invention.
Even if the eventual outcome is favorable to us, such interference proceedings
could result in substantial cost to us.
Prosecution 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 claims of any
of our owned or licensed patents are challenged by one or more third parties,
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 us to lose exclusivity relating to the subject matter delineated by
such patent claims and may have a material adverse effect on our business. If a
third party is found to have rights covering products or processes used by us,
we could be forced to cease using the products or processes covered by the
disputed rights, subject to significant liabilities to such third party and/or
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 us 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 our owned or licensed patents are determined to be valid
and enforceable, there can be no assurance that competitors will not be able to
design around such patents and compete with us using the resulting alternative
technology.
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We also rely upon unpatented, proprietary and trade secret technology that
we seek to protect, in part, by confidentiality agreements with our
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 we would have adequate remedies for any such breach or
that our 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 us, others have not and will not obtain access to
our proprietary technology or that such technology will not be found to be
non-proprietary or not a trade secret.
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 our ongoing research and development activities. All of
our 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-marketing 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 expenditure of substantial
resources. Regulatory approval, when and if obtained, may be limited in scope
which may significantly limit the indicated uses for which a product 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 us, our collaborators or
licensees to obtain or maintain, or any delay in obtaining, regulatory approvals
could adversely affect the marketing of our products, and our 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 a product and its
formulations. The results of these studies must be submitted to the FDA as part
of an 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 generally 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. If the Phase I trials are
satisfactory, 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, large-scale, multi-center, adequately powered and
well-controlled comparative clinical trials are conducted with patients in an
effort 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 us to rely on historical data relating to the
natural course of disease in untreated patients. In some cases, as a condition
of New Drug Application, or NDA, approval, confirmatory trials are required to
be conducted after the FDA's approval of an NDA in order to resolve any open
issues. The FDA requires monitoring of all aspects of clinical trials, and
reports of all adverse events must be made to the agency, both before and after
drug approval.
The results of the preclinical testing and clinical trials are submitted to
the FDA as part of an NDA for evaluation to determine if the product is adequate
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. When an NDA is approved, the manufacturer must employ 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 that the FDA
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,
19
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 U.S. Congress and possible reinterpretation by the FDA are the
subject of frequent discussion. FDA regulations reflecting certain definitions,
limitations and procedures initially went into effect in January 1993 and were
amended in certain respects in 1998. 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. We have received from the FDA orphan drug approval for thalidomide for
the treatment of ENL. We also have received orphan drug designations for
thalidomide: for the treatment of multiple myeloma; for the treatment of
HIV-associated wasting syndrome; for the treatment of the clinical
manifestations of mycobacterial infection caused by mycobacterium tuberculosis
and non-tuberculosis mycobacteria; for the treatment of severe recurrent apthous
stomatitis in severely, terminally compromised patients; and for the treatment
of Crohn's disease. We also obtained orphan drug designation in Kaposi's sarcoma
and primary brain malignancies as part of our agreement with Children's Medical
Center. However, there can be no assurance that another company also holding
orphan drug designation will not receive approval prior to us for the use of
thalidomide for the treatment of one or more of these indications, other than
ENL. If that were to happen, our 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, or cGMP.
In complying with cGMP, 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. If a
manufacturing facility is not in substantial compliance with these requirements,
regulatory enforcement action may be taken by the FDA which may include seeking
an injunction against shipment of products from the facility and recall of
products previously shipped from the facility.
Failure to comply with applicable FDA regulatory requirements can result in
informal administrative enforcement actions such as warning letters, recalls or
adverse publicity issued by the FDA or in legal actions such as seizures,
injunctions, fines based on the equitable remedy of disgorgement, restitution
and criminal prosecution.
Steps similar to those in the United States must be undertaken in virtually
every other country comprising the market for our products before any such
product can be commercialized in those countries. The approval procedure and the
time required for approval vary 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 us.
COMPETITION
The pharmaceutical and biotechnology industries in which we compete are
each highly competitive. Our competitors include major pharmaceutical and
biotechnology companies, many of which have considerably greater financial,
techincal and marketing resources than us. We also experience competition in the
development of our products and processes from universities and other research
institutions and, in some instances, compete with others in acquiring technology
from such sources.
Competition in the pharmaceutical industry, and specifically in the
oncology and immunology areas being addressed by us, is particularly intense.
Numerous pharmaceutical and biotechnology companies have extensive anti-cancer
discovery and development activities. Novartis Pharma AG, Genentech,
20
AstraZeneca, Millenium Pharmaceuticals, Genta and Cell Therapeutics are among
the companies testing new compounds in the oncology field. EntreMed is also
researching the effectiveness of its own thalidomide analogues as
anti-angiogenic agents in the treatment of retinal disease and cancer.
The pharmaceutical and biotechnology 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, we will be
required to continually upgrade our scientific expertise and technology,
identify and retain capable management, and pursue scientifically feasible and
commercially viable opportunities.
Our competition will be determined in part by the indications for which our
products are developed and ultimately approved by regulatory authorities. An
important factor in competition will be timing of market introduction of our or
our competitors' products. Accordingly, the relative speed with which we 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.
SIGNIFICANT ALLIANCES
From time to time we enter into collaborative research and/or license
agreements with other pharmaceutical companies in which in exchange for the
rights to certain compounds, the partnering company will provide funding in the
form of upfront payments, milestone payments or direct research funding. The
following are our most significant collaborations.
NOVARTIS PHARMA AG
We entered into an agreement with Novartis in April 2000 in which we
granted to Novartis an exclusive worldwide license (excluding Canada) for the
development and marketing of Focalin(TM) (d-MPH). We received a $10 million
upfront payment in July 2000, a $5 million milestone payment for the acceptance
of the NDA filing by the FDA in December 2000 and a $12.5 million milestone
payment upon approval by the FDA to market Focalin(TM) in November 2001. We will
also receive royalties on Focalin(TM) as well as all of Novartis' ADD- and
ADHD-related products.
NOVARTIS PHARMA AG
We entered into a second collaborative agreement with Novartis in December
2000 for joint research of SERMs for the treatment and prevention of
osteoporosis. We received a nonrefundable, upfront payment of $10 million, and
we are entitled to receive milestone payments for specific preclinical, clinical
and regulatory endpoints, as well as royalties upon commercialization of
products receiving FDA marketing approval.
SERONO
In November 1997, we entered into a three-year collaborative research,
development and license agreement with Serono to perform research within the
field of the modulation of NF-(kappa)(beta). We will receive payments based on
the achievement of certain program milestones, as well as royalties upon
commercial sales of certain products, if any. In addition, Serono made quarterly
payments to us to fund research efforts. Serono purchased shares of Signal's
then outstanding Series F Preferred Stock in conjunction with the license
agreement. The original agreement was extended for one year and expired in
November 2001. The agreement has not been renewed and the selected compounds
have been transferred to Serono for further development, for which we will
receive royalties upon commercial sales of such products, if any, as described
above.
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MANUFACTURING
THALOMID(Reg. TM) is formulated and encapsulated for us by Penn
Pharmaceuticals Services Limited of Great Britain in an FDA-approved facility
devoted exclusively to the production of THALOMID(Reg. TM) capsules. Both the
bulk manufacturing facility that produced the drug substance for THALOMID(Reg.
TM) and the Penn facility have been certified as cGMP compliant. In certain
instances, we may be required to make substantial capital expenditures to access
additional manufacturing capacity. In addition, we entered into a contract with
another cGMP certified bulk drug substance supplier for THALOMID(Reg. TM) in
2001. We received regulatory approval for that site in late 2001. We are
actively seeking a backup manufacturer to provide additional capacity for the
formulation and encapsulation of THALOMID(Reg. TM) and expect to have another
THALOMID(Reg. TM) manufacturer under contract in 2002.
The bulk API (active pharmaceutical ingredient) for Focalin(TM) is
manufactured and supplied by Johnson Matthey Inc., who is currently the sole
supplier for the API. The product is manufactured into tablets of different
strengths and packaged by Mikart, Inc. for distribution. We have identified a
backup supplier for the API, and are currently seeking a secondary manufacturer
for tableting and packaging.
INTERNATIONAL EXPANSION
In November 2001, we signed agreements with Pharmion Corporation and Penn
Pharmaceuticals Services Limited to expand the THALOMID(Reg. TM) franchise
internationally. The strategic partnership combines Penn's FDA-compliant
manufacturing capability, Pharmion's global development and marketing expertise
and our extensive intellectual property. The new alliance is designed to
accelerate the establishment of THALOMID(Reg. TM) as an important therapy in the
international markets. Additionally, we acquired an exclusive option to purchase
the branch of Penn Pharmaceutical that manufactures THALOMID(Reg. TM). The
option, if exercised, would enable us to receive a 36 percent royalty on all
international sales of THALOMID(Reg. TM) and to manage the manufacturing of
THALOMID(Reg. TM).
SALES AND COMMERCIALIZATION
We have established an organization of approximately 128 persons to sell
and commercialize THALOMID(Reg. TM). These individuals have considerable
experience in the pharmaceutical industry and many have experience with
oncological and immunological products. We expect to expand our THALOMID(Reg.
TM) sales and commercialization group to support products we develop to treat
oncological and immunological diseases. We intend to market and sell the
products we develop for indications with accessible patient populations. For
drugs with indications with larger patient populations, we may partner with
other pharmaceutical companies. In addition, we are positioned to accelerate the
expansion of these sales resources as appropriate to take advantage of product
in-licensing and product acquisition opportunities.
EMPLOYEES
As of February 15, 2002, we had 383 full-time employees, 167 of whom were
engaged primarily in research and development activities, 128 of whom were
engaged in sales and commercialization activities and the remainder of whom were
engaged in executive and administrative activities. Of these employees, 135 have
advanced degrees, including 77 who have doctorate degrees. We also maintain
consulting arrangements with a number of scientists at various universities and
other research institutions in Europe and the United States.
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this annual
report are forward-looking statements concerning our business, financial
condition, results of operations, economic performance and financial condition.
Forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and within the meaning of Section 21E of the Securities Exchange Act
of 1934 are included, for example, in the discussions about:
22
-- our strategy;
-- new product development or product introduction;
-- product sales, royalties and contract revenues;
-- expenses and net income;
-- our credit risk management;
-- our liquidity;
-- our asset/liability risk management; and
-- our operational and legal risks.
These statements involve risks and uncertainties. Actual results may differ
materially from those expressed or implied in those statements. Factors that
could cause such differences include, but are not limited to, those discussed
under "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISK FACTORS
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT.
We have sustained losses in each year since our incorporation in 1986. We
sustained net losses applicable to common stockholders of $1.9 million and $16.3
million for the years ended December 31, 2001 and 2000. We had an accumulated
deficit of $222.4 million at December 31, 2001. We expect to make substantial
expenditures to further develop and commercialize our products. We also expect
that our rate of spending will accelerate as the result of increased clinical
trial costs and expenses associated with regulatory approval and
commercialization of products now in development.
IF WE ARE UNSUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR PRODUCTS, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED WHICH COULD IMPACT NEGATIVELY ON THE VALUE OF OUR SECURITIES.
Many of our 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 being ready for sale. With the
exception of Focalin(TM), all of our other products will require further
development, clinical testing and regulatory approvals. If it becomes too
expensive to sustain our present commitment of resources on a long-term basis,
we will be unable to continue our necessary development. Furthermore, we cannot
be certain that our clinical testing will render satisfactory results, or that
we will receive required regulatory approval for our products. If any of our
products, even if developed and approved, cannot be successfully commercialized,
our business, financial condition and results of operations could be materially
adversely affected which could impact negatively on the value of our securities.
DURING THE NEXT SEVERAL YEARS, WE WILL BE VERY DEPENDENT ON THE COMMERCIAL
SUCCESS OF THALOMID(Reg. TM), FOCALIN(TM) AND THE ENTIRE RITALIN(Reg. TM)
PRODUCT LINE.
At our present level of operations, we may not be able to attain
profitability if physicians prescribe THALOMID(Reg. TM) only for patients who
are diagnosed with ENL. Under current FDA regulations, we are precluded from
promoting THALOMID(Reg. TM) outside this approved use. The market for the use of
THALOMID(Reg. TM) in patients suffering from ENL is relatively small. We have
conducted clinical studies that appear to show that THALOMID(Reg. TM) is active
when used to treat disorders other than ENL, such as multiple myeloma, but we do
not know whether we will succeed in receiving regulatory approval to market
THALOMID(Reg. TM) for additional indications. FDA regulations place restrictions
on our ability to communicate the results of additional clinical studies to
patients and physicians without first obtaining approval from the FDA to expand
the authorized uses for this product. In addition, if adverse experiences are
reported in connection with the use of THALOMID(Reg. TM) by patients, this could
undermine physician and patient comfort with the product, could limit the
commercial success of the product and
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could even impact the acceptance of THALOMID(Reg. TM) in the ENL market. We are
dependent upon royalties from Novartis Pharma AG's entire Ritalin(Reg. TM)
product line as well as Focalin(TM), although we cannot directly impact their
ability to successfully commercialize these products.
WE FACE A RISK OF PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
INSURANCE.
We may be subject to product liability or other claims based on allegations
that the use of our technology or products has resulted in adverse effects,
whether by participants in our clinical trials or by patients using our
products. 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. These
precautions may not be observed in all cases or, if observed, may not be
effective. Use of thalidomide has also been associated, in a limited number of
cases, with other side effects, including nerve damage. Although we have product
liability insurance that we believe is appropriate, we may be unable to obtain
additional coverage if required, or our coverage may be inadequate to protect us
in the event claims are asserted against us. Our obligation to defend against or
pay any product liability or other claim may be expensive and divert the efforts
of our management and technical personnel.
IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, DEMAND FOR OUR PRODUCTS
WILL DETERIORATE OR NOT MATERIALIZE AT ALL.
It is necessary that our products, including THALOMID(Reg. TM) and
Focalin(TM), achieve market acceptance once they receive regulatory approval, if
regulatory approval is required. A number of factors render the degree of market
acceptance of our products uncertain, including the extent to which we can
demonstrate the products' efficacy, safety and advantages, if any, over
competing products, as well as the reimbursement policies of third-party payors,
such as government and private insurance plans. In particular, the negative
history associated with thalidomide and birth defects may decrease the market
acceptance of THALOMID(Reg. TM). If our products are not accepted by the market,
demand for our products will deteriorate or not materialize at all.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING
RESULTS.
We have historically experienced, and expect to continue for the
foreseeable future to experience, significant fluctuations in our quarterly
operating results. These fluctuations are due to a number of factors, many of
which are outside our control, and may result in volatility of our stock price.
Future operating results will depend on many factors, including:
o demand for our products;
o regulatory approvals for our products;
o the timing of the introduction and market acceptance of new products by
us or competing companies;
o the timing and recognition of certain research and development
milestones and license fees; and
o our ability to control our costs.
WE HAVE NO COMMERCIAL MANUFACTURING FACILITIES AND WE ARE DEPENDENT ON TWO
SUPPLIERS FOR THE RAW MATERIAL AND ONE MANUFACTURER FOR THE FORMULATION AND
ENCAPSULATION OF THALOMID(Reg. TM), AND ARE DEPENDENT ON ONE SUPPLIER FOR THE
RAW MATERIAL AND ONE MANUFACTURER FOR THE TABLETING AND PACKAGING OF
FOCALIN(TM).
We currently have no facilities for manufacturing any products on a
commercial scale. Currently, we can obtain all of our bulk drug material for
THALOMID(Reg. TM) from two suppliers, ChemSyn Laboratories, a Division of
Eagle-Picher Technologies, L.L.C., and Sifavitor s.p.a., and we rely on a single
manufacturer, Penn Pharmaceutical Services Limited, to formulate and encapsulate
THALOMID(Reg. TM). In addition, we currently obtain all of our bulk active
pharmaceutical ingredient for Focalin(TM) from one supplier, Johnson Matthey
Inc., and we rely on a single manufacturer, Mikart, Inc., for the packaging and
tableting of Focalin(TM). Presently, we are actively seeking backups to each of
Penn, Johnson Matthey and
24
Mikart. The FDA requires that all suppliers of pharmaceutical bulk material and
all manufacturers of pharmaceuticals for sale in or from the United States
achieve and maintain compliance with the FDA's current Good Manufacturing
Practice, or cGMP, regulations and guidelines. (cGMP are regulations established
by the FDA that govern the manufacture, processing, packing, storage and testing
of drugs intended for human use.) If the operations of any of Penn, Johnson
Matthey or Mikart were to become unavailable for any reason, any required FDA
review and approval of the operations of an alternative could cause a delay in
the manufacture of THALOMID(Reg. TM) or Focalin(TM). In addition, we have
recently acquired an option to purchase the THALOMID(Reg. TM) manufacturing
operations of Penn, and we intend to continue to utilize outside manufacturers
if and when needed to produce our other products on a commercial scale. If our
outside manufacturers do not meet our requirements for quality, quantity or
timeliness, or do not achieve and maintain compliance with all applicable
regulations, demand for our products or our ability to continue manufacturing
such products could substantially decline, to the extent we depend on these
outside manufacturers.
WE HAVE LIMITED MARKETING AND DISTRIBUTION CAPABILITIES.
Although we have a 128-person commercialization group to support
THALOMID(Reg. TM), we may be required to seek a corporate partner to provide
marketing services with respect to our other products. Any delay in developing
these resources could substantially delay or curtail the marketing of these
products. We have contracted with Ivers Lee Corporation, d/b/a Sharp, a
specialty distributor, to distribute THALOMID(Reg. TM). If Sharp does not
perform its obligations, our ability to distribute THALOMID(Reg. TM) may be
severely restricted.
WE ARE DEPENDENT ON COLLABORATIONS AND LICENSES WITH THIRD PARTIES.
Our ability to fully commercialize our products, if developed, may depend
to some extent upon our entering into joint ventures or other arrangements with
established pharmaceutical companies with the requisite experience and financial
and other resources to obtain regulatory approvals and to manufacture and market
such products. Our present joint ventures and licenses include an agreement with
Biovail Corporation International, wherein we granted to Biovail exclusive
Canadian marketing rights for d-MPH; and an agreement with Novartis Pharma AG
with respect to the joint research of SERMs for the treatment and prevention of
osteoporosis, and a separate agreement wherein we have granted to Novartis an
exclusive, worldwide license (excluding Canada) for the development and
commercialization of d-MPH. Our present and future arrangements may be
jeopardized if any or all of the following occur:
o we are not able to enter into additional joint ventures or other
arrangements on acceptable terms, if at all;
o our joint ventures or other arrangements do not result in a compatible
work environment;
o our joint ventures or other arrangements do not lead to the successful
development and commercialization of any products;
o we are unable to obtain or maintain proprietary rights or licenses to
technology or products developed in connection with our joint ventures
or other arrangements; or
o we are unable to preserve the confidentiality of any proprietary rights
or information developed in connection with our joint ventures or other
arrangements.
THE HAZARDOUS MATERIALS WE USE IN OUR RESEARCH AND DEVELOPMENT COULD RESULT
IN SIGNIFICANT LIABILITIES WHICH COULD EXCEED OUR INSURANCE COVERAGE AND
FINANCIAL RESOURCES.
We use some hazardous materials in our research and development activities.
While we believe we are currently in substantial compliance with the federal,
state and local laws and regulations governing the use of these materials, we
cannot be certain that accidental injury or contamination will not occur. Any
such accident or contamination could result in substantial liabilities, which
could exceed our insurance coverage and financial resources. Additionally, the
cost of compliance with environmental and safety laws and regulations may
increase in the future, requiring us to expend more financial resources either
in compliance or in purchasing supplemental insurance coverage.
25
THE PHARMACEUTICAL INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION
WHICH PRESENTS NUMEROUS RISKS TO US.
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.
If we are delayed in receiving, or are unable to obtain at all, necessary
governmental approvals, we will be unable to effectively market our products.
The testing, marketing and manufacturing of our products require regulatory
approval, including approval from the FDA and, in some cases, from the U.S.
Environmental Protection Agency or governmental authorities outside of the
United States that perform roles similar to those of the FDA and EPA. Certain of
our pharmaceutical products, such as Focalin(TM), fall under the Controlled
Substances Act of 1970 which requires authorization by the U.S. Drug Enforcement
Agency of the U.S. Department of Justice in order to handle and distribute these
products. The regulatory approval process presents several risks to us.
In general, preclinical tests and clinical trials can take many years, and
require the expenditure of substantial resources, and the data obtained from
these tests and trials can be susceptible to varying interpretation that could
delay, limit or prevent regulatory approval. Delays or rejections may be
encountered during any stage of the regulatory process based upon the failure of
the clinical or other data to demonstrate compliance with, or upon the failure
of the product to meet, a 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. Requirements for approval may
become more stringent due to changes in regulatory agency policy, or the
adoption of new regulations or legislation. The scope of any regulatory
approval, when obtained, may significantly limit the indicated uses for which a
product may be marketed and may impose significant limitations in the nature of
warnings, precautions and contraindications which could materially affect the
profitability of the drug. Approved drugs, as well as their manufacturers, are
subject to continuing and on-going review, and discovery of previously unknown
problems with these products or the failure to adhere to manufacturing or
quality control requirements may result in restrictions on their manufacture,
sale or use or in their withdrawal from the market. Regulatory authorities and
agencies may promulgate additional regulations restricting the sale of our
existing and proposed products.
Once a product receives marketing approval, the FDA may not permit us to
market that product for broader or different applications, or may not grant us
clearance with respect to separate product applications which represent
extensions of our basic technology. In addition, the FDA may withdraw or modify
existing clearances in a significant manner or promulgate additional regulations
restricting the sale of our present or proposed products.
Our labeling and promotional activities relating to our products are
regulated by the FDA and state regulatory agencies and, in some circumstances,
by the Federal Trade Commission and DEA, and are subject to associated risks. If
we fail to comply with FDA regulations prohibiting promotion of off-label uses
and the promotion of products for which marketing clearance has not been
obtained, the FDA could bring an enforcement action against us which could
inhibit our marketing capabilities as well as result in penalties.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY.
Our success will depend, in part, on our ability to obtain and enforce
patents, protect trade secrets, obtain licenses to technology owned by third
parties, when necessary, and conduct our business without infringing upon the
proprietary rights of others. The patent positions of pharmaceutical firms,
including ours, can be uncertain and involve complex legal and factual
questions. In addition, the coverage sought in a patent application may not be
obtained or may be significantly reduced before the patent is issued.
Consequently, we do not know whether any of our pending applications, or any
pending application we have licensed-in from third parties, will result in the
issuance of patents or, if any patents are issued, whether they will provide
significant proprietary protection or commercial advantage. Since, under the
current patent laws, patent applications in the United States are maintained in
secrecy from six to 18
26
months, and since publications of discoveries in the scientific and patent
literature often lag behind actual discoveries, we cannot be certain that we
were, or that the third parties from whom we have licensed patents or patent
applications were, the first to make the inventions covered by the patents and
patent applications in which we have rights, or that such patents and patent
applications were the first to be filed on such inventions.
In the event that a third party has also filed a patent application for any
of the inventions described in our patents or patent applications, or those we
have licensed-in, we could become involved in an interference proceeding
declared by the U.S. Patent and Trademark Office to determine priority of
invention. Such an interference could result in the loss of a U.S. patent or
loss of any opportunity to secure U.S. patent protection for that invention.
Even if the eventual outcome is favorable to us, such interference proceedings
could result in substantial cost to us. Moreover, different countries have
different procedures for obtaining patents, and patents issued in 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
us or our licensor, in a given 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
interpretation given to the corresponding patent issued in another country.
Furthermore, even if our patents, or those we have licensed-in, are issued,
there can be no assurance that competitors will not challenge the validity and
enforceability of our patents in court. Alternatively, there can be no assurance
that competitors will not be able to design around such patents and compete with
us using the resulting alternative technology. If any of our issued or licensed
patents are infringed, we cannot guarantee that we will be successful in
enforcing our intellectual property rights or defending the validity or
enforceability of our issued patents. Moreover we cannot assure you that we can
successfully defend against any patent infringement suit that may be brought
against us by a third party. Patent infringement lawsuits in the pharmaceutical
and biotechnology industries can be complex, lengthy and costly to all parties.
An adverse outcome in such a litigation could cause us to lose exclusivity
relating to the subject matter delineated by such patent claims and may have a
material adverse effect on our business. For example, if a third party is found
to have rights covering products or processes used by us, we could be forced to
stop selling these products or using these processes, be subject to significant
liabilities to such third party and/or be required to license technologies from
such third party and thus pay royalties. Further, we rely upon unpatented
proprietary and trade secret technology that we try to protect, in part, by
confidentiality agreements with our collaborative partners, employees,
consultants, outside scientific collaborators, sponsored researchers and other
advisors. We cannot assure you that these agreements will not be breached or
that we would have adequate remedies for any such breach. We cannot assure you
that, despite precautions taken by us, others have not obtained and will not
obtain access to or independently develop our proprietary technology or that
such technology will not be found to be non-proprietary or not a trade secret.
Our right to practice the inventions claimed in some patents which relate to
THALOMID(Reg. TM) arises under licenses granted to us by others, including The
Rockefeller University and Children's Medical Center Corporation. While we
believe these agreements to be valid and enforceable, we cannot assure you that
our rights under these agreements will continue or that disputes concerning
these agreements will not arise.
THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND
SIGNIFICANT TECHNOLOGICAL CHANGE.
The pharmaceutical industry in which we operate is highly competitive and
subject to rapid and significant technological change. Our present and potential
competitors include major pharmaceutical and biotechnology companies, as well as
specialty pharmaceutical firms, such as Novartis Pharma AG, Genentech Inc.,
AstraZeneca, Millenium Pharmaceuticals, Genta Inc., Cell Therapeutics, ImClone
Systems Incorporated, IDEC Pharmaceuticals Corporation, ILEX Oncology, Inc. and
Tularik Inc. Many of these companies have considerably greater financial,
technical and marketing resources than us. We also experience competition from
universities and other research institutions and, in some instances, we compete
with others in acquiring technology from these sources. The pharmaceutical
industry has undergone, and is expected to continue to undergo, rapid and
significant technological change, and we
27
expect competition to intensify as technical advances in the field are made and
become more widely known. The development of products or processes by our
competitors with significant advantages over those that we are seeking to
develop could cause the marketability of our products to stagnate or decline.
SALES OF OUR PRODUCTS ARE DEPENDENT ON THIRD-PARTY REIMBURSEMENT.
Sales of our products will depend, in part, on the extent to which the
costs of our 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 of federal and state governments, and the prices of drugs have
been targeted in this effort. If these organizations and third-party payors do
not consider our products to be cost effective, they may not reimburse providers
of our products or, if they do, the level of reimbursement may not be sufficient
to allow us to sell our products on a profitable basis.
THE PRICE OF OUR COMMON STOCK HAS EXPERIENCED SUBSTANTIAL VOLATILITY AND
MAY CONTINUE TO DO SO IN THE FUTURE.
There has been significant volatility in the market prices for publicly
traded shares of biopharmaceutical companies, including ours. In 2000, the price
of our common stock fluctuated from a high of $76.00 to a low of $18.9167 (as
adjusted for a three-for-one stock split effected in April 2000). In addition,
for the fiscal year 2001, the price of our common stock fluctuated from a high
of $38.88 to a low of $14.40. On March 15, 2002, our common stock closed at a
price of $23.30. The price of our common stock may not remain at or exceed
current levels. The following factors may have an adverse impact on the market
price of our common stock:
o results of our clinical trials;
o announcements of technical or product developments by our competitors;
o market conditions for pharmaceutical and biotechnology stocks;
o market conditions generally;
o governmental regulation;
o healthcare legislation;
o public announcements regarding medical advances in the treatment of the
disease states that we are targeting;
o patent or proprietary rights developments;
o changes in third-party reimbursement policies for our products; or
o fluctuations in our operating results.
THE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE COULD
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Future sales of substantial amounts of our common stock could adversely
affect the market price of our common stock. As of March 15, 2002, there were
outstanding stock options for 7,307,222 shares of common stock, of which
4,563,219 were currently exercisable at an average exercise price of $17.90, and
warrants outstanding that are exercisable for 967,693 shares of common stock at
an average exercise price of $2.49. These amounts include outstanding options of
Signal Pharmaceuticals, Inc. which we assumed as part of a merger with Signal on
August 31, 2000 and which were converted into outstanding options of our common
stock pursuant to an exchange ratio. In addition, as of March 15, 2002, the 9.0%
convertible notes issued on January 20, 1999 can be converted into 285,601
shares of common stock and the 9.0% convertible notes issued on July 6, 1999 can
be converted into 1,578,948 shares of common stock. Upon issuance or conversion,
all of these shares of common stock will be freely tradable.
28
OUR SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BY-LAW PROVISIONS MAY
DETER A THIRD PARTY FROM ACQUIRING US AND MAY IMPEDE THE STOCKHOLDERS' ABILITY
TO REMOVE AND REPLACE OUR MANAGEMENT OR BOARD OF DIRECTORS.
Our board of directors has adopted a shareholder rights plan, the purpose
of which is to protect stockholders against unsolicited attempts to acquire
control of us that do not offer a fair price to all of our stockholders. The
rights plan may have the effect of dissuading a potential acquirer from making
an offer for our common stock at a price that represents a premium to the then
current trading price.
Our 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. An
issuance of preferred stock could discourage a third party from acquiring a
majority of our outstanding voting stock. Additionally, our board of directors
has adopted certain amendments to our by-laws intended to strengthen the board's
position in the event of a hostile takeover attempt. These provisions could
impede the stockholders' ability to remove and replace our management and/or
board of directors.
Furthermore, we are subject to the provisions of Section 203 of the
Delaware General Corporation Law, an anti-takeover law, which may also dissuade
a potential inquirer of our common stock.
ITEM 2. PROPERTIES
We lease 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 three five-year renewal options, and an adjoining 29,000-square foot
facility which has a term ending in July 2010 with two five-year renewal
options. Monthly rental expenses for this facility are approximately $64,000. We
also lease an 18,000-square foot laboratory and office facility in North
Brunswick, New Jersey, under a lease with an unaffiliated party which has a term
ending in December 2009 with two five-year renewal options. Monthly rental
expenses for this facility are approximately $46,000. We believe that our
laboratory facilities are adequate for our research and development activities
for at least the next 12 months.
We also lease offices and research facilities in San Diego, California
under three operating lease agreements for our Signal Research operations. The
minimum annual rents are subject to specified annual rental increases. Signal
also reimburses the lessor for taxes, insurance and operating costs associated
with the leases. Monthly rental expense for these facilities is approximately
$81,000. Under the terms of the lease, we have an outstanding letter of credit
for $150,000 in favor of the lessor, which is fully collateralized by cash. In
December 2001, we entered into a new ten-year lease for a 78,200 square foot
facility to consolidate the Signal Research Division into one building. It is
anticipated that we will occupy that facility during the fourth quarter of 2002.
Monthly rental expense will be approximately $172,000. Rental expense will be
incurred when we occupy the building. We intend to sublease the current
facilities until the lease expires in 2003.
ITEM 3. LEGAL PROCEEDINGS
We are not engaged in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
29
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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
(as adjusted for the three-for-one stock split effected in April 2000):
HIGH LOW
----------- -----------
2001
Fourth Quarter ............... $ 38.88 $ 23.45
Third Quarter ................ 29.50 20.50
Second Quarter ............... 36.48 14.40
First Quarter ................ 33.50 16.94
2000
Fourth Quarter ............... $ 74.875 $ 26.875
Third Quarter ................ 76.00 41.75
Second Quarter ............... 68.50 25.00
First Quarter ................ 62.33 18.92
The last reported sales price per share of common stock on the Nasdaq
National Market on March 15, 2002 was $23.30. As of March 15, 2002, there were
approximately 642 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate paying any cash dividends on our common stock in
the foreseeable future.
30
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data should be read in
conjunction with our Consolidated Financial Statements and the related 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 our Consolidated
Statements of Operations for the years ended December 31, 2001, 2000 and 1999
and the Consolidated Balance Sheet data as of December 31, 2001 and 2000 are
derived from our audited Consolidated Financial Statements which are included
elsewhere in this Annual Report and are qualified by reference to such
Consolidated Financial Statements and related Notes thereto. Some information
has been derived from other audited consolidated financial statements. Our
historical results are not necessarily indicative of future results of
operations.
On August 31, 2000, we completed our merger with Signal Pharmaceuticals,
Inc. (Signal) which was accounted for as a pooling-of-interests. All prior
periods reflect the combined results of Celgene and Signal.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
IN THOUSANDS, EXCEPT PER SHARE DATA ---- ---- ---- ---- ----
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total revenue .................................... $ 114,243 $ 84,908 $ 38,192 $ 19,276 $ 8,701
Costs and operating expenses ..................... 139,186 119,217 68,857 56,705 39,654
Interest and other income (expense), net ......... 20,807 15,496 (1,990) 1,050 193
Tax benefit ...................................... 1,232 1,810 3,018 -- --
--------- ---------- ---------- ---------- ----------
Loss from continuing operations .................. (2,904) (17,003) (29,637) (36,379) (30,760)
Preferred stock dividend (including
accretion and imputed dividends) ............... -- -- 818 25 1,474
--------- ---------- ---------- ---------- ----------
Loss from continuing operations applicable
to common stockholders ......................... $ (2,904) $ (17,003) $ (30,455) $ (36,404) $ (32,234)
========= ========== ========== ========== ==========
Per share of common stock-basic and diluted:
Loss from continuing operations applicable
to common stockholders (1) ..................... $ (0.03) $ (0.25) $ (0.59) $ (0.75) $ (0.87)
========= ========== ========== ========== ==========
Weighted average number of shares of
common stock outstanding (1) ................... 75,108 66,598 51,449 48,811 36,900
========= ========== ========== ========== ==========
DECEMBER 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
IN THOUSANDS ---- ---- ---- ---- ----
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents, and marketable
securities ................................ $ 310,041 $ 306,162 $ 28,947 $ 18,076 $ 34,449
Total assets ................................ 353,982 346,726 46,873 31,486 42,055
Long-term obligations under capital leases
and equipment notes payable ............... 46 633 1,828 2,656 1,899
Convertible notes ........................... 11,714 11,714 38,495 8,349 --
Accumulated deficit ......................... (222,367) (220,455) (204,170) (173,715) (144,266)
Stockholders' equity (deficit) .............. 310,425 295,533 (9,727) 8,393 30,589
(1) Note: amounts are adjusted for the three-for-one stock split effected in
April 2000.
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We were organized in 1980 as a unit of Celanese Corporation, a chemical
company. Our 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, we were spun off as an independent
biopharmaceutical company. In July 1987, we completed an initial public offering
of our common stock and commenced the research and development of chemical and
biotreatment processes for the chemical and pharmaceutical industries. We
discontinued the biotreatment operations in 1994 to focus on our targeted small
molecule cancer and immunology compound development programs and our
biocatalytic chiral chemistry program.
Between 1990 and 1998, our revenue was generated primarily through the
development 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 revenue from
THALOMID(Reg. TM) sales, license agreements and milestone payments related to
our cancer and immunology programs increased, sales of chirally pure
intermediates became a less integral part of our strategic focus. Accordingly,
on January 9, 1998, we completed the sale of our chiral intermediates business
to Cambrex Corporation for $15.0 million. Terms of the sale provided for a
payment to Celgene of $7.5 million at closing and future royalties on product
sales not to exceed the net present value on the initial date of the sale of
$7.5 million, with a guarantee of certain minimum payments to Celgene beginning
in the third year following the close of the agreement.
In July 1998, we received approval from the FDA to market THALOMID(Reg. TM)
(thalidomide) for use in ENL, a side effect of leprosy, and, in late September
1998, we commenced sales of THALOMID(Reg. TM) in the United States. Sales have
grown rapidly each year since the launch and, in 2001, we recorded net sales of
THALOMID(Reg. TM) of $82.0 million.
On February 16, 2000, we completed a follow-on public offering to sell
10,350,000 shares of our common stock at a price of $33.67 per share, as
adjusted for a three-for-one stock split effective April 2000. 8,802,000 shares
were for our account and 1,548,000 were for the account of a selling shareholder
pursuant to the conversion of $9,288,000 of the 9%, January 1999 convertible
notes held by that shareholder. Our proceeds, net of offering expenses, were
approximately $278.0 million.
On April 19, 2000, we signed a license and development agreement with
Novartis Pharma AG in which we granted to Novartis a worldwide license for
d-MPH, our chirally pure version of Ritalin(Reg. TM). The agreement provides for
significant upfront and milestone payments based on achieving various regulatory
approvals and royalties on the entire family of Ritalin(Reg. TM) products upon
approval of d-MPH by the FDA. We have retained the rights for the use of d-MPH
in oncology indications. We received approval from the FDA to market d-MPH, or
Focalin(TM), on November 14, 2001.
On August 31, 2000, we completed a merger, accounted for as a
pooling-of-interests, with Signal Pharmaceuticals, Inc., a privately held
biopharmaceutical company focused on the discovery and development of drugs that
regulate genes associated with disease.
We have sustained losses in each year since our inception as an independent
biopharmaceutical company in 1986. In 2001, we had a net loss of $1.9 million
and, at December 31, 2001, we had an accumulated deficit of $222.4 million. We
expect to make substantial expenditures to further develop and commercialize
THALOMID(Reg. TM), develop our other oncology and immunological disease
programs, and advance our gene regulation and target discovery program. These
expenditures are expected to be more than offset by increasing sales of
THALOMID(Reg. TM), sales of Focalin(TM) to Novartis and royalties from Novartis
on their sales of Ritalin(Reg. TM), revenues from various research
collaborations and license agreements with other pharmaceutical and
biopharmaceutical companies, and investment income.
Subject to the risks described elsewhere in this Annual Report on Form
10-K, we believe there are significant market opportunities for the
pharmaceutical products and processes under development by us. To address these
and potential future opportunities in a timely and competitive manner, we intend
to
32
seek out drug discovery and development collaborations and licensing
arrangements with third parties. We have entered into agreements covering the
manufacture and distribution for us of certain compounds, such as THALOMID(Reg.
TM) and Focalin(TM), and the development by us of processes for producing
chirally pure crop protection agents for license to agrochemical manufacturers.
The latter development activities are performed through Celgro Corporation, our
wholly owned agrochemical subsidiary.
We have established a commercial sales, marketing and customer service
organization to sell and support THALOMID(Reg. TM) and as of February 15, 2002,
we employ 128 persons in this capacity. We intend to develop and market our own
pharmaceuticals for indications with economically accessible patient populations
in our disease franchises. For drugs with indications outside the oncology and
immunological disease fields and for larger patient populations, we may partner
with other pharmaceutical companies. We currently partner with companies such as
Novartis for the development and commercialization of our chirally pure
pharmaceutical and agrochemical products. We expect these arrangements typically
will include some combination of license fees, milestone payments, reimbursement
of research and development expenses and royalty arrangements. We also may
acquire products or companies to expand our product portfolio and to augment our
development and commercialization resources.
Future operating results will depend on many factors, including demand for
our products, regulatory approvals of our products, the timing of the
introduction and market acceptance of new products by us or competing companies,
the timing of research and development milestones and our ability to control
costs.
RESULTS OF OPERATIONS
Fiscal Years Ended December 31, 2001, 2000 and 1999
Total revenue. Our total revenue for the year ended December 31, 2001
increased 35% to $114.2 million compared with $84.9 million for the same period
in 2000. Total revenue in 2001 consisted of product sales of $84.2 million, of
which $82.0 million were THALOMID(Reg. TM) sales and $2.2 million were sales of
Focalin(TM), which received FDA approval in November 2001, research contract
revenue of $28.1 million and related party revenue of $1.9 million compared with
product sales of $62.7 million, all of which were THALOMID(Reg. TM) sales,
research contract revenue of $15.9 million and related party revenue of $6.3
million in 2000. THALOMID(Reg. TM) sales continue to grow in oncology as more
clinical data is presented either in publications or at oncology meetings.
Research contract revenue included approximately $10.4 million of amortization
of upfront payments related to two separate agreements with Novartis Pharma AG
and a milestone payment of $12.5 million from Novartis for receiving FDA
approval to market Focalin(TM). Related party revenue decreased in 2001 as the
initial terms of both related party agreements expired and such entities are no
longer considered related parties. One of those agreements has been extended and
approximately $2.8 million was classified as research contract revenue in 2001.
Our total revenue for the year ended December 31, 2000 increased 122% to $84.9
million compared with $38.2 million for the same period in 1999. Revenue in 2000
consisted of THALOMID(Reg. TM) sales of $62.7 million, research contract revenue
of $15.9 million and related party collaborative agreement revenue of $6.3
million compared with THALOMID(Reg. TM) sales of $24.3 million, research
contract revenue of $9.4 million and revenue from related party collaborative
agreements of $4.5 million in 1999. The growth in THALOMID(Reg. TM) sales
primarily is related to increased use for oncology indications. Research
contract revenue for 2000 included the recognition of $4.6 million of the $10.0
million nonrefundable upfront license fee payment received in connection with a
collaborative agreement entered into with Novartis Pharma AG in April 2000, and
a $5.0 million milestone payment related to the same agreement with Novartis.
Cost of goods sold. Cost of goods sold in 2001 increased approximately 36%
to $13.6 million from approximately $10.0 million in 2000, in line with the
increase in product sales and therefore primarily volume related. Cost of goods
sold for 2001 relating to Focalin(TM) sales was favorably impacted as
manufacturing costs incurred prior to Focalin's(TM) approval in November 2001
were expensed as research and development expenses. This favorability will
continue until the quantity previously expensed is completely sold. Cost of
goods sold in the year ended December 31, 2000 was approximately $10.0 million
compared with approximately $3.2 million in 1999. The increase in cost of goods
sold reflects the higher
33
volume of THALOMID(Reg. TM) sales in 2000. In addition, the cost of goods sold
during the first quarter of 2000 and the full year of 1999 was lower than
anticipated as raw material, formulation and encapsulation costs of
THALOMID(Reg. TM) were charged as research and development expenses prior to
receiving FDA marketing approval.
Research and development expenses. Research and development expenses
consist primarily of salaries and benefits, contractor fees, principally with
contract research organizations to assist in our clinical development programs,
clinical drug supplies for our clinical and preclinical programs as well as
other consumable research supplies, and allocated facilities charges such as
building rent and utilities. Research and development expenses in 2001 increased
20% to $67.7 million from $56.2 million in 2000. Approximately $33 million was
spent on THALOMID(Reg. TM) and its follow-on compounds, the IMiDs(Reg. TM) and
SelCIDs(TM), primarily for preclinical toxicology and phase I/II clinical
trials, regulatory expenses for preparation of an sNDA for THALOMID(Reg. TM) in
multiple myeloma and legal expenses related to patent filings. Approximately
$2.8 million was spent for Focalin(TM) (d-MPH) primarily for drug supply which
was expensed prior to FDA approval. We spent approximately $31.8 million in our
gene regulation, target discovery and agro-chemical programs, primarily for
internal headcount related expenses, laboratory supplies and product development
costs. Research and development expenses increased by 45% for the year ended
December 31, 2000 to approximately $56.2 million compared to $38.8 million in
1999. The increase was primarily due to spending for preclinical toxicology and
pharmacology studies and phase I and phase II clinical trials for our
SelCIDs(TM) and IMiDs(Reg. TM), completion of the pivotal clinical trials and
preparation for filing the NDA for d-MPH, our chirally pure version of
Ritalin(Reg. TM), and preclinical product development for our SERM cancer
program. Additionally, there was an increase in the recognition of deferred
compensation recorded for stock options granted by Signal during the first
quarter of 2000. As a percent of total revenue, research and development
expenses were approximately 59%, 66% and 101% in 2001, 2000 and 1999,
respectively. As a result of increasing revenue, research and development
expense is expected to decrease as a percent of total revenue although the
actual dollar amount will continue to increase as we move our earlier stage
compounds through preclinical and clinical programs.
Reference the table on page 4 of Part I -- Business section for the status
of specific compounds. In general, estimated time to completion within the
various stages of clinical development are as follows:
ESTIMATED COMPLETION
CLINICAL PHASE PERIOD
- -------------- --------------------
Phase I 1-2 years
Phase II 1-2 years
Phase III 2-3 years
Due to the significant risks and uncertainties inherent in preclinical
tests and clinical trials associated with each of our research and development
projects, the cost to complete such projects is not reasonably estimable. The
data obtained from these tests and trials may be susceptible to varying
interpretation that could delay, limit or prevent a project's advancement
through the various stages of clinical development, which would significantly
impact the costs incurred to bring a project to completion.
Selling, general and administrative expenses. Selling expense consist of
salaries and benefits for sales and marketing and customer service personnel,
warehousing and distribution costs, and other commercial expenses to support the
sales force and the education and registration efforts underlying the
S.T.E.P.S.(Reg. TM) program. General and administrative expenses consist
primarily of salaries and benefits, outside services for legal, audit, tax and
investor activities and allocations of facilities costs, principally for rent,
utilities and property taxes. Selling, general and administrative expenses
increased 25% in 2001 to $58.0 million from $46.4 million in 2000. The increased
spending was primarily commercial expenses to support the commercialization of
THALOMID(Reg. TM), with approximately a $2.7 million increase in sales and
marketing expenses primarily related to the sales force expansion and an
increase of $2.5 million in customer service and warehousing and distribution,
primarily related to bringing the previously out-sourced customer service
function in house and a roll out of an enhanced S.T.E.P.S.(Reg. TM) program.
Selling, general and administrative expenses for 2000 increased 73% to $46.4
million from $26.9 million in 1999. The increase was due primarily to the
expansion of our sales and marketing organization and related expenses, and
34
spending for customer service, warehousing and distribution, all to support the
growth in THALOMID(Reg. TM) sales. As a percent of total revenue, selling,
general and administrative expenses were approximately 51%, 55% and 70% in 2001,
2000 and 1999, respectively. While in actual dollar terms these expenses will
continue to increase, the percent of total revenue is expected to decline as
total revenue increases.
Merger-related costs. We incurred one-time costs of $6.7 million associated
with the merger with Signal Pharmaceuticals, Inc. in 2000. These costs were
primarily related to fees for financial advisors, accountants, lawyers and
financial printers.
Interest and other income and interest expense. Interest and other income
increased approximately 19% in 2001, to $20.9 million from $17.6 million in
2000. The increase was primarily related to higher average cash balances and the
recognition of a gain on the sale of certain marketable securities during 2001.
Interest and other income in 2000 increased significantly to $17.6 million from
$1.3 million in 1999. The increase was due to the investment of the net proceeds
of approximately $278.0 million from the follow-on public offering in February
of 2000, and $10.0 million received from Novartis Pharma AG in July 2000 related
to the license and development agreement entered into in the second quarter of
2000.
Interest expense decreased to approximately $83,000 in 2001 compared with
$2.1 million in 2000. The decrease was primarily related to an agreement with
the convertible note-holders to eliminate the interest requirements in exchange
for the right to hedge the shares underlying the convertible notes. Interest
expense decreased significantly in 2000 to $2.1 million from $3.3 million in
1999. The decrease was the result of the conversion to equity of a significant
portion of the outstanding long-term convertible notes throughout 2000.
Loss from continuing operations. The loss from continuing operations
decreased significantly in 2001, to $2.9 million from $17.0 million in 2000. The
decreased loss resulted from an increase in total revenue of $29.3 million, an
increase in net interest and other income and expense of $5.3 million and an
income tax benefit of $1.2 million from the sale of a portion of our New Jersey
state net operating loss carryforwards, partially offset by an increase in costs
and expenses of $20.0 million The loss from continuing operations decreased 43%
to $17.0 million in 2000 from $29.6 million in 1999. The decreased loss was the
result of higher THALOMID(Reg. TM) sales, increased revenues from research
contracts and collaborative agreements and an income tax benefit of $1.8 million
from the sale of a portion of our New Jersey state net operating loss
carryforwards, partially offset by higher cost of goods sold, research and
development expenses, selling, general and administrative expenses and one-time
merger-related costs.
Gain on sale of chiral assets. We received royalty payments from Cambrex
Corporation of approximately $1.0 million in 2001 and $719,000 in 2000, which
represent additional portions of the purchase price paid by Cambrex for our
chiral assets.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our working capital requirements
primarily through product sales, private and public sales of our debt and equity
securities, income earned on the investment of proceeds from the sale of such
securities and revenue from research contracts and license and milestone
payments. Since our initial product launch in the third quarter of 1998, we have
recorded net product sales totaling approximately $174.0 million through
December 31, 2001. We also received $37.5 million from two separate research and
license agreements during 2000 and 2001.
Our working capital at December 31, 2001 increased approximately 3% to
$306.5 million from $298.2 million in 2000. The increase in working capital was
primarily due to a higher combination of cash, cash equivalents and marketable
securities and lower current liablilities.
Cash and cash equivalents decreased to $47.1 million in 2001 from $161.4
million in 2000 while investments in marketable debt securities increased to
$262.9 million in 2001 from $144.8 million in 2000. Total cash, cash equivalents
and marketable securities increased by approximately $3.9 million reflecting the
receipt of funds from revenue received from research contracts and collection of
receivables from sales of THALOMID(Reg. TM).
35
We expect that our rate of spending will increase as the result of research
and product development spending, increased clinical trial costs, increased
expenses associated with the regulatory approval process and commercialization
of products currently in development, increased costs related to the
commercialization of THALOMID(Reg. TM) and increased capital investments. On
February 16, 2000, we completed a public offering of 10,350,000 shares of our
common stock, as adjusted for a three-for-one stock split effective April 2000.
Proceeds from the transaction net of expenses, were approximately $278.0
million. These funds, combined with the increasing revenue from product sales
and various research agreements and collaborations, are expected to provide
sufficient capital for our operations for the foreseeable future.
Contractual Obligations
Our major outstanding contractual obligations relate to our operating
(facilities) leases. Our facilities lease expense in future years will increase
over previous years as a result of a new lease arrangement entered into in 2001.
We lease 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 three five-year renewal options, and a 29,000-square foot facility
which has a term ending in July 2010 with two five-year renewal options. Monthly
rental expenses for this facility are approximately $64,000. We also lease an
18,000-square foot laboratory and office facility in North Brunswick, New
Jersey, under a lease with an unaffiliated party which has a term ending in
December 2009 with two five-year renewal options. Monthly rental expenses for
this facility are approximately $46,000. We believe that our laboratory
facilities are adequate for our research and development activities for at least
the next 12 months.
We also lease offices and research facilities in San Diego, California
under three operating lease agreements for our Signal Research operations. The
minimum annual rents are subject to specified annual rental increases. Signal
also reimburses the lessor for taxes, insurance and operating costs associated
with the leases. Monthly rental expense for these facilities is approximately
$81,000. Under the terms of the lease, we have an outstanding letter of credit
for $150,000 in favor of the lessor, which is fully collateralized by cash. In
December 2001, we entered into a new ten-year lease for a 78,200 square foot
facility to consolidate the Signal Research Division into one building. It is
anticipated that we will occupy that facility during the fourth quarter of 2002.
Monthly rental expense will be approximately $172,000. Rental expense will be
incurred when we occupy the building. We intend to sublease the current
facilities until the lease expires in 2003.
For a schedule of payments related to the operating leases, refer to the
table included in footnote 17(a) to the consolidated financial statements
included elsewhere in this Annual Report.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants discuss their most
"critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. While
our significant accounting policies are more fully described in Note 2 to our
consolidated financial statements included in this annual report, we believe the
following accounting policy to be critical:
Revenue Recognition. We have formed collaborative research and development
agreements and alliances with several pharmaceutical companies. These agreements
are in the form of research and development and license agreements. The
agreements are for both early and late stage compounds and are focused on
specific disease areas. For the early stage compounds, the agreements are
relatively short-term agreements that are renewable depending on the success of
the compounds as they move
36
through preclinical development. The agreements call for nonrefundable upfront
payments, milestone payments on achieving significant milestone events, and in
some cases ongoing research funding. The agreements also contemplate royalty
payments on sales if and when the compound receives FDA marketing approval.
In accordance with Staff Accounting Bulletin No. 101 ("SAB 101") Revenue
Recognition in Financial Statements, upfront payments are recorded as deferred
revenue and recognized over the estimated service period. If the estimated
service period is subsequently modified, the period over which the upfront fee
is recognized is modified accordingly on a prospective basis. Revenue from the
achievement of research and development milestones, which represent the
achievement of a significant step in the research and development process, are
recognized when and if the specific milestones are achieved. Continuation of
certain contracts is dependent upon our achieving specific contractual
milestones; however, none of the payments received to date are refundable
regardless of the outcome of the project. Research funding is recorded in the
period during which the expenses covered by the funding occurred.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations be accounted for under a single method--the purchase
method. Use of the pooling-of-interests method no longer is permitted. SFAS No.
141 requires that the purchase method be used for business combinations
initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment. The amortization
of goodwill ceases upon adoption of the Statement, which for calendar year-end
companies, will be January 1, 2002. SFAS No. 142 has no financial impact on us
as we do not have any goodwill or intangible assets which resulted from business
combinations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Our holdings of financial instruments are comprised of commercial paper,
U.S. government and corporate securities. These financial instruments may be
classified as securities available for sale and carried at fair value or held to
maturity and carried at amortized cost depending upon our intent. Securities
classified as available for sale are held for an indefinite period of time and
are intended to be used to meet our ongoing liquidity needs. Unrealized gains
and losses (which are deemed to be temporary) on available for sale securities,
if any, are reported in a separate component of stockholders' equity. The cost
of all debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. The amortization, along with realized gains and losses,
is included in interest and other income. We do not use financial derivatives
for investment or trading purposes. As of December 31, 2001 and 2000, all
securities have been classified as available for sale.
We have established guidelines relative to diversification and maturities
to maintain safety and liquidity. These guidelines are reviewed periodically and
may be modified depending on market conditions. Although our investments are
subject to credit risk, our investment policy specifies credit quality standards
for our investments and limits the amount of credit exposure from any single
issue, issuer or type of investment. Our investments are also subject to
interest rate risk and will decrease in value if market interest rates increase.
Due to the limited number of foreign currency transactions, our foreign exchange
currency risk is minimal.
37
The table below presents the principal amounts and related weighted average
interest rates by year of maturity for our investment portfolio as of December
31, 2001:
2002 2003 2004 2005
---- ---- ---- ----
(in Thousands $)
Fixed Rate .................... $ 5,250 $ 36,800 $ 5,000 $ 28,510
Average Interest Rate ......... 6.66% 6.63% 6.75% 7.70%
Variable Rate ................. -- -- -- --
Average Interest Rate ......... -- -- -- --
------- -------- ------- --------
Total ....................... $ 5,250 $ 36,800 $ 5,000 $ 28,510
2007 AND
2006 BEYOND TOTAL FAIR VALUE
---- -------- ----- ----------
Fixed Rate .................... $ 64,307 $ 113,000 $ 252,867 $260,900
Average Interest Rate ......... 6.80% 6.90% 6.92% --
Variable Rate ................. -- $ 2,000 $ 2,000 $ 2,000
Average Interest Rate ......... -- 8.00% 8.00% --
-------- --------- --------- --------
Total ....................... $ 64,307 $ 115,000 $ 254,867 $262,900
At December 31, 2001, our 9% January 1999 and July 1999 convertible notes with
outstanding principal amounts of $1,713,600 and $10,000,000, respectively, no
longer accrue interest. These convertible notes are convertible into our common
stock at a conversion price of $6.00 and $6.33 per share, respectively. The fair
value of fixed interest rate instruments are affected by changes in interest
rates and in the case of the convertible notes by changes in the price of our
common stock. An increase in the price of our common stock results in an
increase in the fair value of the convertible notes.
We do not use derivative financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11, Executive Compensation, is presented
below. Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, all
other information required by Part III (Items 10, 12 and 13) is being
incorporated by reference herein from our definitive proxy statement (or an
amendment to Form 10-K) to be filed with the Securities and Exchange Commission
on or before April 30, 2002 in connection with its 2002 Annual Meeting of
Stockholders.
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation paid, or
payable, by us for services rendered in all capacities to our Chief Executive
Officer and each of our most highly paid executive officers who earned more than
$100,000, for each of the last three fiscal years in which such officers were
executive officers for all or part of the year.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- -------------------------------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND COMPENSATION STOCK UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) AWARD(S) ($) OPTIONS (#) ($)
- ------------------ ---- ---------- --------- ------------ ------------ ----------- -------------
John W. Jackson 2001 506,250 230,344 10,200(1) 0 100,000 13,390(2)
Chairman and 2000 372,500 338,975 14,280(1) 0 450,000 13,390(2)
Chief Executive 1999 300,000 390,000 19,200(1) 0 660,000 13,390(2)
Officer
Sol J. Barer, Ph.D. 2001 405,000 131,625 10,200(1) 0 50,000 0
President and 2000 308,550 194,387 14,280(1) 0 255,000 0
Chief Operating 1999 255,833 230,250 19,200(1) 0 210,000 0
Officer
Robert J. Hugin(3) 2001 354,375 92,138 10,200(1) 0 35,000 0
Sr. V.P. & Chief 2000 270,500 132,545 14,280(1) 0 180,000 0
Financial Officer 1999 127,385 168,000 7,200(1) 0 450,000 0
- ----------
(1) Reflects matching contributions under the Company's 401(k) plan.
(2) Reflects life insurance premiums for a life insurance policy for Mr.
Jackson.
(3) Mr. Hugin has been employed by us since June 1999.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
John W. Jackson, Sol J. Barer and Robert J. Hugin (each an "Executive") are
employed pursuant to substantially similar employment agreements (the
"Employment Agreements") providing for their continued employment until January
1, 2003 (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 we or Executive gives written notice to the
other at least six months prior to the expiration of the Employment Period. The
Employment Agreements provide Messrs. Jackson, Barer and Hugin with an initial
base salary (which has been increased and which from time to time may be further
increased by the Board of Directors, or a committee thereof) of $300,000,
$258,000 and $240,000, respectively, per annum. In addition, each of the
Employment Agreements provides for an annual target bonus in an amount equal to
65%, 45% and 35%, respectively, of Executive's base salary measured against
objective criteria to be determined by the Board of Directors, or a committee
thereof. The Employment Agreements also provide that Messrs. Jackson, Barer and
Hugin are entitled to continue to
39
participate in all group health and insurance programs and all other fringe
benefit or retirement plans which are generally available to our employees. Each
of the Employment Agreements provides that if the Executive is terminated by us
without cause or due to Executive's disability, he shall be entitled to receive
a lump-sum payment in an amount equal to Executive's annual base salary and a
pro rata share of Executive's annual target bonus. Upon the occurrence of a
change in control (as defined in the Employment Agreements) and thereafter, each
Employment Agreement provides that if (a) at any time within one year of a
change in control Executive's employment is terminated by us without cause or
for disability or by Executive for good reason (as defined in the Employment
Agreement) or (b) at any time within 90 days prior to a change in control,
Executive's employment is terminated by us without cause or by Executive for
good reason, Executive shall be entitled to receive: (i) a lump sum payment in
an amount equal to three times Executive's base salary and three times
Executive's highest annual bonus within the three years prior to the change in
control; (ii) any accrued benefits; (iii) payment of health and welfare premiums
for Executive and his dependants; and (iv) full and immediate vesting of all
stock options and equity awards; provided, however, that such payment shall be
reduced by any payments made to Executive prior to the change in control
pursuant to Sections 10(a)(iv) and (v) of the Employment Agreements. Each
Employment Agreement also provides that Executive shall be entitled to receive a
gross-up payment on any payments made to Executive that are subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code, except that a
gross-up will not be made if the payments made to Executive do not exceed 105%
of the greatest amount that could be paid to Executive such that the receipt of
payments would not give rise to the excise tax. Each Executive is subject to a
non-compete which applies during the period the Executive is employed and until
the first anniversary of the date Executive's employment terminates (the
non-compete applies to the second anniversary of the date Executive's employment
terminates if the Executive receives change in control payments and benefits).
STOCK OPTIONS
The following table provides information concerning grants of stock options
to the following named executive officers in fiscal 2001.
OPTION GRANTS DURING FISCAL 2001
POTENTIAL REALIZABLE VALUE
AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
DATE OF OPTIONS EMPLOYEES PRICE EXPIRATION ------------------------
NAME GRANT GRANTED(1) IN 2000(2) PER SHARE DATE 5% 10%
- ---- ------- ---------- ---------- --------- ---------- ---------- ----------
John W. Jackson ............. 1/17/01 100,000 9.0% $ 24.875 1/17/11 $1,564,638 $3,965,075
Sol J. Barer, Ph.D. ......... 1/17/01 50,000 4.5% $ 24.875 1/17/11 $ 782,319 $1,982,538
Robert J. Hugin ............. 1/17/01 35,000 3.1% $ 24.875 1/17/11 $ 547,623 $1,387,776
- ----------
* Less than one percent (1%)
(1) All options granted in 2001 were granted pursuant to the Company's 1998
Long-Term Incentive Plan. The grants to Mr. Jackson, Dr. Barer and Mr.
Hugin are exercisable in annual increments of 33 1/3% of each total grant,
beginning on the date of grant. All options were granted at the fair market
value of Common Stock on the effective date of grant.
(2) The total number of options granted to employees in 2001 was 1,111,450.
The following table sets forth information for each of the named executive
officers with respect to the value of options exercised during the year ended
December 31, 2001 and the value of outstanding and unexercised options held as
of December 31, 2001. There were no SARs exercised during 2001 and none were
outstanding as of December 31, 2001.
40
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES VALUE AT DECEMBER 31, 2001 AT DECEMBER 31, 2001(2)
ACQUIRED REALIZED --------------------------- ---------------------------
NAME ON EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------- ----------- ------------- ----------- -------------
John W. Jackson ............. 538,870 7,829,835 473,331 436,669 $ 5,109,239 $ 6,819,951
Sol J. Barer, Ph.D. ......... 35,034 507,432 580,108 188,334 $11,311,175 $ 2,373,153
Robert J. Hugin ............. 68,500 913,312 262,466 233,334 $ 4,005,059 $ 4,385,633
- ----------
(1) Represents the difference between the average high and low trading price of
the Common Stock on the Nasdaq National Market on the date the shares were
acquired upon exercise and the exercise price of the options exercised
multiplied by the number of shares acquired upon exercise.
(2) Represents the difference between the closing market price of the Common
Stock as reported by Nasdaq on December 31, 2001 of $31.92 per share and
the exercise price per share of the in-the-money options multiplied by the
number of shares underlying the in-the-money options.
COMPENSATION COMMITTEE REPORT
The Management Compensation and Development Committee (the "Compensation
Committee") determines our executive compensation policies. The Compensation
Committee determines the compensation of our 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
Our 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 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, commercial, and individual goals.
We do not have a pension plan (other than the 401(k) 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.
On and after September 19, 2000, stock options granted to executives at the
vice-president level and above contain a reload feature which provides that if
(1) the optionee exercises all or any portion of the stock option (a) at least
six months prior to the expiration of the stock option, (b) while employed by us
or our affiliates and (c) prior to the expiration date of the 1998 Long-Term
Incentive Plan and (2) the optionee pays the exercise price for the portion of
the stock option so exercised or pays applicable withholding taxes by using
Common Stock owned by the optionee for at least six months prior to the date of
exercise, the optionee shall be granted a new stock option under the 1998
Long-Term Incentive Plan on the date all or any portion of the stock option is
exercised to purchase the number of shares of Common Stock equal to the number
of shares of Common Stock exchanged by the optionee to exercise the stock option
or to pay withholding taxes thereon. The reload stock option will be exercisable
on the same terms and conditions as apply to the original stock option except
that (x) the reload stock option will become exercisable in full on the day
which is six months after the date the original stock option is exercised, (y)
the exercise price shall be the fair market value (as defined in the 1998
Long-Term Incentive Plan) of the Common Stock on the date the reload stock
option is granted and (z) the expiration of the reload stock option will be the
date of expiration of the original stock option. An optionee may not reload the
reload stock option unless otherwise permitted by the Compensation Committee.
41
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 we compete for our 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.
Deferred Compensation. Certain designated executives may elect to defer the
receipt of a portion of their base salary and bonuses, the receipt of restricted
stock and the delivery of stock option gains to our Deferred Compensation Plan,
an unfunded non-qualified deferred compensation arrangement. We make a matching
contribution to the Deferred Compensation Plan on behalf of certain executives
in the plan at a rate specified by the Compensation Committee.
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 us. The
size of grants is tied to comparative biotechnology industry practices. To
determine such comparative data, we rely on outside compensation consultants and
third-party industry surveys.
Under our 2001 incentive program, it was agreed, subject to the achievement
of certain goals in 2001 by us, that we would grant at a future date options to
purchase shares of Common Stock. A similar incentive program has been designed
for 2002 based on attainment of corporate, business unit and individual goals.
The program is open to all regular full-time employees with at least six months
of service, other than our executive officers.
Chief Executive Officer Compensation. Pursuant to Mr. Jackson's contract
with us entered into on January 1, 2000, Mr. Jackson received base salary of
$506,250 for 2001. Mr. Jackson also received a bonus of $230,344 for 2001.
Factors considered in determining Mr. Jackson's bonus included the successful
attainment of several important milestones in the development of our products,
as well as comparisons to total compensation packages of chief executive
officers at corporations within our industry that are of comparable size.
Policy with Respect to Qualify Compensation Deductibility. Our policy with
respect to the deductibility limit of Section 162(m) of the Internal Revenue
Code of 1986, as amended, generally is to preserve the federal income tax
deductibility of compensation paid when it is appropriate and is in the best
interest of us and our stockholders. However, we reserve the right to authorize
the payment of non-deductible compensation if we deem that it is appropriate.
Members of the Compensation Committee
Richard C. E. Morgan, Chairman
Frank T. Cary
Jack L. Bowman
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Richard C. E. Morgan,
Chairman, Frank T. Cary and Jack L. Bowman. Each is an outside director.
DIRECTOR COMPENSATION
Directors do not receive salaries 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 our employees ("Non-Employee Directors")
receive $1,500 for each Board Meeting attended and 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 "Directors' Option
Plan").
42
The Directors' Option Plan was adopted by the Board of Directors on April
5, 1995, and approved by our stockholders at the 1995 Annual Meeting of
Stockholders. At our Annual Meeting held in 1997, the Director's Option Plan was
amended to increase the number of shares of our Common Stock that may be issued
upon exercise of options granted thereunder from 750,000 shares to 1,050,000
shares. At our Annual Meeting held in 1999, the Directors' Option Plan was
amended to increase the number of shares of our Common Stock that may be issued
upon exercise of options granted thereunder from 1,050,000 shares to 1,800,000
shares. The Directors' Option Plan currently provides for the granting to
Non-Employee Directors of non-qualified options to purchase an aggregate of not
more than 1,800,000 shares (subject to adjustment to reflect changes in
capitalization) of Common Stock.
Under the Directors' Option Plan, each Non-Employee Director as of April 5,
1995 was granted a non-qualified option to purchase 60,000 shares of Common
Stock, and each new Non-Employee Director upon the date of his or her 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 Directors' Option 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 ceases to be a Non-Employee Director
for any reason, or is not nominated for election by our stockholders, all
unvested portions of a stock option will automatically vest.
In 2001, pursuant to the Directors' Option Plan, each of Messrs. Bowman,
Cary and Morgan and Drs. Hayes, Robb and Kaplan received an option to purchase
10,000 shares of Common Stock at an exercise price of $30.81 per share, the fair
market value of the stock on the date of the grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 11.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 11.
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(a)(1), (1)(2) See Index to Consolidated Financial Statements and
Consolidated Financial Statement Schedule immediately following Exhibit Index.
(b) None
(c) Exhibits
The following exhibits are filed with this report:
EXHIBIT
NO. EXHIBIT DESCRIPTION
- -------- -------------------
3.1 Certificate of Incorporation of the Company, as amended (incorporated
by reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1, dated July 24, 1987).
3.2 Bylaws 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 1986 Stock Option Plan (incorporated by reference to Exhibit A to the
Company's Proxy Statement dated April 13, 1990).
10.3 1992 Long-Term Incentive Plan (incorporated by reference to Exhibit A
to the Company's Proxy Statement, dated May 30, 1997).
10.4 1995 Non-Employee Directors' Incentive Plan (incorporated by reference
to Exhibit A to the Company's Proxy Statement, dated May 24, 1999).
10.5 Form of Warrant to be issued in connection with the issuance of Series
B Convertible Preferred Stock, pursuant to a Securities Purchase
Agreement among the Company and certain Investors as set forth therein
(the "Chancellor Entities"), such Warrants thereafter assigned by the
Chancellor Entities to Deutsche Bank A.G. (incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K dated June 10,
1997).
10.6 Rights Agreement, dated as of September 16, 1996, between the Company
and American Stock Transfer & Trust Company (incorporated by reference
to the Company's Registration Statement on Form 8A, filed on September
16, 1996), as amended on February 28, 2000 (incorporated by reference
to the Company's Current Report on Form 8-K filed on February 22,
2000).
10.7 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).
10.8 Employment Agreement dated as of January 1, 2000 between the Company
and John W. Jackson (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1999).
10.9 Employment Agreement dated as of January 1, 2000 between the Company
and Sol J. Barer (incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1999).
10.10 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)).
10.11 Celgene Corporation Replacement Stock Option Plan (incorporated by
reference to Exhibit 99.1 of the Company's Registration Statement on
Form S-3 dated May 18, 1998 (No. 333-52963)).
44
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ---------- -------------------
10.12 Form of Stock Option Agreement to be issued in connection with the
Celgene Corporation Replacement Stock Option Plan (incorporated by
reference to Exhibit 99.2 of the Company's Registration Statement on
Form S-3 dated May 18, 1998 (No. 333-52963)).
10.13 1998 Long-Term Incentive Plan (incorporated by reference to Exhibit A
to the Company's Proxy Statement, dated May 18, 1998).
10.14 Stock Purchase Agreement dated June 23, 1998 between the Company and
Biovail Laboratories Incorporated (incorporated by reference to the
Company's Current Report on Form 8-K filed on July 17, 1998).
10.15 Employment Agreement dated as of January 1, 2000 between the Company
and Robert J. Hugin (incorporated by reference to Exhibit 10.18 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1999).
10.16 Note Purchase Agreement dated January 20, 1999 between the Company
and the Purchasers named on Schedule I to the agreement in connection
with the purchase of $15,000,000 principal amount of the Company's
9.00% Senior Convertible Note Due January 20, 2004 (incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form
10-K for the year ended December 31, 1999).
10.17 Form of 9.00% Senior Convertible Note Due January 20, 2004
(incorporated by reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999).
10.18 Registration Rights Agreement dated as of January 20, 1999 between
the Company and the Purchasers in connection with the issuance of the
Company's 9.00% Senior Convertible Note Due January 20, 2004
(incorporated by reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999).
10.19 Note Purchase Agreement dated July 6, 1999 between the Company and
the Purchasers named in Schedule I to the agreement in connection
with the purchase of $15,000,000 principal amount of the Company's
9.00% Senior Convertible Note Due June 30, 2004 (incorporated by
reference to Exhibit 10.25 to the Company's Annual Report on Form
10-K for the year ended December 31, 1999).
10.20 Form of 9.00% Senior Convertible Note Due June 30, 2004 (incorporated
by reference to Exhibit 10.26 to the Company's Annual Report on Form
10-K for the year ended December 31, 1999).
10.21 Registration Rights Agreement dated as of July 6, 1999 between the
Company and the Purchasers in connection with the issuance of the
Company's 9.00% Senior Convertible Note Due June 30, 2004
(incorporated by reference to Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999).
10.22 Development and License Agreement between the Company and Novartis
Pharma AG, dated April 19, 2000 (incorporated by reference to Exhibit
10.21 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000).
10.23 Collaborative Research and License Agreement between the Company and
Novartis Pharma AG, dated December 20, 2000 (incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000).
10.24 Custom Manufacturing Agreement between the Company and Johnson
Matthey Inc., dated March 5, 2001.
10.25 Manufacturing and Supply Agreement between the Company and Mikart,
Inc., dated as of April 11, 2001.
10.26 Distribution Services Agreement between the Company and Ivers Lee
Corporation, d/b/a Sharp, dated as of June 1, 2000.
23.1 Consent of KPMG LLP.
45
EXHIBIT
NO. EXHIBIT DESCRIPTION
- -------- -------------------
23.2 Consent of Ernst & Young LLP, Former Independent Auditors of Signal
Pharmaceuticals, Inc..
24.1 Power of Attorney (included in Signature Page).
46
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person or entity whose signature
appears below constitutes and appoints John W. Jackson, Sol J. Barer and Robert
J. Hugin, and each of them, its true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for it and in its name,
place and stead, in any and all capacities, to sign any and all amendments to
this Form 10-K and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all contents and purposes as it might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes may
lawfully do or cause to be done by virtue thereof.
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: March 29, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ John W. Jackson Chairman of the Board and March 29, 2002
- ---------------------------- Chief Executive Officer
John W. Jackson
/s/ Sol J. Barer Director, President and Chief March 29, 2002
- ---------------------------- Operating Officer
Sol J. Barer
/s/ Robert J. Hugin Director, Chief Financial Officer March 29, 2002
- ---------------------------- and Senior Vice President
Robert J. Hugin
/s/ Jack L. Bowman Director March 29, 2002
- ----------------------------
Jack L. Bowman
/s/ Frank T. Cary Director March 29, 2002
- ----------------------------
Frank T. Cary
/s/ Arthur Hull Hayes, Jr. Director March 29, 2002
- ----------------------------
Arthur Hull Hayes, Jr.
47
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Gilla Kaplan Director March 29, 2002
- ----------------------------
Gilla Kaplan
/s/ Richard C.E. Morgan Director March 29, 2002
- ----------------------------
Richard C.E. Morgan
/s/ Walter L. Robb Director March 29, 2002
- ----------------------------
Walter L. Robb
/s/ James R. Swenson Controller (Chief Accounting Officer) March 29, 2002
- ----------------------------
James R. Swenson
The foregoing constitutes a majority of the directors.
48
CELGENE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Consolidated Financial Statements
Independent Auditors' Report ............................................................ F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 ............................ F-4
Consolidated Statements of Operations -- Years Ended December 31, 2001, 2000 and 1999 ... F-5
Consolidated Statements of Stockholders' Equity (Deficit) -- Years Ended December 31,
2001,
2000 and 1999 ......................................................................... F-6
Consolidated Statements of Cash Flows -- Years Ended December 31, 2001, 2000 and 1999 ... F-9
Notes to Consolidated Financial Statements .............................................. F-11
Consolidated Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts ........................................ F-31
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Celgene Corporation:
We have audited the consolidated financial statements of Celgene
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the consolidated financial statement schedule as listed on the accompanying
index. These consolidated financial statements and consolidated financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedule based on our audits.
The consolidated financial statements of Celgene Corporation and
subsidiaries for the year ended December 31, 1999 have been restated to reflect
the pooling-of-interests transaction with Signal Pharmaceuticals, Inc. as
described in note 1 to the consolidated financial statements. We did not audit
the 1999 financial statements of Signal Pharmaceuticals, Inc., which statements
reflect total revenues constituting 31% of the related consolidated total in
1999. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Signal Pharmaceuticals, Inc. for the year ended December 31, 1999 is based
solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to in the first paragraph present
fairly, in all material respects, the financial position of Celgene Corporation
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ KPMG LLP
Short Hills, New Jersey
January 30, 2002
F-2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Signal Pharmaceuticals, Inc.
We have audited the related statements of operations, stockholders' equity,
and cash flows of Signal Pharmaceuticals, Inc. for the year ended December 31,
1999 (not presented separately herein). 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of Signal Pharmaceuticals, Inc.'s
operations and its cash flows for the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
February 4, 2000
F-3
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 47,141,291 $ 161,393,835
Marketable securities available for sale ............................... 262,900,049 144,767,777
Accounts receivable, net of allowance of $998,395 and $382,577 at
December 31, 2001 and 2000, respectively .............................. 13,415,101 9,846,000
Inventory .............................................................. 3,603,462 4,266,257
Other current assets ................................................... 9,362,423 11,747,727
-------------- --------------
Total current assets ................................................ 336,422,326 332,021,596
Plant and equipment, net ............................................... 10,645,647 8,395,902
Other assets ........................................................... 6,914,445 6,308,417
-------------- --------------
Total assets ........................................................ $ 353,982,418 $ 346,725,915
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 10,831,464 $ 10,868,473
Accrued expenses ....................................................... 13,667,022 9,511,507
Current portion of capital leases and note obligation .................. 586,731 929,258
Current portion of deferred revenue .................................... 4,882,668 12,473,574
-------------- --------------
Total current liabilities ........................................... 29,967,885 33,782,812
Long term convertible notes ............................................ 11,713,600 11,713,600
Capitalized leases and note obligation, net of current portion ......... 46,215 632,946
Deferred revenue, net of current portion ............................... -- 4,866,000
Other non-current liabilities .......................................... 1,829,251 197,685
-------------- --------------
Total liabilities ................................................... $ 43,556,951 $ 51,193,043
============== ==============
Stockholders' equity:
Preferred stock,$.01 par value per share, 5,000,000 authorized; none
outstanding at December 31, 2001 and 2000 ............................. $ -- $ --
Common stock, $.01 par value per share 120,000,000 shares
authorized; issued and outstanding 75,574,785 and 73,999,889 shares
at December 31, 2001 and 2000, respectively. .......................... 755,748 739,999
Common stock in treasury, at cost; 282 shares at December 31, 2001,
and none at December 31, 2000. ........................................ (2,804) --
Additional paid-in capital ................................................ 527,023,001 519,290,323
Accumulated deficit ....................................................... (222,367,088) (220,454,722)
Deferred compensation ..................................................... (1,592,490) (4,890,607)
Notes receivable from stockholders ........................................ (42,000) (62,000)
Accumulated other comprehensive income .................................... 6,651,100 909,879
-------------- --------------
Total stockholders' equity .......................................... 310,425,467 295,532,872
-------------- --------------
Total liabilities and stockholders' equity .......................... $ 353,982,418 $ 346,725,915
============== ==============
See accompanying notes to consolidated financial statements.
F-4
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
2001 2000 1999
---- ---- ----
Revenue:
Product sales ......................................... $ 84,194,839 $ 62,675,879 $ 24,286,258
Research contracts .................................... 28,149,501 15,882,112 9,380,825
Related-party collaborative agreement revenue ......... 1,898,605 6,349,996 4,525,000
------------- ------------- -------------
Total revenue ...................................... 114,242,945 84,907,987 38,192,083
------------- ------------- -------------
Expenses:
Cost of goods sold .................................... 13,571,401 9,986,743 3,216,847
Research and development .............................. 67,653,087 56,172,848 38,777,628
Selling, general and administrative ................... 57,961,795 46,389,311 26,862,905
Merger-related costs .................................. -- 6,668,110 --
------------- ------------- -------------
Total expenses ..................................... 139,186,283 119,217,012 68,857,380
------------- ------------- -------------
Operating loss ......................................... (24,943,338) (34,309,025) (30,665,297)
Other income and expense:
Interest and other income ............................. 20,890,006 17,576,856 1,301,803
Interest expense ...................................... 82,971 2,080,981 3,291,364
------------- ------------- -------------
Loss before tax benefit ................................ (4,136,303) (18,813,150) (32,654,858)
Tax benefit ............................................ 1,231,964 1,809,677 3,017,910
------------- ------------- -------------
Loss from continuing operations ........................ (2,904,339) (17,003,473) (29,636,948)
Discontinued operations:
Gain on sale of chiral assets ......................... 991,973 719,103 --
------------- ------------- -------------
Net loss ............................................... (1,912,366) (16,284,370) (29,636,948)
Deemed dividend for preferred stock conversion
discount .............................................. -- -- 818,487
------------- ------------- -------------
Net loss applicable to common stockholders ............. $ (1,912,366) $ (16,284,370) $ (30,455,435)
============= ============= =============
Per share of common stock-basic and diluted:
Loss from continuing operations ....................... $ (0.04) $ (0.25) $ (0.59)
Discontinued operations:
Gain on sale of chiral assets ....................... 0.01 0.01 --
------------- ------------- -------------
Net loss applicable to common stockholders ............ $ (0.03) $ (0.24) $ (0.59)
============= ============= =============
Weighted average number of shares of common
stock outstanding ................................... 75,108,000 66,598,000 51,449,000
============= ============= =============
See accompanying notes to consolidated financial statements.
F-5
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
SIGNAL CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK IN TREASURY
------------------------ ---------------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
Balances at January 1, 1999 ....... 24,203,931 $39,519,431 16,761,029 $ 167,610 -- $ --
Exercise of stock options and
warrants ......................... 1,015,471 10,154
Issuance of Series F-1 preferred
stock ............................ 288,708 992,882
Imputed dividend on Series F-1 .... 818,487
Issuance of common stock and
options for services ............. 60 1
Deferred compensation .............
Amortization of deferred
compensation .....................
Issuance of common stock for
employee benefit plans ........... 81,916 819
Issuance of options related to
license--agreement ...............
Comprehensive loss:
Net loss .........................
Net change in unrealized gain
(loss) on available for sale
securities .......................
Total comprehensive loss ..........
---------- ----------- ---------- --------- -- ----
Balances at December 31, 1999 ..... 24,492,639 $41,330,800 17,858,476 $ 178,584 -- $ --
========== =========== ========== ========= == ====
ACCUMULATED
NOTES OTHER
ADDITIONAL RECEIVABLE COMPREHENSIVE
PAID-IN ACCUMULATED DEFERRED FROM INCOME
CAPITAL DEFICIT COMPENSATION STOCKHOLDERS (LOSS)
---------- ----------- ------------ ------------ -------------
Balances at January 1, 1999 ....... $ 143,432,955 $ (173,714,917) $ (922,892) $ (95,600) $ 6,226
Exercise of stock options and
warrants ......................... 8,415,647
Issuance of Series F-1 preferred
stock ............................
Imputed dividend on Series F-1 .... (818,487)
Issuance of common stock and
options for services ............. 24,917
Deferred compensation ............. 1,024,244 (1,024,244)
Amortization of deferred
compensation ..................... 675,122
Issuance of common stock for
employee benefit plans ........... 799,004
Issuance of options related to
license--agreement ............... 696,895
Comprehensive loss:
Net loss ......................... (29,636,948)
Net change in unrealized gain
(loss) on available for sale
securities ....................... (98,130)
Total comprehensive loss ..........
------------- -------------- ------------ ---------- ----------
Balances at December 31, 1999 ..... $ 154,393,662 $ (204,170,352) $ (1,272,014) $ (95,600) $ (91,904)
============= ============== ============ ========== ==========
TOTAL
-----
Balances at January 1, 1999 ....... $ 8,392,813
Exercise of stock options and
warrants ......................... 8,425,801
Issuance of Series F-1 preferred
stock ............................ 992,882
Imputed dividend on Series F-1 .... --
Issuance of common stock and
options for services ............. 24,918
Deferred compensation ............. --
Amortization of deferred
compensation ..................... 675,122
Issuance of common stock for
employee benefit plans ........... 799,823
Issuance of options related to
license--agreement ............... 696,895
Comprehensive loss:
Net loss ......................... (29,636,948)
Net change in unrealized gain
(loss) on available for sale
securities ....................... (98,130)
-------------
Total comprehensive loss .......... (29,735,078)
-------------
Balances at December 31, 1999 ..... $ (9,726,824)
=============
See accompanying notes to consolidated financial statements.
F-6
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
SIGNAL CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Balances at January 1, 2000 ............. 24,492,639 $ 41,330,800 17,858,476 $178,584
Exercise of stock options and
warrants ............................... 2,424,930 24,250
Issuance of common stock for
employee benefit plans ................. 40,394 404
Issuance of common stock in
follow-on offering ..................... 2,934,000 29,340
Costs related to follow-on offering .....
Conversion of long term
convertible notes ...................... 4,358,260 43,583
Shares issued for stock split ........... 43,305,104 433,051
Conversion of Signal preferred
stock .................................. (24,492,639) (41,330,800) 3,078,725 30,787
Deferred compensation ...................
Amortization of deferred
compensation ...........................
Expense related to non-employee
stock options ..........................
Collection of notes receivable from
stockholders ...........................
Issuance of Signal preferred stock
warrants for promissory note ...........
Comprehensive loss:
Net loss ...............................
Net change in unrealized gain
(loss) on available for sale
securities .............................
Total comprehensive loss ................
Balances at December 31, 2000 ........... -- $ -- 73,999,889 $739,999
=========== ============== ========== ========
COMMON STOCK NOTES
IN TREASURY ADDITIONAL RECEIVABLE
----------------- PAID-IN ACCUMULATED DEFERRED FROM
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION STOCKHOLDERS
------ ------ ---------- ----------- -------------- -------------
Balances at January 1, 2000 ............. -- $ -- $154,393,662 $ (204,170,352) $ (1,272,014) $ (95,600)
Exercise of stock options and
warrants ............................... 10,433,513
Issuance of common stock for
employee benefit plans ................. 1,047,351
Issuance of common stock in
follow-on offering ..................... 278,524,620
Costs related to follow-on offering ..... (885,160)
Conversion of long term
convertible notes ...................... 26,780,983
Shares issued for stock split ........... (433,051)
Conversion of Signal preferred
stock .................................. 41,301,822
Deferred compensation ................... 6,706,274 (6,706,274)
Amortization of deferred
compensation ........................... 3,087,681
Expense related to non-employee
stock options .......................... 970,309
Collection of notes receivable from
stockholders ........................... 33,600
Issuance of Signal preferred stock
warrants for promissory note ........... 450,000
Comprehensive loss:
Net loss ............................... (16,284,370)
Net change in unrealized gain
(loss) on available for sale
securities .............................
Total comprehensive loss ................
Balances at December 31, 2000 ........... -- $ -- $519,290,323 $ (220,454,722) $ (4,890,607) $ (62,000)
== ==== ============ ============== ============= ==========
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
(LOSS) TOTAL
-------------- -----
Balances at January 1, 2000 ............. $ (91,904) $ (9,726,824)
Exercise of stock options and
warrants ............................... 10,457,763
Issuance of common stock for
employee benefit plans ................. 1,047,755
Issuance of common stock in
follow-on offering ..................... 278,553,960
Costs related to follow-on offering ..... (885,160)
Conversion of long term
convertible notes ...................... 26,824,566
Shares issued for stock split ........... --
Conversion of Signal preferred
stock .................................. 1,809
Deferred compensation ................... --
Amortization of deferred
compensation ........................... 3,087,681
Expense related to non-employee
stock options .......................... 970,309
Collection of notes receivable from
stockholders ........................... 33,600
Issuance of Signal preferred stock
warrants for promissory note ........... 450,000
Comprehensive loss:
Net loss ............................... (16,284,370)
Net change in unrealized gain
(loss) on available for sale
securities ............................. 1,001,783 1,001,783
-------------
Total comprehensive loss ................ (15,282,587)
-------------
Balances at December 31, 2000 ........... $ 909,879 $ 295,532,872
========== =============
See accompanying notes to consolidated financial statements.
F-7
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
SIGNAL
CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK IN TREASURY ADDITIONAL
--------------- --------------------- -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ ------ ------ -----------
Balances at January 1, 2001 ............ -- $ -- 73,999,889 $739,999 -- $ -- $519,290,323
Exercise of stock options and
warrants .............................. 1,544,625 15,446 6,760,473
Issuance of common stock for
employee benefit plans ................ 29,014 290 741,219
Issuance of common stock for
services .............................. 1,257 13 37,776
Purchase of treasury stock ............. (282) (2,804)
Reduction of deferred
compensation for terminations ......... (832,711)
Amortization of deferred
compensation ..........................
Expense related to non-employee
stock options and restricted stock 1,025,921
Collection of notes receivable from
stockholders ..........................
Comprehensive income:
Net loss ..............................
Net change in unrealized gain
(loss) on available for sale
securities ............................
Less: reclassification adjustment
for gain included in net loss .........
Net unrealized gain (loss) on
securities ............................
Total comprehensive income .............
-- ---- ---------- -------- ---- -------- ------------
Balances at December 31, 2001 .......... -- $ -- 75,574,785 $755,748 (282) $ (2,804) $527,023,001
== ==== ========== ======== ==== ======== ============
ACCUMULATED
NOTES OTHER
RECEIVABLE COMPREHENSIVE
ACCUMULATED DEFERRED FROM INCOME
DEFICIT COMPENSATION STOCKHOLDERS (LOSS) TOTAL
----------- ------------ ------------ -------------- -----
Balances at January 1, 2001 ............ $ (220,454,722) $ (4,890,607) $ (62,000) $ 909,879 $295,532,872
Exercise of stock options and
warrants .............................. 6,775,919
Issuance of common stock for
employee benefit plans ................ 741,509
Issuance of common stock for
services .............................. 37,789
Purchase of treasury stock ............. (2,804)
Reduction of deferred
compensation for terminations ......... 832,711 --
Amortization of deferred
compensation .......................... 2,465,406 2,465,406
Expense related to non-employee
stock options and restricted stock 1,025,921
Collection of notes receivable from
stockholders .......................... 20,000 20,000
Comprehensive income:
Net loss .............................. (1,912,366) (1,912,366)
Net change in unrealized gain
(loss) on available for sale
securities ............................ 6,760,396 6,760,396
Less: reclassification adjustment
for gain included in net loss ......... (1,019,175) (1,019,175)
Net unrealized gain (loss) on
securities ............................ 5,741,221
------------
Total comprehensive income ............. 3,828,855
-------------- ------------- ---------- ------------ ------------
Balances at December 31, 2001 .......... $ (222,367,088) $ (1,592,490) $ (42,000) $ 6,651,100 $310,425,467
============== ============= ========== ============ ============
See accompanying notes to consolidated financial statements.
F-8
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Loss from continuing operations ................................ $ (2,904,339) $ (17,003,473) $ (29,636,948)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of long-term assets ............. 5,086,048 3,722,467 3,038,222
Provision for accounts receivable allowances .................. 553,168 130,000 58,051
Realized gain on marketable securities available for sale ..... (1,019,175) -- --
Non-cash stock-based compensation ............................. 3,529,116 4,057,990 700,040
Amortization of premium on marketable securities
available for sale .......................................... 212,066 -- --
Amortization of debt issuance and warrant costs ............... 28,560 700,000 250,000
Amortization of discount on note obligations .................. -- 274,848 192,978
Shares issued for employee benefit plans ...................... 741,509 1,047,755 799,823
Change in current assets & liabilities:
Increase in accounts receivable ............................... (4,122,269) (4,938,569) (2,285,845)
(Increase) decrease in inventory .............................. 662,795 (1,810,198) (884,651)
(Increase) decrease in other operating assets ................. 2,284,583 (10,649,979) (393,863)
Increase in accounts payable and accrued expenses ............. 5,750,073 9,793,831 2,469,216
Increase (decrease) in deferred revenue ....................... (12,456,906) 13,239,782 2,068,693
-------------- -------------- -------------
Net cash used in operating activities .......................... (1,654,771) (1,435,546) (23,624,284)
-------------- -------------- -------------
Cash flows from investing activities:
Capital expenditures ........................................... (7,869,661) (9,637,333) (1,875,072)
Proceeds from sales and maturities of marketable securities
available for sale ............................................ 119,789,801 139,575,925 17,781,948
Purchases of marketable securities available for sale .......... (231,373,743) (276,264,605) (16,444,276)
Proceeds from sale of chiral intermediate assets ............... 991,973 719,103 --
Purchase of license rights ..................................... -- -- (450,000)
-------------- -------------- -------------
Net cash used in investing activities .......................... (118,461,630) (145,606,910) (987,400)
-------------- -------------- -------------
Cash flows from financing activities:
Net proceeds from follow-on public offering .................... -- 277,668,800 --
Proceeds from notes receivable from stockholders ............... 20,000 33,600 --
Proceeds from exercise of common stock options and
warrants ...................................................... 6,775,919 10,457,762 8,425,801
Purchase of treasury stock ..................................... (2,804) -- --
Net proceeds from issuance of preferred stock .................. -- -- 992,882
Repayment of capital lease and note obligations ................ (929,258) (1,593,127) (1,751,059)
Debt issuance costs ............................................ -- -- (750,000)
Net proceeds from issuance of convertible notes ................ -- -- 30,000,000
-------------- -------------- -------------
Net cash provided by financing activities ...................... 5,863,857 286,567,035 36,917,624
-------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents ........... (114,252,544) 139,524,579 12,305,940
Cash and cash equivalents at beginning of period ............... 161,393,835 21,869,256 9,563,316
-------------- -------------- -------------
Cash and cash equivalents at end of period ..................... $ 47,141,291 $ 161,393,835 $ 21,869,256
============== ============== =============
See accompanying notes to consolidated financial statements.
F-9
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
YEARS ENDED DECEMBER 31,
----------------------------------------------
2001 2000 1999
---- ---- ----
Supplemental schedule of non-cash investing and
financing activity:
Change in net unrealized gain(loss) on marketable
securities available for sale ............................... $ 5,741,221 $ 1,001,783 $ (98,130)
=========== =========== ==========
Issuance of options related to license agreement ............. $ -- $ -- $ 696,895
=========== =========== ==========
Capital lease obligations entered into for equipment ......... $ -- $ -- $ 526,128
=========== =========== ==========
Issuance of common stock upon the conversion of
convertible notes and accrued interest thereon, net ......... $ -- $26,737,824 $ --
=========== =========== ==========
Deemed dividend for preferred stock conversion
discount .................................................... $ -- $ -- $ 818,487
=========== =========== ==========
Issuance of common stock upon the conversion of
convertible preferred stock and Signal preferred stock....... $ -- $41,330,800 $ --
=========== =========== ==========
Deferred compensation relating to stock options .............. $ (832,711) $ 6,706,274 $1,024,244
=========== =========== ==========
Supplemental disclosure of cash flow information:
Interest paid ................................................ $ 82,971 $ 3,114,144 $1,957,325
=========== =========== ==========
Cash received related to tax benefit ......................... $ 1,231,964 $ 1,089,677 $3,017,910
=========== =========== ==========
See accompanying notes to consolidated financial statements.
F-10
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(1) NATURE OF BUSINESS AND BASIS OF PRESENTATION
Celgene Corporation and its subsidiaries (collectively "Celgene" or the
"Company") is an independent biopharmaceutical company engaged in the discovery,
development and commercialization of novel human pharmaceuticals for the
treatment of cancer and inflammatory diseases. The Company's primary therapeutic
focus is on the development of orally administered, small molecule
pharmaceuticals that selectively regulate gene and protein modulation.
THALOMID(Reg. TM) (thalidomide), the Company's lead product, was approved for
sale in the United States by the U.S. Food and Drug Administration, ("FDA"), on
July 16, 1998 and sales of THALOMID(Reg. TM) in 2001 totaled $82 million.
THALOMID(Reg. TM) is being evaluated in clinical trials for the treatment of
solid tumor and hematological cancers as well as serious inflammatory diseases.
In November 2001, Celgene received FDA approval for Focalin(TM), its
refined version of Ritalin(Reg. TM), for the treatment of attention deficit
disorder/attention deficit hyperactivity disorder. Focalin(TM) is marketed by
Novartis Pharma AG ("Novartis"). In preparation for the commercial launch in
January 2002, approximately $2.2 million of Focalin(TM) was shipped to Novartis
and recorded as revenue in December 2001. Under the agreement with Novartis,
Celgene will collect royalties on the entire Ritalin(Reg. TM) family of
products.
Several classes of small molecule drugs highlight Celgene's product
pipeline: IMiDs(Reg. TM) (Immunomodulatory Drugs), SelCIDs(TM) (Selective
Cytokine Inhibitory Drugs), SERMs (Selective Estrogen Receptor Modulators) and
JNK (c-Jun N-terminal kinase) inhibitors. These classes are novel and
proprietary oral agents that are being developed for the treatment of solid
tumor and hematological cancers and chronic inflammatory diseases, such as
Crohn's disease and rheumatoid arthritis.
On August 31, 2000, the Company completed its merger with Signal
Pharmaceuticals, Inc. ("Signal"), a privately held San Diego-based
biopharmaceutical company focused on the discovery and development of drugs that
regulate genes associated with disease. The Company issued 3,710,144 shares of
its common stock for all the outstanding common shares of Signal at an exchange
ratio of .1257 of a share of Celgene common stock for each share of Signal
common stock. Immediately prior to the consummation of the merger, all Signal
preferred shares were converted into Signal common shares on a one-for-one
basis. In addition, Celgene issued 380,607 options for all the Signal options
outstanding at the closing date.
The merger was accounted for as a pooling-of-interests. All consolidated
financial statements of Celgene prior to the merger were restated to include the
results of operations, financial position and cash flows of Signal.
The consolidated financial statements include the accounts of Celgene
Corporation and its subsidiaries. All inter-company transactions have been
eliminated.
The preparation of the consolidated financial statements requires
management to make estimates and assumptions that affect reported amounts and
disclosures. 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.
The Company made certain reclassifications to the 2000 and 1999 financial
statements to conform to the 2001 presentation.
F-11
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH EQUIVALENTS
At December 31, 2001 and 2000, cash equivalents consisted principally of
highly liquid funds invested in commercial paper, money market funds, and United
States government securities such as treasury bills and notes. These instruments
are stated at cost, which approximates market because of the short maturity of
these investments.
(B) MARKETABLE SECURITIES
All of the Company's marketable securities are classified as securities
available for sale in current assets and are carried at fair value. Such
securities are held for an indefinite period of time and are intended to be used
to meet the ongoing liquidity needs of the Company. Unrealized gains and losses
(which are deemed to be temporary), if any, are reported in a separate component
of stockholders' equity. The cost of the debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. The
amortization, along with realized gains and losses, is included in interest
income. The cost of securities is based on the specific identification method.
(C) CONCENTRATION OF CREDIT RISK
Cash, cash equivalents, and marketable securities are financial instruments
that potentially subject the Company to concentration of credit risk. The
Company invests its excess cash primarily in U.S. government and agency
securities and marketable debt securities of financial institutions and
corporations with strong credit ratings. The Company also has established
guidelines relative to diversification and maturities to maintain safety and
liquidity. These guidelines are reviewed periodically and may be modified to
take advantage of trends in yields and interest rates. The Company has for a
majority of its investments held them to maturity. However, the Company has the
ability to sell these investments before maturity and has therefore classified
the investments as available for sale. The Company has not experienced any
significant losses on its investments.
(D) INVENTORY
Inventories are carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
(E) 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 years
Furniture and fixtures ..................... 5 years
Computer equipment ......................... 3 years
Amortization of leasehold improvements is calculated using the
straight-line method over the remaining 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.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, the Company reviews long-lived assets for impairment whenever
events or changes in business circumstances occur that indicate 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.
F-12
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
(F) OTHER ASSETS
Other assets include capitalized costs associated with a new customer
service system, an enhanced S.T.E.P.S.(Reg. TM) system, certain patent rights
and licensed technology. Costs associated with the customer service system and
the enhanced S.T.E.P.S.(Reg. TM) system, which were developed and implemented
during 2000 and 2001, respectively, were capitalized in accordance with
Statement of Position No. 98-1, Accounting for the Costs of Computer Software
Developed and Obtained for Internal Use, and are amortized over their estimated
useful life of three years from the date the system was ready for its intended
use. At December 31, 2001 and 2000, computer software costs totaled
approximately $5.3 million and $4.4 million, respectively, which is net of $2.0
million and $0.5 million in accumulated amortization, respectively. The cost of
patent rights is amortized using the straight-line method over the life of the
patents. The weighted average remaining patent life at December 31, 2001 is 10
years. Licensed technology is stated at cost and depreciated over the estimated
useful life of three years using the straight-line method. At December 31, 2001
and 2000, patent rights and licensed technology totaled $1.0 million and $1.3
million, respectively which is net of $1.5 million and $1.2 million in
accumulated amortization, respectively.
(G) RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred. These include
all internal costs, external costs related to services contracted by the Company
and research services conducted for others. Research and development costs
consist primarily of salaries and benefits, contractor fees, clinical drug
supplies for our preclinical and clinical development programs, consumable
research supplies and allocated facility and administrative costs.
(H) 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 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.
(I) REVENUE RECOGNITION
Revenue from the sale of products is recognized upon product shipment.
Provisions for discounts for early payments, rebates and sales returns under
terms customary in the industry are provided for in the same period the related
sales are recorded. Revenue under research contracts is recorded as earned under
the contracts, as services are provided. In accordance with SEC Staff Accounting
Bulletin No. 101, upfront nonrefundable fees associated with license and
development agreements where the Company has continuing involvement in the
agreement, are recorded as deferred revenue and recognized over the estimated
service period. If the estimated service period is subsequently modified, the
period over which the up-front fee is recognized is modified accordingly on a
prospective basis. Revenues from the achievement of research and development
milestones, which represent the achievement of a significant step in the
research and development process, are recognized when and if the milestones are
achieved. Continuation of certain contracts and grants are dependent upon the
Company achieving specific contractual milestones; however, none of the payments
received to date are refundable regardless of the outcome of the project. Grant
revenue is recognized in accordance with the terms of the grant and as services
are performed, and generally equals the related research and development
expense.
Until October 2001, Axys Pharmaceutical ("Axys") was treated as a related
party, as the previous Chief Executive Officer of Axys served on the Signal
Board of Directors at the time Signal and Axys entered into a collaboration
agreement prior to the merger with Celgene. The initial term of that
F-13
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
agreement expired in October 2001. Therefore revenue recognized subsequent to
October 2001 is no longer classified as related party. Accordingly, related
party revenue of $1.9 million, $2.5 million and $625,000 was recorded in 2001,
2000 and 1999, respectively.
Serono S.A. ("Serono") was treated as a related party, based on its
ownership interest in Signal at the time Signal and Serono entered into a
collaboration agreement. The initial term of the agreement expired in November
2000 and while the agreement has been extended, Serono is no longer considered a
related party. Accordingly, revenue from Serono of $3.8 million and $3.9 million
were recognized in 2000 and 1999, respectively, as related party revenue.
As a result of the merger, revenues from these companies has ceased being
classified as related party upon the expiration of the initial term of the
respective agreements.
(J) STOCK OPTION PLANS
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation,
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 123.
When the exercise price of employee or director stock options is less than
the fair value of the underlying stock on the grant date, the Company records
deferred compensation for the difference and amortizes this amount to expense
over the vesting period of the options. Options or stock awards issued to
non-employees and consultants are recorded at their fair value as determined in
accordance with SFAS No. 123 and EITF No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services and recognized over the related
vesting period.
(K) EARNINGS PER SHARE
"Basic" earnings (loss) per common share equals net income (loss)
applicable to common stockholders divided by weighted average common shares
outstanding during the period. "Diluted" earnings per common share would equal
net income applicable to common stockholders divided by the sum of weighted
average common shares outstanding during the period plus common stock
equivalents if dilutive. The Company's basic and diluted per share amounts are
the same since the assumed exercise of stock options, and warrants, and the
conversion of convertible debentures and preferred stock are all anti-dilutive.
The amount of common stock equivalents excluded from the calculation were
10,128,670 in 2001, 11,033,930 in 2000 and 19,373,823 in 1999.
(L) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net losses and the change in net
unrealized gains (losses) on securities classified as available for sale and is
presented in the consolidated statements of stockholders' equity (deficit).
(M) FINANCIAL INSTRUMENTS AND DERIVATIVES
The fair value, which equals carrying value, of marketable securities
available for sale is based on quoted market prices. For all other financial
instruments, excluding convertible notes (see Note 8), their carrying value
approximates fair value due to the short maturity of these instruments.
F-14
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities was issued and, as amended, is effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133 standardizes the accounting for
derivative instruments including certain derivative instruments embedded in
other contracts and requires derivative instruments to be recognized as assets
and liabilities and recorded at fair value. The adoption of SFAS No. 133 had no
impact on the Company's consolidated financial statements because the Company
currently is not party to any derivative instruments. Any future transactions
involving derivative instruments will be accounted for based on SFAS No. 133.
(N) WAREHOUSING AND DISTRIBUTION EXPENSES
Warehousing and distribution expenses are included in selling, general and
administrative expenses and totaled approximately $5.4 million, $4.5 million and
$3.9 million in 2001, 2000, and 1999, respectively.
(O) RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
all business combinations be accounted for under a single method--the purchase
method. Use of the pooling-of-interests method no longer is permitted. SFAS No.
141 requires that the purchase method be used for business combinations
initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment. The amortization
of goodwill ceases upon adoption of the Statement, which for calendar year-end
companies, will be January 1, 2002. SFAS No. 142 has no financial impact on the
Company as the Company does not have any goodwill or intangible assets which
resulted from business combinations.
(3) MERGER OF CELGENE AND SIGNAL
As discussed in Note 1, on August 31, 2000, Celgene completed the merger
with Signal in a transaction accounted for as a pooling of interests.
Accordingly, the consolidated financial statements reflect the combined results
of Celgene and Signal as if the merger had been in effect for all periods
presented. The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements for the periods prior
to the merger follow:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
---------------- -----------------
Revenues:
Celgene ................ $ 29,156,588 $ 26,443,758
Signal ................. 5,337,008 11,748,325
------------- -------------
Combined ............... $ 34,493,596 $ 38,192,083
------------- -------------
Net loss:
Celgene ................ $ (3,971,178) $ (21,781,200)
Signal ................. (8,535,931) (7,855,748)
------------- -------------
Combined ............... $ (12,507,109) $ (29,636,948)
------------- -------------
Celgene and Signal incurred direct transaction expenses of approximately
$6.7 million which were recognized upon consummation of the merger. The
merger-related costs consisted of transaction fees for financial advisors,
attorneys, accountants, financial printing and other related charges.
F-15
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
(4) MARKETABLE SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value of available-for-sale securities by major security
type and class of security at December 31, 2001 and 2000, were as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2001 COST GAIN LOSS VALUE
- ----------------- --------- ---------- ---------- ---------
Government agencies ............... $ 24,668,882 $ 318,218 $ -- $ 24,987,100
Government bonds & notes .......... 553,594 15,076 -- 568,670
Corporate debt securities ......... 231,026,473 7,603,951 (1,286,145) 237,344,279
------------- ----------- ------------ -------------
$ 256,248,949 $ 7,937,245 $ (1,286,145) $ 262,900,049
============= =========== ============ =============
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2000 COST GAIN LOSS VALUE
- ----------------- --------- ---------- ---------- ----------
Government agencies ............... $ 113,811,071 $ 411,117 $ (776) $ 114,221,412
Government bonds & notes .......... 301,758 -- (822) 300,936
Corporate debt securities ......... 29,745,069 500,360 -- 30,245,429
------------- --------- --------- -------------
$ 143,857,898 $ 911,477 $ (1,598) $ 144,767,777
============= ========= ========= =============
Maturities of debt securities classified as available-for-sale were as
follows at December 31, 2001:
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
Due within one year ............................ $ 5,248,710 $ 5,309,925
Due after one year through five years .......... 135,705,061 140,101,379
Due after five years through ten years ......... 113,295,178 115,488,745
Due after ten years ............................ 2,000,000 2,000,000
------------- -------------
$ 256,248,949 $ 262,900,049
============= =============
(5) INVENTORY
DECEMBER 31,
----------------------------
2001 2000
---- ----
Raw materials ........... $ 763,662 $ 985,556
Work in process ......... 1,710,305 1,869,104
Finished goods .......... 1,129,495 1,411,597
----------- -----------
$ 3,603,462 $ 4,266,257
----------- -----------
(6) PLANT AND EQUIPMENT
Plant and equipment consists of the following:
DECEMBER 31,
----------------------------
2001 2000
---- ----
Laboratory equipment and machinery ......... $ 9,172,226 $ 7,896,666
Leasehold improvements ..................... 7,297,768 7,434,963
Computer equipment ......................... 2,957,346 2,747,181
Furniture and fixtures ..................... 2,731,996 1,224,976
Leased equipment ........................... 3,514,146 3,547,378
Construction in progress ................... 68,511 2,527,955
------------ -----------
25,741,993 25,379,119
Less: accumulated depreciation and
amortization .............................. 15,096,346 16,983,217
------------ -----------
$ 10,645,647 $ 8,395,902
============ ===========
F-16
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
(7) ACCRUED EXPENSES
Accrued expenses consists of the following:
DECEMBER 31,
----------------------------
2001 2000
---- ----
Professional and consulting fees ..................... $ 3,514,287 $ 1,685,679
Accrued compensation ................................. 4,847,558 4,651,488
Accrued interest, royalties and license fees ......... 1,925,109 1,530,703
Accrued sales returns and rebates .................... 1,710,903 668,680
Other ................................................ 1,669,165 974,957
------------ -----------
$ 13,667,022 $ 9,511,507
============ ===========
(8) CONVERTIBLE DEBT
On September 16, 1998, the Company issued convertible notes to an
institutional investor in the amount of $8,750,000. The notes have a five-year
term and a coupon rate of 9.25% with interest payable on a semi-annual basis.
The notes contained a conversion feature that allowed the note holders to
convert the notes into common shares at $3.67 per share. These notes were issued
at a discount of $437,500 which was being amortized over three years. On October
16, 2000, all of the notes were converted into 2,386,387 common shares.
On January 20, 1999, the Company issued to an institutional investor
convertible notes in the amount of $15,000,000. The notes have a five year term
and a coupon rate of 9% with interest payable on a semi-annual basis. The notes
contain a conversion feature that allows the note holders to convert the notes
into common shares after one year at $6.00 per share. The Company can redeem the
notes after three years at 103% of the principal amount (two years under certain
conditions). Issuance costs of $750,000 incurred in connection with these notes
are being amortized over three years. Just prior to the Company's follow-on
offering on February 16, 2000, a portion of the notes totaling $9,288,000 were
converted into 1,548,000 common shares and included in the public offering. On
May 17, 2000, an additional $3,998,400 of the notes were converted into 666,399
common shares and issued to the note holders. At December 31, 2001, the
remaining notes have a carrying value of $1,713,600 and are convertible into
285,601 common shares.
On July 6, 1999, the Company issued to an institutional investor
convertible notes in the amount of $15,000,000. The notes have a five year term
and a coupon rate of 9% with interest payable on a semi-annual basis. The notes
contain a conversion feature that allows the note holders to convert the notes
into common shares after one year at $6.33 per share. The Company can redeem the
notes after three years at 103% of the principal amount (two years under certain
conditions). There was no fee or discount associated with these notes. On July
6, 2000, $5,000,000 of the notes were converted to 789,474 common shares. At
December 31, 2001, the remaining notes have a carrying value of $10,000,000 and
are convertible into 1,578,948 common shares.
On September 26, 2000, the Company entered into an agreement with the note
holders of the January 1999 and the July 1999 notes that allows the note holders
to take a "short position" in the common stock (as defined in the respective
Note Purchase Agreements) of the Company with certain limitations on
transactions resulting in a "short position" based upon the level of the stock
price. In exchange for the Company consenting to waive the provisions that
prohibit short sales, the note holders waive the right to the receipt of any
interest after the effective date of August 24, 2000.
At December 31, 2001 and 2000, the fair value of the Company's convertible
notes exceeded their carrying value reflecting the increase to $31.92 and $32.50
per share, respectively in the market value of the Company's common stock. An
increase in the market price of the Company's common stock over the conversion
price has the effect of increasing the fair value of the convertible notes.
F-17
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
(9) SECURED PROMISSORY NOTE
In November 1996, the Company issued a secured promissory note for
$3,000,000. The proceeds of the note payable were used for general corporate
purposes and working capital. The note payable accrued interest at a rate of 14%
and was secured by certain assets of the Company. The outstanding obligation at
December 31, 1999 of approximately $396,000 was repaid upon its due date during
May 2000.
(10) STOCKHOLDERS' EQUITY
PREFERRED STOCK
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.
SIGNAL CONVERTIBLE PREFERRED STOCK
Immediately prior to the consummation of the merger, all Signal preferred
shares were converted into Signal common shares on a one-for-one basis and
exchanged into Celgene shares on a .1257-for-1 basis upon consummation of the
merger.
A summary of the Signal convertible preferred stock at December 31, 1999 is
as follows:
SHARES ISSUED PREFERENCE IN
AND OUTSTANDING LIQUIDATION
--------------- -------------
Series A ................ 2,626,892 $ 2,626,892
Series B ................ 2,875,000 3,450,000
Series C ................ 8,791,432 12,308,005
Series D ................ 732,601 2,000,000
Series E ................ 6,455,493 12,329,929
Series F ................ 2,722,513 8,194,761
Series F-1 .............. 288,708 1,000,000
--------- ------------
24,492,639 $ 41,909,587
========== ============
Each of the shares of Series A, B, C, D, E, F and F-1 preferred stock were
convertible on a one-for-one basis, at the option of the holder, into shares of
Signal's common stock.
Annual dividends of $.08, $.10, $.11, $.32, $.15, $.24 and $.28 per share
of Series A, B, C, D, E, F and F-1 preferred stock, respectively, were payable
whenever funds were legally available and when declared by the Board of
Directors. No dividends were paid.
COMMON STOCK
On February 16, 2000, the Company completed an offering to sell 10,350,000
shares of its common stock at a price of $33.67 per share. Of the total shares
offered, 8,802,000 shares were for the account of the Company and 1,548,000
shares were for the account of a selling shareholder pursuant to the conversion
of $9,288,000 of the 9%, January 1999 convertible notes held by that
shareholder. Proceeds to the Company, net of expenses, were approximately
$278,000,000.
On April 14, 2000, the Company effected a three-for-one stock split for
stockholders of record as of April 11, 2000. On April 10, 2000, the Company's
stockholders approved an increase in the number of authorized shares of common
stock from 30,000,000 to 120,000,000. All share and per share amounts in the
consolidated statements of operations and share and per share amounts disclosed
in the accompanying notes to the consolidated financial statements have been
retroactively restated to reflect the three-for-one stock split. Share and per
share amounts in the consolidated statements of stockholders'
F-18
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
equity (deficit) have not been retroactively restated to reflect the stock
split. During the second quarter 2000, the Company recorded a reclassification
of approximately $433,000 to decrease additional paid-in-capital and to increase
common stock in order to reflect the three-for-one stock split.
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 each holder 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 are exercisable upon, certain triggering events, and the exercise price is
based on the estimated long term value of the Company's common stock. In certain
circumstances, the Rights Plan permits the holders to purchase shares of the
Company's common stock at a discounted rate. The Company's Board of Directors
retains the right at all times prior to acquisition of 15% of our voting common
stock by an acquiror, to discontinue the Rights Plan through the redemption of
all rights or to amend the Rights Plan in any respect. On February 17, 2000, the
Company's Board of Directors approved an amendment to the Rights Plan changing
the initial exercise price thereunder from $100.00 per Right (as defined in the
original Rights Plan agreement) to $700.00 per Right and extending the final
expiration date of the Rights Plan to February 17, 2010.
(11) STOCK BASED COMPENSATION
(A) STOCK OPTIONS AND RESTRICTED STOCK AWARDS
The Company has two equity incentive plans ("Incentive Plans") that provide
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 4,200,000 shares of common
stock under the 1992 plan and 8,500,000 shares of common stock under the 1998
plan, as amended, subject to adjustment under certain circumstances. As a result
of the merger with Signal, the Company also assumed the former Signal stock
option plans. The options issued pursuant to the former Signal plans converted
into Celgene options upon consummation of the merger at a .1257-for-1 exchange
ratio. No additional options will be granted from the former Signal plans. 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 Plans. The Plans terminate in 2002 and 2008,
respectively.
With respect to options granted under the Incentive Plans, 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 Plans 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 and after September 19, 2000, stock options granted to executives at the
vice-president level and above contain a reload feature which provides that if
(1) the optionee exercises all or any portion of the stock option (a) at least
six months prior to the expiration of the stock option, (b) while employed by
the Company and (c) prior to the expiration date of the 1998 Long-Term Incentive
Plan and (2) the optionee pays the exercise price for the portion of the stock
option exercised or pays applicable withholding taxes by using common stock
owned by the optionee for at least six months prior to the date of exercise, the
optionee shall be granted a new stock option under the 1998 Long-Term Incentive
Plan on the date all or any portion of the stock option is exercised to purchase
the number of shares of common stock equal to the number of shares of common
stock exchanged by the optionee to exercise the stock option or to pay
withholding taxes thereon. The reload stock option will be exercisable on the
same terms and
F-19
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
conditions as apply to the original stock option except that (x) the reload
stock option will become exercisable in full on the day which is six months
after the date the original stock option is exercised, (y) the exercise price
shall be the fair market value (as defined in the 1998 Long-Term Incentive Plan)
of the common stock on the date the reload stock option is granted and (z) the
expiration of the reload stock option will be the date of expiration of the
original stock option. An optionee may not reload the reload stock option unless
otherwise permitted by the Company's Compensation Committee. As of December 31,
2001, the Company has issued 620,000 stock options to executives which contain
the reload features noted above.
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 1,050,000
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
election or appointment, receives an option to purchase 20,000 shares of common
stock. Additionally, 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 for service less than one year). The
shares subject to each non-employee director's option grant of 20,000 shares
vest in four equal annual installments commencing 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. On June 22, 1999, the stockholders of the Company approved an
amendment to the 1995 Non-Employee Directors' Incentive Plan that a.) increased
the number of shares authorized to 1,800,000 and b.) provided for a
discretionary grant upon the date of each annual meeting of an additional option
to purchase up to 5,000 shares to a non-employee director who serves as a member
(but not a chairman) of a committee of the Board of Directors and up to 10,000
shares to a non-employee director who serves as the chairman of a committee of
the Board of Directors. 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 share was $9.83, $16.44 and $3.06 for
stock options granted in 2001, 2000 and 1999, respectively. The Company
estimated the fair values using the Black-Scholes option pricing model and used
the following assumptions:
2001 2000 1999
---- ---- ----
Risk-free interest rate ....................... 3.52% 4.84% 6.37%
Expected stock price volatility ............... 57% 57% 46%
Expected term until exercise (years) .......... 2.81 2.81 4.94
Expected dividend yield ....................... 0% 0% 0%
The following table summarizes results as if compensation expense was
recorded for the annual option grants under the fair value method:
2001 2000 1999
---- ---- ----
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Net loss applicable to common stockholders:
As reported .............................. $ (1,912) $ (16,284) $ (30,455)
Pro forma ................................ (24,902) (38,011) (34,248)
Net loss per common share basic and diluted:
As reported .............................. $ (0.03) $ (0.24) $ (0.59)
Pro forma ................................ ( 0.33) 0.57) ( 0.67)
F-20
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
The pro forma effects on net loss applicable to common stockholders and net
loss per common share for 2001, 2000 and 1999 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.
The following table summarizes the stock option activity for the
aforementioned Plans:
OPTIONS OUTSTANDING
------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE
AVAILABLE PRICE PER
FOR GRANT SHARES SHARE
--------- ------ ---------
Balance January 1, 1999 ........... $ 5,150,269 7,694,579 $ 3.18
Authorized ....................... 870,000 -- --
Expired .......................... (210,141) -- --
Granted .......................... (2,715,591) 2,715,591 6.38
Exercised ........................ -- (2,870,021) 2.81
Cancelled ........................ 184,618 (184,618) 3.38
Repurchases ...................... 219 -- --
------------ ---------- --------
Balance December 31, 1999 ......... 3,279,374 7,355,531 4.50
Authorized ....................... 2,417,100 -- --
Expired .......................... -- -- --
Granted .......................... (3,266,281) 3,261,281 42.20
Exercised ........................ -- (2,569,570) 3.66
Cancelled ........................ 99,555 (99,555) 19.62
Repurchases ...................... 2,197 -- --
------------ ---------- --------
Balance December 31, 2000 ......... 2,531,945 7,947,687 20.05
Authorized ....................... 2,000,000 -- --
Expired .......................... -- -- --
Granted .......................... (1,111,450) 1,111,450 26.04
Exercised ........................ -- (1,304,960) 4.74
Cancelled ........................ 457,249 (457,249) 34.49
Repurchases ...................... 190 -- --
------------ ---------- --------
Balance December 31, 2001 ......... 3,877,934 7,296,928 $ 22.80
============ ========== ========
The following table summarizes information concerning options outstanding
under the Incentive Plans at December 31, 2001:
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
OUTSTANDING EXERCISE REMAINING EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICE AT 12/31/01 PRICE TERM (YRS.) AT 12/31/01 PRICE
----------------------- ----------- -------- ----------- ----------- --------
1.11 - 3.50 ............. 740,946 $ 2.74 5.4 625,272 $ 2.71
3.51 - 6.00 ............. 2,397,794 5.10 6.4 1,603,761 4.91
6.01 - 24.00 ............ 489,080 14.70 8.1 305,704 13.39
24.01 - 30.00 ........... 2,095,450 25.55 8.5 604,386 25.70
30.01 - 50.00 ........... 365,108 37.20 8.5 84,069 40.41
50.01 - 70.00 ........... 1,208,550 64.36 8.6 509,011 63.79
--------- -------- --- --------- --------
7,296,928 $ 22.80 7.5 3,732,203 $ 17.43
========= ======== === ========= ========
The Company recorded $6,706,274 and $1,024,244 of deferred compensation for
options granted under the former Signal plans during 2000 and 1999,
respectively, representing the difference between the option
F-21
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
exercise price and the estimated fair value of the underlying stock for
financial statement presentation purposes. The Company is amortizing the
deferred compensation over the vesting period of the options and recorded
$2,465,406, $3,087,681 and $675,122 of compensation expense during the years
ended December 31, 2001, 2000 and 1999, respectively. During 2001, the Company
reversed $832,731 of deferred compensation related to optionholders who are no
longer providing services to the Company.
During 2001, the Company issued to certain employees an aggregate of 52,500
restricted stock awards. Such restricted stock awards will vest on September 19,
2006 unless certain conditions are met prior to the vesting date. The restricted
stock awards provide for accelerated vesting during specified intervals in 25%
increments if certain milestones relating to research and development activities
and the level of the Company's stock price are met over the next three years.
The fair value of these restricted stock awards at the grant date amounted to
$1,385,625 which is being recorded as compensation expense over the contractual
vesting period. During 2001, the Company recorded $209,668 in compensation
expense relating to these restricted stock awards, which is classified as
selling, general and administrative expenses.
Former non-employee directors of Signal, who entered into consulting
agreements with Celgene effective August 31, 2000, held unvested stock options
to purchase 36,457 shares of the Company's common stock. As a result, the
Company is required to record compensation expense relative to the fair value of
such options which is being recognized over the remaining vesting period for
such options. During 2001, 2000 and 1999 the Company recorded $854,042, $970,309
and $20,646 in compensation expense relating to stock, stock options or warrants
issued to consultants, advisors or financial institutions, respectively.
(B) WARRANTS
In connection with the retention of an placement agent to assist in the
sale and issuance of the Series A Convertible Preferred Stock, the Company, in
1996 granted to such agent, warrants valued at $60,168 to purchase an aggregate
of 200,559 shares of common stock at an exercise price of $6.84 per share. As of
December 31, 2001 all warrants were exercised into 200,559 shares of common
stock.
In connection with the placement of the Series B Convertible Preferred
Stock in June 1997, the Company issued warrants to purchase 1,557,690 shares of
common stock at an exercise price of $2.50 per share with a term of four years
from the issuance date which ends on June 1, 2002. As of December 31, 2001,
967,693 warrants were outstanding.
In conjunction with the issuance of a secured promissory note in June 2000
which expired on December 21, 2000, the Company issued the creditor a warrant to
purchase up to 225,000 shares of Signal C-2 Preferred Stock at a price of $4.00
per share, of which 150,000 shares were issuable under the warrant upon signing
of a loan commitment letter in May 2000, and the remaining 75,000 shares would
become issuable under the warrant upon any borrowing against the note greater
than $2,500,000. The warrant was fair valued at $450,000 which was recorded as
interest expense during 2000. As a result of the Company not borrowing against
the note, the remaining 75,000 shares are no longer issuable under the warrant.
None of these warrants were outstanding as of December 31, 2000.
In conjunction with the issuance of a secured promissory note in November
1996, the Company issued the creditor a warrant to purchase 250,000 shares of
Signal Series C-1 Preferred Stock at a price of $2.10 per share. The warrant was
valued at $165,000, which was recorded as a discount on the related debt. The
value of the warrant was amortized as interest expense over the term of the debt
which ended during May 2000. None of these warrants were outstanding as of
December 31, 2000.
(12) EMPLOYEE BENEFIT PLANS
The Company has an investment savings plan and a deferred compensation plan
for certain employees, of which the investment savings plan qualifies under
Section 401(k) of the Internal Revenue Code. The Company's contributions to the
savings plan are discretionary and have historically been made
F-22
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
in the form of the Company's common stock. Such contributions are based on
specified percentages of employee contributions and aggregated a total expense
charged to operations of $1.4 million in 2001, $1.2 million in 2000 and $1
million in 1999.
During 2000, the Company's Board of Directors approved a deferred
compensation plan effective September 1, 2000. Eligible participants, which
include certain top-level executives of the Company as specified by the plan,
can elect to defer up to 25% of the participant's base salary, 100% of cash
bonuses and restricted stock and stock options gains (both subject to a minimum
deferral of 50% of each award of restricted stock or stock option gain approved
by the Committee for deferral). Company contributions to the deferred
compensation plan represent a 100% match of the participant's deferral up to a
specified percentage (ranging from 10% to 25%, depending on the employee's
position as specified in the plan) of the participant's base salary. The Company
recorded $359,608 and $52,541 in expense associated with the matching of the
deferral of compensation for 2001 and 2000, respectively. All amounts are 100%
vested at all times, except with respect to restricted stock, which will not be
vested until the date the applicable restrictions lapse. At December 31, 2001
and 2000, the Company had a deferred compensation liability included in other
non-current liabilities in the consolidated balance sheets of approximately $1.6
million and $122,000, respectively, which included the participant's elected
deferral of salaries and bonuses, the Company's matching contribution and
earnings on deferred amounts as of that date. The plan provides participants
eight investment options for amounts they elect to defer. Such options include a
combination of funds that offer the investor the option to spread their risk
across a diverse group of investments. These investment choices include an
equity and equity index fund, a bond fund, a fund that is balanced between
equities and bonds, a fund that invests worldwide, a growth fund and a fund that
invests in mid to large cap companies and seeks capital appreciation.
(13) SPONSORED RESEARCH AND LICENSE AGREEMENT
NOVARTIS PHARMA AG
On April 19, 2000, the Company entered into an agreement with Novartis
Pharma AG wherein the Company granted to Novartis an exclusive worldwide license
for the development and marketing of d-methylphenidate ("d-MPH"), its chirally
pure version of Ritalin(Reg. TM). The Company also granted rights to all its
related intellectual property and patents, including new formulations of the
currently marketed Ritalin(Reg. TM). Celgene received a $10,000,000,
nonrefundable, upfront license fee payment in July 2000 and is entitled to
receive substantial milestone payments in addition to royalties on the entire
family of Ritalin(Reg. TM) drugs. The upfront license fee of $10,000,000 was
recognized as revenue over a 17 month period commencing June 2000 which was
management's estimate of the period of time required to fulfill its obligations
related to obtaining FDA approval of the immediate release form of d-MPH. The
Company received FDA approval to market the drug in November 2001. Accordingly,
the Company recognized approximately $5,400,000 and $4,600,000 of research
contract revenue in 2001 and 2000, respectively. The Company also received a
milestone payment of $5,000,000 in December 2000 upon acceptance of the New Drug
Application ("NDA") by the FDA for d-MPH. The milestone payment was recognized
as research contract revenue in December 2000. The Company received an
additional milestone payment of $12,500,000 in November 2001, upon FDA approval
to market the drug which was recognized as research contract revenue. The
Company incurred costs of approximately $2.8 million and $9.4 million in 2001
and 2000, respectively.
In December 2000, the Company signed a collaborative research agreement
with Novartis for joint research of selective estrogen receptor modulator
compounds ("SERMs") for the treatment and prevention of osteoporosis. The
Company received a nonrefundable, upfront payment of $10,000,000 and is entitled
to receive milestone payments for specific preclinical, clinical and regulatory
endpoints, as well as royalties upon commercialization of products receiving FDA
marketing approval. The upfront payment is being amortized over the estimated
two year research period. During 2001, the Company incurred costs of
approximately $2.0 million related to this agreement.
F-23
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
AXYS
On October 15, 1999, the Company entered into a two-year collaborative
research and license agreement with Axys to develop and commercialize certain
compounds for use in the prevention and/or treatment of certain human diseases.
The Company received an initial non-refundable license fee of $2,000,000, which
was amortized over the term of the agreement, and the potential to receive
additional payments based on the achievement of certain program milestones, as
well as royalties upon commercial sales of certain products, if any. The Company
also has the right to exercise a profit share option in the United States and
possibly other territories at a predetermined point during development in lieu
of royalties on product sales. In addition, Axys agreed to pay the Company
certain amounts for the full time equivalent personnel working on the research.
During 2001, 2000 and 1999, Axys paid $1,148,600, $1,500,000 and $375,000,
respectively, to the Company, which represents the approximate cost of the
full-time equivalent personnel working on the related research. This agreement
expired in October 2001 and has not been renewed.
NIPPON KAYAKU
In February 1998, the Company entered into a two-year collaborative
research and license agreement with Nippon Kayaku to develop and commercialize
products based on or derived from a compound supplied by Nippon Kayaku for the
treatment and prevention of diseases and disorders of the CNS and PNS. Nippon
Kayaku agreed to pay the Company certain amounts for the full-time equivalent
personnel working on the research. During 2001, 2000 and 1999, Nippon Kayaku
paid $0, $470,517 and $2,297,695, respectively, to the Company, which represents
the approximate cost of the full-time equivalent personnel working on the
related research. Each party was obligated to pay the other royalties on future
product sales arising from the collaboration.
In February 2000, following the initial research phase of the
collaboration, the Company executed an interim agreement with Nippon Kayaku
under which the Company agreed to enter into a joint agreement to develop and
commercialize neuroprotectant drugs for PNS and CNS disorders.
In July 2000, the Company and Nippon Kayaku mutually agreed to conclude
their collaboration. Nippon Kayaku was granted a worldwide, royalty-free license
to certain compounds involved in the collaboration.
DUPONT
In December 1997, the Company entered into a three-year collaborative
research and license agreement with DuPont Pharmaceuticals ("DuPont") to develop
and commercialize novel products for the treatment and prevention of human
immunodeficiency virus and hepatitis C virus infection. The Company received an
initial non-refundable license fee of $1,000,000, which was amortized over the
term of the agreement, and the potential to receive additional payments based on
the achievement of certain program milestones, as well as royalties upon
commercial sales of certain products, if any. In addition, DuPont agreed to pay
the Company certain amounts for the full time equivalent personnel working on
the research. During 2001, 2000 and 1999, Dupont paid $0, $1,995,564 and
$2,057,400, respectively, to the Company, which represents the approximate cost
of the full-time equivalent personnel working on the related research. Due to
the Company's achievement of a certain milestone in 1999, DuPont purchased
288,708 shares of Signal Series F-1 Preferred Stock for total cash proceeds of
$1,000,000. In accordance with EITF 98-5 the Company recognized an imputed
dividend of $818,487 to reflect a beneficial conversion feature on these
preferred shares. This agreement expired in December 2000 and has not been
renewed.
SERONO
In November 1997, the Company entered into a three-year collaborative
research, development and license agreement with Serono to perform research
within the field of the modulation of NF-kB. The Company will receive payments
based on the achievement of certain program milestones, as well as royalties
upon commercial sales of certain products, if any. In addition, Serono made
quarterly payments
F-24
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
to the Company to fund research efforts. During 2001, 2000 and 1999, Serono paid
$2,793,330, $3,000,000 and $3,000,000, respectively, to the Company, which
represents the approximate cost of the full-time equivalent personnel working on
the related research. Serono purchased shares of Signal's Series F Preferred
Stock in conjunction with the license agreement. The original agreement was
extended for one year and expired in November 2001. The agreement has not been
renewed and the selected compounds have been transferred to Serono for further
development, for which the Company will receive royalties upon commercial sales
of such products, if any, as described above.
(14) INCOME TAXES
At December 31, 2001 and 2000, the tax effects of temporary differences
that give rise to deferred tax assets are as follows:
2001 2000
---- ----
Deferred assets:
Federal and state net operating loss carryforwards .............. $ 131,547,226 $ 125,087,000
Capitalized research expenses ................................... 7,008,725 6,788,000
Research and experimentation tax credit carryforwards ........... 7,366,596 6,111,000
Plant and equipment, principally due to differences in
depreciation .................................................. 1,841,857 2,168,000
Patents, principally due to differences in amortization ......... 113,569 111,000
Accrued and other expenses ...................................... 6,261,988 4,470,000
------------- -------------
Total deferred tax assets ....................................... 154,139,961 144,735,000
Valuation allowance .............................................. (154,139,961) (144,735,000)
------------- -------------
Net deferred tax assets ......................................... $ -- $ --
============= =============
During 2001, 2000 and 1999, the Company recognized a tax benefit of
$1,231,964, $1,809,677 and $3,017,910, respectively, from the sale of certain
State net operating loss carryforwards.
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,
2001, the Company had Federal net operating loss carryforwards of approximately
$329,482,000 and combined State net operating loss carryforwards of
approximately $221,588,000 that will expire in the years 2002 through 2021.
State net operating loss carryforwards differ from Federal net operating loss
carryforwards primarily due to the fact that the Company sold approximately
$75,816,000 of its State net operating loss carryforwards during 2001, 2000 and
1999, and approximately $32,078,000 has expired. The Company also has research
and experimentation credit carryforwards of approximately $7,367,000 that expire
in the years 2002 through 2021. Ultimate utilization/availability of such net
operating losses and credits may be curtailed if a significant change in
ownership occurs. Signal experienced an ownership change, as that term is
defined in section 382 of the Internal Revenue Code, when it was merged with
Celgene. As such, there is an annual limitation on the use of this Net Operating
Loss in the amount of approximately $11,580,000. Of the deferred tax asset
related to the Federal and State net operating loss carryforwards, approximately
$65,909,000 relates to a tax deduction for non qualified stock options. The
Company will increase paid in capital when these benefits are realized for tax
purposes.
(15) DISCONTINUED OPERATION
On January 9, 1998, the Company concluded an agreement with Cambrex
Corporation ("Cambrex") for Cambrex to acquire Celgene's chiral intermediate
business for approximately $15,000,000. The Company received $7,500,000 upon the
closing of the transaction, and will receive future royalties with
F-25
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
a present value not exceeding $7,500,000, 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. Pursuant to the minimum royalty
provision of the agreement, the Company received $991,973 and $719,103 during
the fourth quarter 2001 and 2000, respectively.
F-26
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED )
(16) COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company leases its offices and research facilities under several
operating lease agreements. The minimum annual rents may be subject to specified
annual rental increases. The non-cancelable lease terms for the operating leases
expire at various dates between 2002 and 2012 and each agreement includes
renewal options ranging from one or two additional three or five-year terms.
Under the terms of one of these lease arrangements, the Company has an
outstanding letter of credit for $150,000 in favor of the lessor, which is fully
collateralized by cash. In general, the Company is also required to reimburse
the lessors for real estate taxes, insurance, utilities, maintenance and other
operating costs associated with the leases. The Company's newest lease
arrangement was entered into in December 2001 to consolidate the Company's
California research division into one building. Currently, the division has
three lease arrangements under which the Company intends to sublease upon
relocating to the new facility during the fourth quarter 2002.
In July 1997, the Company entered into an equipment leasing agreement;
under the agreement, the Company could lease up to $1,000,000 of equipment for a
three year term after which the Company could purchase the equipment for a
nominal value. The Company leased $675,000 of laboratory equipment under this
agreement in two separate take-downs, the second three year term expired in June
of 2001. Accordingly, the Company has purchased all the equipment for a nominal
value. In addition, the Company leases certain laboratory equipment and
machinery and office furniture under other capital lease arrangements with three
year terms and options to extend the lease term to five years. Assets held under
capital leases are included in plant and equipment and the amortization of these
assets is included with depreciation expense.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 2001 are:
OPERATING CAPITAL
YEAR ENDING DECEMBER 31 LEASES LEASES
- ----------------------- --------- -------
2002 .............................................................. $ 2,830,655 $ 601,530
2003 .............................................................. 3,938,072 46,800
2004 .............................................................. 2,975,601 --
2005 .............................................................. 3,039,543 --
2006 .............................................................. 3,101,866 --
Thereafter ........................................................ 17,518,412 --
------------ ---------
Total minimum lease payments ..................................... $ 33,404,149 648,330
============
Less amount representing interest ................................. 15,384
---------
Present value of net minimum capital lease payments .............. 632,946
Less current installments of obligations under capital leases ..... 586,731
---------
Obligations under capital leases, excluding current
installments ................................................... $ 46,215
=========
Total facilities rental expense under operating leases amounted to
$2,342,058, $2,142,937 and $1,815,792 in 2001, 2000 and 1999, respectively.
(B) EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain officers and employees.
The related outstanding commitment for 2002 is approximately $2.2 million
(excluding any change in control provisions). Employment contracts provide for
an increase in compensation reflecting annual reviews and related salary
adjustments.
F-27
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
(C) CONTRACTS
Pursuant to the terms of a research and development agreement with The
Rockefeller University ("Rockefeller"), the Company has purchased for cash and
stock options the world-wide exclusive license to manufacture and market any
drugs, including THALOMID(Reg. TM), which may result from the research performed
at Rockefeller and funded by the Company. The portion of the agreement that
provides for research services to be performed by Rockefeller is renewable for
one year terms upon agreement of both parties. Under terms of the current
research agreement extension, the Company is committed to pay Rockefeller
$504,000 annually for research. The Company has an agreement with Penn
Pharmaceutical, Ltd. of Great Britain ("Penn") for the production of
THALOMID(Reg. TM). Penn manufactures THALOMID(Reg. TM) and sells it exclusively
to the Company. The agreement has been extended through 2002 for facility
payments totaling approximately $540,000.
In October 1997, the Company entered into a 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.(Reg. TM) (System for THALOMID(Reg.
TM) Education and Prescribing Safety) program for all THALOMID(Reg. TM)
patients. The contract is renewable for one year terms upon agreement of both
parties and is being renegotiated for 2002.
In December 1998, the Company entered into an exclusive sublicense
agreement with EntreMed, Inc. ("EntreMed") whereby EntreMed granted to the
Company an exclusive sublicense to its patent and technology rights for
thalidomide. In return, EntreMed received royalties on all sales of
THALOMID(Reg. TM). In August 2001, the agreement was terminated and Celgene was
directly granted an exclusive license by Children's Medical Center Corporation
for its patent rights related to thalidomide in exchange for royalties on
THALOMID(Reg. TM) sales.
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, the Company agreed
to pay the University approximately $200,000 in two annual installments. The
term of the original agreement was for two years and is renewable for one year
terms. The agreement has been renewed for 2002.
In 1998, the Company paid $280,000 in cash and issued shares of common
stock related to a license agreement with the University of Massachusetts and
capitalized the value as purchased technology. The Company has future
commitments to make additional payments based on the achievement of certain
milestones, as well as royalties upon commercial sales, if any, of certain
products. Such fees or milestone payments may also involve the issuance of
shares of common stock, which would be recorded at fair value at the date of
issuance.
In March 2001, the Company entered into a Master Services Agreement with
PPD Development, LLC, ("PPD"), a contract research organization, under which
project addenda may be executed from time to time for PPD to provide services in
support of clinical development projects. In 2001, the Company executed such
project agreements and it is anticipated the Company will spend approximately
$2.2 million in 2002.
In May 2001, the Company entered into an agreement with Pharmacia to
conduct a collaborative study of THALOMID(Reg. TM) in combination with
CAMPTOSAR(Reg. TM) (irinotecan) and 5-fluorouracil and leucovorin for the
treatment of metastatic colorectal cancer. The Company expects to spend
approximately $1.0 million in 2002.
In April 2001, the Company entered into a license and development agreement
with Anthrogenesis Corporation ("Anthrogenesis") for the development of a human
angiogenesis assay system for screening the effect of certain molecules on the
process of neovascularization. The Company paid $250,000 for a one year
exclusive, royalty-free license to all assay system technology. This payment was
expensed upon the signing of the agreement.
F-28
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 - (CONTINUED)
In December 2001, the Company entered into a second development agreement
with Anthrogenesis for a period of one year. Anthrogenesis will perform certain
development work on several of the Company's compounds. The Company recorded a
development fee of $250,000 which is being amortized over the term of the
agreement. Anthrogenesis is considered a related party as two senior executives
of the Company serve on the Board of Directors of Anthrogenesis.
In November, 2001, the Company entered into a license agreement with
Pharmion Corporation and Pharmion GmbH ("Pharmion") in which the Company granted
an exclusive royalty-bearing license for its intellectual property covering
thalidomide and S.T.E.P.S.(Reg. TM) in Europe and selected other countries
outside North America in exchange for licensing payments and royalties. The
agreement will terminate upon the tenth anniversary of the initial European
regulatory approval of thalidomide, and pursuant to the agreement, the Company
will receive $300,000 on a quarterly basis beginning in December 2001.
In November, 2001, concurrent with the Pharmion License agreement, the
Company entered into an agreement with Penn Pharmaceuticals, Ltd ("Penn") and
its shareholders in which Penn granted an option to purchase their thalidomide
Dedicated Containment Facilities ("DCF") and related thalidomide assets. The
Company has three years in which to exercise the option. The purchase price will
be determined in the future based on a formula defined in the agreement.
(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 it is in substantial compliance with all applicable environmental laws
and regulations.
(17) SEGMENTS
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires the use of the management approach in identifying and
disclosing financial information about segments of an enterprise. The Company is
engaged in the discovery, development and commercialization of orally
administered, small molecule drugs for the treatment of cancer and immunological
diseases. Additionally, the Company's chiral chemistry program develops chirally
pure versions of existing compounds for both pharmaceutical and agrochemical
markets. The Company markets and sells its products in the United States and
management has determined that the Company operates in one business segment.
All of the Company's customers are located in North America. In 2001 and
2000, six customers accounted for 87% and 85% of total product sales revenue,
respectively. At December 31, 2001 and 2000, these same customers had
outstanding accounts receivable balances that represented 88% and 80% of the
total accounts receivable balance, respectively. The Company estimates an
allowance for doubtful accounts based on the creditworthiness of its customers
as well as general economic conditions. Consequently, an adverse change in those
factors could affect the Company's estimate of its bad debts.
F-29
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999 -- (CONTINUED)
(18) QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED,
-------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30,
2001 2001 2001
---- ---- ----
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total revenue ............................. $ 41,735 $ 26,178 $ 23,931
Gross profit(1) ........................... 22,006 18,463 15,841
Merger-related costs ...................... -- -- --
Tax benefit ............................... 1,232 -- --
Net income(loss) .......................... $ 6,736 $ (6,342) $ (2,419)
============ ============ ============
Per share of common stock basic and
diluted:(2)
Net income (loss)--basic .................. $ 0.09 $ (0.08) $ (0.03)
Net income (loss)--diluted ................ $ 0.08 $ (0.08) $ (0.03)
Weighted average number of shares of
common stock outstanding--basic(2) ....... 75,511,000 75,356,000 75,113,000
Weighted average number of shares of
common stock outstanding--diluted(2) ..... 81,674,000 75,356,000 75,113,000
THREE MONTHS ENDED,
-------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2001 2000 2000 2000 2000
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total revenue ............................. $ 22,399 $ 27,583 $ 22,832 $ 19,846 $ 14,647
Gross profit(1) ........................... 14,313 13,892 15,144 13,652 10,002
Merger-related costs ...................... -- (500) 7,168 -- --
Tax benefit ............................... -- 1,810 -- -- --
Net income(loss) .......................... $ 113 $ 3,693 $ (7,471) $ (5,882) $ (6,625)
============ ============ ============ ============ ============
Per share of common stock basic and
diluted:(2)
Net income (loss)--basic .................. $ 0.00 $ 0.05 $ (0.11) $ (0.09) $ (0.11)
Net income (loss)--diluted ................ $ 0.00 $ 0.05 $ (0.11) $ (0.09) $ (0.11)
Weighted average number of shares of
common stock outstanding--basic(2) ....... 74,439,000 73,314,000 68,301,000 65,544,000 59,151,000
Weighted average number of shares of
common stock outstanding--diluted(2) ..... 80,608,000 81,662,000 68,301,000 65,544,000 59,151,000
(1) Gross profit is calculated as Product sales less Cost of goods sold
(2) These amounts are adjusted for the three-for-one stock split effected April
2000.
F-30
CELGENE CORPORATION
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
YEAR EXPENSE OR SALES DEDUCTIONS YEAR
------------ ---------------- ---------- ----------
Year ended December 31, 2001
Allowance for doubtful accounts ... $231,437 $ 553,168 $ 76,915 $ 707,690
Allowance for sales returns ....... 381,088 2,440,460 (1) 1,964,054 857,494
Allowance for customer discounts .. 151,140 1,785,306 (1) 1,645,741 290,705
-------- ------------- ---------- ----------
$763,665 $ 4,778,934 $3,686,710 $1,855,889
======== ============= ========== ==========
Year ended December 31, 2000
Allowance for doubtful accounts ... $101,437 $ 130,000 $ -- $ 231,437
Allowance for sales returns ....... 75,327 2,522,000 (1) 2,216,239 381,088
Allowance for customer discounts .. 20,000 1,304,000 (1) 1,172,860 151,140
-------- --------------- ---------- ----------
$196,764 $ 3,956,000 $3,389,099 $ 763,665
======== =============== ========== ==========
Year ended December 31, 1999
Allowance for doubtful accounts ... $ 43,386 $ 58,051 $ -- $ 101,437
Allowance for sales returns ....... -- 1,131,572 (1) 1,056,245 75,327
Allowance for customer discounts .. -- 453,208 (1) 433,208 20,000
-------- --------------- ---------- ----------
$ 43,386 $ 1,642,831 $1,489,453 $ 196,764
======== =============== ========== ==========
(1) Amounts are a reduction from gross sales
F-31