SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 2001
-----------------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from ______________ to _______________
Commission File Number 0-19119
-------
CEPHALON, INC.
-------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 23-2484489
- ----------------------------------------------- -------------------
(State Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification Number)
145 Brandywine Parkway, West Chester, PA 19380-4245
- ------------------------------------------ --------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610) 344-0200
--------------
Not Applicable
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report
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 ___
---
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of November 5, 2001
- ---------------------------- ----------------------------------
Common Stock, par value $.01 50,568,977 Shares
This Report Includes a Total of 27 Pages
CEPHALON, INC. AND SUBSIDIARIES
-------------------------------
INDEX
-----
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - 3
September 30, 2001 and December 31, 2000
Consolidated Statements of Operations - 4
Three and nine months ended September 30, 2001 and 2000
Consolidated Statements of Stockholders' Equity - 5
September 30, 2001 and December 31, 2000
Consolidated Statements of Cash Flows - 6
Nine months ended September 30, 2001 and 2000
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 13
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
2
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
September 30, December 31,
2001 2000
--------------------- --------------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 42,167,000 $ 36,571,000
Investments 402,217,000 60,813,000
Receivables, net 29,873,000 21,905,000
Inventory (Note 2) 30,096,000 20,161,000
Other 5,600,000 1,579,000
--------------------- --------------------
Total current assets 509,953,000 141,029,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $21,028,000 and $18,905,000 35,660,000 29,730,000
INTANGIBLE ASSETS, net of accumulated
amortization of $10,261,000 and $1,679,000 127,609,000 135,794,000
OTHER (Note 3) 15,041,000 1,882,000
--------------------- --------------------
$ 688,263,000 $308,435,000
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 5,010,000 $ 3,590,000
Accrued expenses 34,591,000 32,758,000
Current portion of deferred revenues 1,198,000 1,469,000
Current portion of long-term debt (Note 3) 5,702,000 42,950,000
--------------------- --------------------
Total current liabilities 46,501,000 80,767,000
DEFERRED REVENUES 5,486,000 7,151,000
LONG-TERM DEBT (Note 3) 440,482,000 55,138,000
OTHER 112,000 186,000
--------------------- ---------------------
Total liabilities 492,581,000 143,242,000
--------------------- --------------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
2,500,000 issued and outstanding at December 31, 2000 -- 25,000
Common stock, $.01 par value, 100,000,000 shares authorized,
50,571,084 and 42,478,225 shares issued 506,000 425,000
Additional paid-in capital 710,860,000 683,004,000
Treasury stock, 173,395 and 138,183 shares outstanding, at cost (6,093,000) (4,119,000)
Accumulated deficit (512,146,000) (515,543,000)
Accumulated other comprehensive income 2,555,000 1,401,000
--------------------- --------------------
Total stockholders' equity 195,682,000 165,193,000
--------------------- --------------------
$ 688,263,000 $308,435,000
===================== ====================
The accompanying notes are an integral part of these consolidated financial
statements.
3
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
2001 2000 2001 2000
-------------- ------------- --------------- -------------
REVENUES: (Note 7)
Product sales $ 73,953,000 $ 24,265,000 $ 159,061,000 $ 58,848,000
Other revenues 9,869,000 3,791,000 28,032,000 12,248,000
-------------- ------------- --------------- -------------
83,822,000 28,056,000 187,093,000 71,096,000
-------------- ------------- --------------- -------------
COSTS AND EXPENSES:
Cost of product sales 14,341,000 5,427,000 31,912,000 11,648,000
Research and development 19,307,000 17,446,000 59,821,000 48,088,000
Selling, general and administrative 23,236,000 19,941,000 74,899,000 58,753,000
Depreciation and amortization 3,663,000 1,180,000 10,698,000 2,648,000
-------------- ------------- --------------- -------------
60,547,000 43,994,000 177,330,000 121,137,000
-------------- ------------- --------------- -------------
INCOME (LOSS) FROM OPERATIONS 23,275,000 (15,938,000) 9,763,000 (50,041,000)
-------------- ------------- --------------- -------------
OTHER INCOME AND EXPENSE
Interest income 4,121,000 2,856,000 8,667,000 14,277,000
Interest expense (6,666,000) (1,354,000) (12,122,000) (3,483,000)
Other income (expense) 847,000 (594,000) (263,000) (1,485,000)
-------------- ------------- --------------- -------------
(1,698,000) 908,000 (3,718,000) 9,309,000
-------------- ------------- --------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN, DIVIDENDS
ON PREFERRED STOCK AND CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 21,577,000 (15,030,000) 6,045,000 (40,732,000)
Extraordinary gain on early extinguishment of debt (Note 3) -- -- 3,016,000 --
-------------- ------------- --------------- -------------
INCOME (LOSS) BEFORE DIVIDENDS ON PREFERRED STOCK
AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE 21,577,000 (15,030,000) 9,061,000 (40,732,000)
Dividends on convertible exchangeable preferred stock (Note 6) (70,000) (2,266,000) (5,664,000) (6,797,000)
-------------- ------------- --------------- -------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 21,507,000 (17,296,000) 3,397,000 (47,529,000)
Cumulative effect of adopting Staff Accounting Bulletin 101
(SAB 101) -- -- -- (7,434,000)
-------------- ------------- --------------- -------------
INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 21,507,000 $(17,296,000) $ 3,397,000 $(54,963,000)
============== ============= =============== =============
BASIC INCOME (LOSS) PER COMMON SHARE:
Income (loss) per common share before extraordinary gain and
cumulative effect of adopting SAB 101 $ 0.43 $ (0.42) $ 0.01 $ (1.19)
Extraordinary gain on early extinguishment of debt - - 0.06 -
Cumulative effect of adopting SAB 101 - - - (0.19)
-------------- ------------- --------------- -------------
$ 0.43 $ (0.42) $ 0.07 $ (1.38)
============== ============= =============== =============
DILUTED INCOME (LOSS) PER COMMON SHARE:
Income (loss) per common share before extraordinary gain and
cumulative effect of adopting SAB 101 $ 0.40 $ (0.42) $ 0.01 $ (1.19)
Extraordinary gain on early extinguishment of debt - - 0.06 -
Cumulative effect of adopting SAB 101 - - - (0.19)
-------------- ------------- --------------- -------------
$ 0.40 $ (0.42) $ 0.07 $ (1.38)
============== ============= =============== =============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 50,269,000 41,298,000 46,909,000 39,893,000
============== ============= =============== =============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING-ASSUMING DILUTION 53,412,000 41,298,000 49,831,000 39,893,000
============== ============= =============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
4
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Other
Comprehensive Accumulated Comprehensive
Loss Total Deficit Income
---------------------- ---------------------------------------------------
BALANCE, JANUARY 1, 2000 $ 230,783,000 $(405,302,000) $ 566,000
Loss $(101,178,000) (101,178,000) (101,178,000) --
---------------------
Foreign currency translation gain 1,015,000
Unrealized investment losses (180,000)
---------------------
Other comprehensive income 835,000 835,000 -- 835,000
---------------------
Comprehensive loss $(100,343,000)
=====================
Issuance of common stock under stock purchase plan 78,000 -- --
Stock options and warrants exercised 40,051,000 -- --
Restricted stock award plan 5,625,000 -- --
Employee benefit plan 891,000 -- --
Dividends declared on convertible preferred stock (9,063,000) (9,063,000) --
Treasury stock acquired (2,829,000) -- --
--------------- ----------------- -----------
BALANCE, DECEMBER 31, 2000 165,193,000 (515,543,000) 1,401,000
Net Income $ 9,061,000 9,061,000 9,061,000 --
---------------------
Foreign currency translation gain 75,000
Unrealized investment gains 1,079,000
---------------------
Other comprehensive income 1,154,000 1,154,000 -- 1,154,000
---------------------
Comprehensive income $ 10,215,000
=====================
Conversion of preferred stock into common stock -- -- --
Stock options and warrants exercised 22,664,000 -- --
Restricted stock award plan 4,350,000 -- --
Employee benefit plan 883,000 -- --
Dividends declared on convertible preferred stock (5,664,000) (5,664,000) --
Treasury stock acquired (1,974,000) -- --
Other 15,000 -- --
--------------- ----------------- -----------
BALANCE, SEPTEMBER 30, 2001 $ 195,682,000 $(512,146,000) $2,555,000
=============== ================= ===========
Additional
Common Preferred Paid-in Treasury
Stock Stock Capital Stock
------------------------------------------------------------
BALANCE, JANUARY 1, 2000 $389,000 $ 25,000 $636,395,000 $(1,290,000)
Loss -- -- -- --
Foreign currency translation gain
Unrealized investment losses
Other comprehensive income -- -- -- --
Comprehensive loss
Issuance of common stock under stock purchase plan -- -- 78,000 --
Stock options and warrants exercised 35,000 -- 40,016,000 --
Restricted stock award plan 1,000 -- 5,624,000 --
Employee benefit plan -- -- 891,000 --
Dividends declared on convertible preferred stock -- -- -- --
Treasury stock acquired -- -- -- (2,829,000)
----------- ---------- --------------- ------------
BALANCE, DECEMBER 31, 2000 425,000 25,000 683,004,000 (4,119,000)
Net Income -- -- -- --
Foreign currency translation gain
Unrealized investment gains
Other comprehensive income -- -- -- --
Comprehensive income
Conversion of preferred stock into common stock 70,000 (25,000) (45,000) --
Stock options and warrants exercised 11,000 -- 22,653,000 --
Restricted stock award plan -- -- 4,350,000 --
Employee benefit plan -- -- 883,000 --
Dividends declared on convertible preferred stock -- -- -- --
Treasury stock acquired -- -- -- (1,974,000)
Other -- -- 15,000 --
----------- ---------- --------------- ------------
BALANCE, SEPTEMBER 30, 2001 $506,000 $ -- $710,860,000 $(6,093,000)
=========== ========== =============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine Months Ended
September 30,
--------------------------------------------
2001 2000
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) before preferred dividends $ 9,061,000 $ (48,166,000)
Adjustments to reconcile income (loss) to net cash
provided by (used for) operating activities:
Cumulative effect of adoption of SAB 101 -- 7,434,000
Depreciation and amortization 10,698,000 2,648,000
Non-cash interest expense 3,715,000 --
Non-cash compensation expense 5,233,000 4,615,000
Gain on extinguishment of debt (3,016,000) --
Other 26,000 (63,000)
(Increase) decrease in operating assets:
Receivables, net (7,968,000) (11,044,000)
Inventory (9,935,000) (12,585,000)
Other current assets (4,021,000) (2,393,000)
Other long-term assets 8,000 40,000
Increase (decrease) in operating liabilities:
Accounts payable 1,023,000 (3,096,000)
Accrued expenses 2,966,000 1,751,000
Deferred revenues (1,936,000) (1,306,000)
Other long-term liabilities (74,000) (4,029,000)
-------------------- --------------------
Net cash provided by (used for) operating activities 5,780,000 (66,194,000)
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,695,000) (5,896,000)
Acquistion of intangible assets -- (23,850,000)
Sales and maturities (purchases) of investments, net (340,325,000) 116,644,000
-------------------- --------------------
Net cash (used for) provided by investing activities (348,020,000) 86,898,000
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock options and warrants 20,913,000 24,007,000
Payments to acquire treasury stock (224,000) --
Preferred dividends paid (6,797,000) (6,797,000)
Net proceeds from issuance of long-term debt 385,648,000 --
Principal payments on and retirements of long-term debt (51,779,000) (32,424,000)
-------------------- --------------------
Net cash provided by (used for) financing activities 347,761,000 (15,214,000)
-------------------- --------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 75,000 1,450,000
-------------------- --------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,596,000 6,940,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 36,571,000 24,898,000
-------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 42,167,000 $ 31,838,000
==================== ====================
Supplemental disclosure of non-cash investing activities:
Capital lease additions $ 360,000 $ 1,148,000
==================== ====================
The accompanying notes are an integral part of these consolidated financial
statements.
6
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Cephalon, Inc. is an international biopharmaceutical company dedicated to
the discovery, development and marketing of products to treat sleep disorders,
neurological disorders, cancer and pain. In addition to an active research and
development program, we market three products in the United States and eight
products in various countries in Europe.
In the United States, we maintain our corporate and research and
development headquarters and market three products: PROVIGIL(R) (modafinil)
Tablets [C-IV] for treating excessive daytime sleepiness associated with
narcolepsy, ACTIQ(R) (oral transmucosal fentanyl citrate) [C-II] for the
management of breakthrough cancer pain in opioid tolerant patients and
GABITRIL(R) (tiagabine hydrochloride) for the treatment of partial seizures
associated with epilepsy. We market these products through our two specialty
sales forces: the first, numbering approximately 135 representatives, details
PROVIGIL and GABITRIL to neurologists, psychiatrists and sleep specialists; the
second, numbering approximately 50 representatives, details ACTIQ to oncologists
and pain specialists.
In the United Kingdom, we market PROVIGIL and five other products under our
collaboration agreement with Novartis Pharma AG, including TEGRETOL(R)
(carbamazepine), a treatment for epilepsy and RITALIN(R) (methylphenidate), a
treatment for attention deficit hyperactivity disorder (ADHD). We also market
products in France, Germany, Austria and Switzerland. In support of our European
sales and marketing efforts, we have established a European sales and marketing
organization comprised of approximately 30 persons.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnote disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in our annual report on Form 10-K, filed with the Securities and
Exchange Commission, which includes financial statements as of December 31, 2000
and 1999 and for each of the three years in the period ended December 31, 2000.
The results of our operations for any interim period are not necessarily
indicative of the results of our operations for any other interim period or for
a full year.
Merger
On October 10, 2000, we completed a merger with Anesta Corp. under which we
acquired all of the outstanding shares of Anesta in a tax-free, stock-for-stock
transaction. Under the terms of the merger agreement, each stockholder of Anesta
received 0.4765 shares of our common stock for each share of Anesta common
stock. The merger has been accounted for as a pooling-of-interests and,
accordingly, all of our prior period consolidated financial statements have been
restated to include the results of operations, financial position, and cash
flows of Anesta. Information concerning common stock, employee stock plans, and
per share data has been restated on an equivalent share basis. There were no
material adjustments required to conform the accounting policies of the two
companies. Certain amounts of Anesta have been reclassified to conform to our
reporting practices.
7
Staff Accounting Bulletin No. 101
During 2000, we adopted the SEC's Staff Accounting Bulletin No. 101 (SAB
101) on revenue recognition for use in recording revenues from collaborative
research and development agreements and similar sources of other revenue.
Results for 2000 have been restated to give effect for the implementation of SAB
101 in the fourth quarter of 2000 retroactively to January 1, 2000. The impact
of the change resulted in an increase in total revenues and a corresponding
decrease in loss before cumulative effect of a change in accounting principle of
$291,000 for the three months ended September 30, 2000 and $654,000 for the nine
months ended September 30, 2000 as compared to amounts previously reported.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized Statements
of Financial Accounting Standards No. 141, Business Combinations (SFAS 141), and
No. 142, Goodwill and Other Intangible Assets (SFAS 142), which are effective
for fiscal years beginning after December 15, 2001. SFAS 141 requires all
business combinations initiated after June 30, 2001, to be accounted for using
the purchase method. SFAS 142 no longer requires the amortization of goodwill;
rather, goodwill will be subject to a periodic assessment for impairment by
applying a fair-value-based test. In addition, an acquired intangible asset
should be separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the intangible asset
can be sold, transferred, licensed, rented, or exchanged, regardless of the
acquirer's intent to do so. Such acquired intangible assets will be amortized
over their useful lives. All of our intangible assets were obtained through
contractual rights and have been separately identified and recognized in our
balance sheets. These intangibles are being amortized over their estimated
useful lives or contractual lives as appropriate. Therefore, we do not expect
the adoption of SFAS 142 to have an effect on our intangible asset transactions
recorded to date.
2. INVENTORY
Inventory is stated at the lower of cost or market value using the first-
in, first-out method:
September 30, December 31,
2001 2000
---- ----
Raw material.......................................................... $15,719,000 $ 6,401,000
Work-in-process....................................................... 6,150,000 5,325,000
Finished goods........................................................ 8,227,000 8,435,000
----------- -----------
$30,096,000 $20,161,000
=========== ===========
3. LONG-TERM DEBT
Long-term debt consisted of the following:
September 30, December 31,
2001 2000
---- ----
Capital lease obligations............................................ $ 1,883,000 $ 2,342,000
Mortgage and building improvement loans.............................. 12,377,000 14,900,000
Abbott/Novartis obligations.......................................... 31,924,000 80,846,000
Convertible subordinated notes....................................... 400,000,000 --
------------ ------------
Total debt........................................................... 446,184,000 98,088,000
Less current portion................................................. (5,702,000) (42,950,000)
------------ ------------
Total long-term debt................................................. $440,482,000 $ 55,138,000
============ ============
8
In May 2001, we made a payment of $24,000,000 to Abbott Laboratories due
under our licensing agreement. Also, in May 2001, we paid $24,438,000 to
Novartis Pharma AG for deferred obligations due to them under our continuing
November 2000 collaboration agreement. In connection with this payment, we
recorded an extraordinary gain on the early extinguishment of debt of
$3,016,000.
In the second quarter of 2001, we completed a private placement of
$400,000,000 of 5.25% convertible subordinated notes due 2006. Debt issuance
costs of $14,352,000 have been capitalized in other assets and will be amortized
over the term of the notes. As of September 30, 2001, the remaining balance to
be amortized is $13,167,000. Interest on the notes is payable each May 1 and
November 1, beginning November 1, 2001. The notes are convertible into our
common stock at a conversion price of $74.00 per share, subject to adjustment in
certain circumstances. We may redeem the notes on or after May 5, 2003. Prior to
that date, we may redeem the notes if our common stock price exceeds 150% of the
conversion price for a specified period of time. Upon early redemption, we are
required to pay interest that would have been due up through May 5, 2003.
In July 2001, we made a payment of $1,667,000 to retire a variable-rate
term note payable in connection with the remodeling of our facility in Salt Lake
City, Utah.
4. LEGAL PROCEEDINGS
In August 1999, the U.S. District Court for the Eastern District of
Pennsylvania entered a final order approving the settlement of a class action
alleging that statements made about the results of certain clinical studies of
MYOTROPHIN(R) (mecasermin) Injection were misleading. A related complaint has
been filed with the Court by a small number of plaintiffs who decided not to
participate in the settlement. This related complaint alleges that we are liable
under common law for misrepresentations concerning the results of the MYOTROPHIN
clinical trials, and that we and certain of our current and former officers and
directors are liable for the actions of persons who allegedly traded in our
common stock on the basis of material inside information. We believe that we
have valid defenses to all claims raised in this action. Moreover, even if there
is a judgment against us in this case, we do not believe it will have a material
adverse effect on our financial condition or results of operations.
Due to our past involvement in promoting STADOL NS(R) (butorphanol
tartrate) Nasal Spray, a product of Bristol-Myers Squibb Company, we are co-
defendants in several product liability actions brought against Bristol-Myers.
Although we cannot predict with certainty the outcome of this litigation, we
believe that any expenses or damages that we may incur will be paid by Bristol-
Myers under the indemnification provisions of our co-promotion agreement. As
such, we do not believe that these actions will have a material adverse effect
on our financial condition or results of operations.
In February 2001, a complaint was filed in Utah state court by Zars, Inc.
and one of its research scientists, against us and our subsidiary Anesta Corp.
The plaintiffs are seeking a declaratory judgment to establish their right to
develop transdermal or other products containing fentanyl and other
pharmaceutically active agents under a royalty and release agreement between
Zars and Anesta. The complaint also asks for unspecified damages for breach of
contract, interference with economic relations, defamation and slander. We
believe that we have valid defenses to all claims raised in this action. In any
event, we do not believe any judgment against us will have a material adverse
effect on our financial condition or results of operations.
9
5. COMMITMENTS AND CONTINGENCIES
Related party
In August 1992, we exclusively licensed our rights to MYOTROPHIN for human
therapeutic use within the United States, Canada and Europe to Cephalon Clinical
Partners, L.P., or CCP. Development and clinical testing of MYOTROPHIN is
performed on behalf of CCP under a research and development agreement with CCP.
CCP has granted us an exclusive license to manufacture and market
MYOTROPHIN for human therapeutic use within the United States, Canada and Europe
in return for royalty payments equal to a percentage of product sales and a
milestone payment of approximately $16,000,000 that will be made if MYOTROPHIN
receives regulatory approval.
We have a contractual option to purchase all of the limited partnership
interests of CCP. To exercise this purchase option, we are required to make an
advance payment of $40,275,000 in cash or, at our election, shares of common
stock with a value of $42,369,000 or a combination thereof. The purchase option
will become exercisable upon the occurrence of certain events once sales
activity commences. Should we discontinue development of MYOTROPHIN or if we do
not exercise the purchase option, our license will terminate and all rights to
manufacture or market MYOTROPHIN in the United States, Canada and Europe will
revert to CCP, which may then commercialize MYOTROPHIN itself or license or
assign its rights to a third party. In that event, we would not receive any
benefits from such commercialization, license or assignment of rights.
6. STOCKHOLDERS' EQUITY
In May 2001, the holders of 2,344,586 shares of the 2,500,000 shares
outstanding of our convertible exchangeable preferred stock converted their
preferred shares into an aggregate of 6,541,394 shares of our common stock, in
accordance with the terms of the preferred stock. As an inducement to the
holders to convert their preferred stock prior to August 2001, when we were
initially permitted to redeem the preferred stock, we agreed to pay immediately
all dividends accrued through the date of conversion as well as all dividends
that would have accrued on the converted shares through the August 2001
redemption date. In the second quarter of 2001, we recognized an additional
$1,063,000 of dividend expense associated with the early conversion. In
September 2001, the remaining 155,414 shares of our convertible exchangeable
preferred stock were converted into an aggregate of 433,604 shares of our common
stock.
7. REVENUES
Revenues consisted of the following:
Three months Nine months
ended September 30, ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
Product sales:
PROVIGIL....................................... $53,694,000 $19,213,000 $110,566,000 $47,963,000
ACTIQ.......................................... 14,003,000 5,052,000 30,349,000 9,045,000
GABITRIL....................................... 6,256,000 -- 18,146,000 1,840,000
----------- ----------- ------------ -----------
Total product sales............................... 73,953,000 24,265,000 159,061,000 58,848,000
Other revenues.................................... 9,869,000 3,791,000 28,032,000 12,248,000
----------- ----------- ------------ -----------
Total revenues.................................... $83,822,000 $28,056,000 $187,093,000 $71,096,000
=========== =========== ============ ===========
10
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(Unaudited)
8. OTHER COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires presentation of the components of comprehensive
income (loss). Our comprehensive income (loss) includes net income (loss),
unrealized gains and losses from foreign currency translation adjustments, and
unrealized investment gains and losses. Our total comprehensive income (loss) is
as follows:
Three months Nine months
ended September 30, ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
Income (loss) before preferred dividends........ $ 21,577,000 $(15,030,000) $ 9,061,000 $(48,166,000)
Other comprehensive income (loss):
Foreign currency translation adjustment....... (712,000) 660,000 75,000 1,450,000
Unrealized investment gains (losses).......... 972,000 455,000 1,079,000 (198,000)
------------- ------------ ----------- ------------
Other comprehensive income (loss)............... $ 21,837,000 $(13,915,000) $10,215,000 $(46,914,000)
============= ============ =========== ============
9. EARNINGS PER SHARE
We compute income (loss) per common share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Basic income
(loss) per common share is computed based on the weighted average number of
common shares outstanding during the period. Diluted income (loss) per common
share is computed based on the weighted average shares outstanding and the
dilutive impact of common stock equivalents outstanding during the period. The
dilutive effect of employee stock options and restricted stock awards is
measured using the treasury stock method. Common stock equivalents are not
included in periods where there is a loss, as they are anti-dilutive. The
following is a reconciliation of net income (loss) and weighted average common
shares outstanding for purposes of calculating basic and diluted income (loss)
per common share:
Three months Nine months
ended September 30, ended September 30,
2001 2000 2001 2000
----------- ------------ ----------- ------------
Numerator:
Net income (loss) used for basic
income (loss) per common share.............. $21,507,000 $(17,296,000) $ 3,397,000 $(54,963,000)
Dividends on convertible exchangeable
preferred stock............................. 70,000 -- -- --
----------- ------------ ----------- ------------
Net income (loss) used for diluted income
(loss) per common share..................... $21,577,000 $(17,296,000) $ 3,397,000 $(54,963,000)
=========== ============ =========== ============
Denominator:
Weighted average shares used for basic
income (loss) per common share.............. 50,269,000 41,298,000 46,909,000 39,893,000
Effect of dilutive securities:
Employee stock options and restricted
stock awards................................ 2,499,000 -- 2,702,000 --
Warrants...................................... 220,000 -- 220,000 --
Convertible exchangeable preferred stock...... 424,000 -- -- --
----------- ------------ ----------- ------------
Weighted average shares used for diluted
income (loss) per common share.............. 53,412,000 41,298,000 49,831,000 39,893,000
=========== ============ =========== ============
11
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(Unaudited)
The weighted average shares used in the calculation of diluted income per
common share for the three months ended September 30, 2001 excludes 404,000
shares relating to employee stock options and 5,405,000 shares relating to
convertible notes as the inclusion of such shares would be anti-dilutive. The
weighted average shares used in the calculation of diluted income per common
share for the nine months ended September 30, 2001 excludes 479,000 shares
relating to employee stock options, 2,883,000 shares relating to convertible
notes, and 3,338,000 shares relating to convertible exchangeable preferred stock
as the inclusion of such shares would be anti-dilutive.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain Risks Related to Our Business
In addition to historical facts or statements of current condition, this report
contains forward-looking statements. Forward-looking statements provide our
current expectations or forecasts of future events. These may include
statements regarding anticipated scientific progress in our research programs,
development of potential pharmaceutical products, prospects for regulatory
approval, manufacturing capabilities, market prospects for our products, sales
and earnings projections, and other statements regarding matters that are not
historical facts. Some of these forward-looking statements may be identified by
the use of words in the statements such as "anticipate," "estimate," "expect," "
project," "intend," "plan," "believe" or other words and terms of similar
meaning. Our performance and financial results could differ materially from
those reflected in these forward-looking statements due to general financial,
economic, regulatory and political conditions affecting the biotechnology and
pharmaceutical industries as well as more specific risks and uncertainties such
as those set forth below and in our reports to the SEC on Forms 8-K and 10-K.
Given these risks and uncertainties, any or all of these forward-looking
statements may prove to be incorrect. Therefore, you should not rely on any
such forward-looking statements. Furthermore, we do not intend to update
publicly any forward-looking statements, except as required by law. This
discussion is permitted by the Private Securities Litigation Reform Act of 1995.
During the next several years we will be very dependent upon the commercial
success of our products, especially PROVIGIL, and we may not be able to
consistently and meaningfully increase sales of these products during this
period, or to maintain profitability on the basis of such sales.
The commercialization of our pharmaceutical products involves a number of
significant challenges. In particular, our ability to meaningfully increase
sales depends, in large part, on the success of our clinical development
programs, and our sales and marketing efforts to physicians, patients and third-
party payors. A number of factors could impact these efforts, including our
ability to demonstrate clinically that our products have utility beyond current
indications, our limited financial resources and sales and marketing experience
relative to our competitors, the perceived differences between our products and
those of our competitors, the availability and level of reimbursement of our
products by third-party payors, incidents of adverse reactions, side effects or
misuse of our products and the unfavorable publicity that could result, or the
occurrence of manufacturing, supply or distribution disruptions.
Ultimately, our efforts may not prove to be as effective as the efforts of our
competitors. In the United States and elsewhere, our products face significant
competition in the marketplace. The conditions that our products treat, and
some of the other disorders for which we are conducting additional studies, are
currently treated with several drugs, many of which have been available for a
number of years or are available in inexpensive generic forms. Thus, we will
need to demonstrate to physicians, patients and third party payors that the cost
of our products is reasonable and appropriate in the light of their safety and
efficacy, the price of competing products and the related health care benefits
to the patient. Even if we are able to increase sales over the next several
years, we cannot be sure that we will maintain profitability.
We may be unsuccessful in our efforts to expand the number and scope of
authorized uses of PROVIGIL, which would hamper sales growth and make it more
difficult to maintain profitability.
PROVIGIL is approved for sale in the United States and abroad for use by those
suffering from excessive daytime sleepiness associated with narcolepsy. Under
current FDA regulations, we are limited in our ability to promote the use of
PROVIGIL outside of this approved indication. The market for the use of
PROVIGIL in narcolepsy patients is relatively small; it is limited to
approximately 125,000 persons in the United States, of which we estimate
approximately 50,000 seek treatment from a physician.
We have initiated clinical studies to examine whether or not PROVIGIL is
effective and safe when used to treat disorders other than narcolepsy. Although
some study data has been positive, additional studies in these disorders will be
necessary before we can apply to expand the authorized uses of PROVIGIL. We do
not know whether these studies will demonstrate safety and efficacy, or if they
do, whether we will succeed in receiving regulatory approval to market PROVIGIL
for additional disorders. If the results of some of these studies are negative,
or if adverse
13
experiences are reported in these clinical studies or otherwise in connection
with the use of PROVIGIL by patients, this could undermine physician and patient
comfort with the product, limit the commercial success of the product and
diminish the acceptance of PROVIGIL in the narcolepsy market. Even if the
results of these studies are positive, the impact on sales of PROVIGIL may be
minimal unless we are able to obtain FDA approval to expand the authorized use
of PROVIGIL. FDA regulations restrict 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.
As our products are used commercially, unintended side effects, adverse
reactions or incidents of misuse may occur that could result in additional
regulatory controls, and reduce sales of our products.
Prior to 1999, the use of our products had been limited principally to
clinical trial patients under controlled conditions and under the care of expert
physicians. We cannot predict whether the widespread commercial use of our
products will produce undesirable or unintended side effects or adverse
reactions that have not been evident in our clinical trials or the relatively
limited commercial use to date. In addition, in patients who take multiple
medications, drug interactions could occur that can be difficult to predict.
Additionally, incidents of product misuse may occur. These events, among
others, could result in additional regulatory controls that could limit the
circumstances under which the product is prescribed or even lead to the
withdrawal of the product from the market. More specifically, ACTIQ has been
approved under regulations concerning drugs with certain safety profiles, under
which the FDA has established special restrictions to ensure safe use. Any
violation of these special restrictions could lead to the imposition of further
restrictions or withdrawal of ACTIQ from the market.
We may not be able to maintain adequate patent protection or market exclusivity
for our products and therefore potential competitors may develop competing
products, which could result in a decrease in sales and market share, cause us
to reduce prices to compete successfully, and limit our commercial success.
We place considerable importance on obtaining patent protection for new
technologies, products and processes. To that end, we file applications for
patents covering the composition of matter or uses of our drug candidates or our
proprietary processes. We could incur substantial costs in asserting our patent
rights, including those licensed to us by third parties, and in defending patent
infringement suits against us or our employees relating to ownership of, or
rights to, patents and other intellectual property of third parties. Such
disputes could substantially delay our drug development or commercialization.
The Patent Trademark Office or a private party could institute an interference
proceeding involving us in connection with one or more of our patents or patent
applications. Such proceedings could result in an adverse decision as to
priority of invention, in which case we would not be entitled to a patent on the
invention at issue in the interference proceeding. The Patent Trademark Office
or a private party also could institute reexamination proceedings involving us
in connection with one or more of our patents, and such proceedings could result
in an adverse decision as to the validity or scope of the patents. We could be
forced to either seek a license to intellectual property rights of others, which
may not be available to us on acceptable terms, if at all, or alter our products
or processes so that they no longer infringe on the proprietary rights of
others.
We also rely on trade secrets, know-how and continuing technological
advancements to support our competitive position. Although we have entered into
confidentiality and invention rights agreements with our employees, consultants,
advisors and collaborators, we cannot be sure that such agreements will be
honored or that we will be able to effectively protect our rights to our
unpatented trade secrets and know-how. Moreover, we cannot be sure that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets and know-how. In
addition, many of our scientific and management personnel have been recruited
from other biotechnology and pharmaceutical companies where they were conducting
research in areas similar to those that we now pursue. As a result, we could be
subject to allegations of trade secret violations and other claims.
PROVIGIL
In the United States, the Orphan Drug Act provides incentives to drug
manufacturers to develop and manufacture drugs for the treatment of rare
disorders. The FDA has granted orphan drug status to PROVIGIL for its use in
the treatment of excessive daytime sleepiness associated with narcolepsy. The
grant of orphan drug status to PROVIGIL allows us a seven-year period of
marketing exclusivity for the product in that indication which expires December
24, 2005. While the marketing exclusivity provided by the orphan drug law
should prevent other sponsors from obtaining
14
approval of the same compound for the same indication (unless the other sponsor
can demonstrate clinical superiority or we are unable to provide or obtain
adequate supplies of PROVIGIL), it would not prevent approval of the same
compound for other indications that otherwise are non-exclusive, or approval of
other compounds for the same indication. In addition, we own a U.S. patent
covering the particle size of modafinil that was issued in 1997 and expires on
October 6, 2014. However, we cannot guarantee that our patent will be found to
be valid if challenged by a third party. Additionally, we cannot be sure that a
potential competitor will not develop a competing product or product formulation
that would avoid infringement of this patent or any patent owned or licensed by
us.
ACTIQ
We hold exclusive worldwide licenses to U.S. and foreign patents covering this
product that are held by the University of Utah and its assignee, the University
of Utah Research Foundation. Specifically, we have U.S. patents covering the
currently approved formulation, methods for administering fentanyl via this
formulation and a method of producing the approved product. These patents are
currently set to expire in 2005. Corresponding patents in foreign countries are
set to expire between 2009 and 2010. Other issued patents and pending patent
applications in the U.S. and foreign countries that are owned or licensed by us
are directed to various processes of manufacturing the product as well as to a
child-resistant disposal container required by the FDA to be provided as part of
the product. We cannot guarantee that any of these patents will be held to be
valid if challenged by a third party. In any event, we cannot be sure that a
potential competitor will not develop a competing product or product formulation
that would avoid infringement of these patents or any patent owned or licensed
by us.
GABITRIL
The issued U.S. composition-of-matter patent claiming tiagabine, the active
drug substance in GABITRIL, is exclusively sublicensed to us and is currently
set to expire in 2008. An extension of this patent in the United States under
the terms of the U.S. Drug Price Competition and Patent Term Restoration Act of
1984, as amended, to extend the term of this patent until 2011 is being sought.
We cannot be certain that this patent extension will be obtained or that we will
be able to take advantage of any other patent benefits of the patent restoration
act. In addition, this product is covered by another issued U.S. patent directed
to crystalline tiagabine hydrochloride monohydrate and its use as an anti-
epileptic agent, which is currently set to expire in 2012. We cannot guarantee
that any of these patents will be held to be valid if challenged by a third
party. In any event, we cannot be sure that a potential competitor will not
develop a competing product or product formulation that would avoid infringement
of these patents or any patent owned or licensed by us.
Manufacturing, supply and distribution problems may create supply disruptions
that could result in a reduction of product sales revenue, and damage commercial
prospects for PROVIGIL, ACTIQ, GABITRIL and other products.
We must comply with all applicable regulatory requirements of the FDA and
foreign authorities, including current Good Manufacturing Practice regulations.
In addition, we must comply with all applicable regulatory requirements of the
Drug Enforcement Administration, and analogous foreign authorities for PROVIGIL
(Schedule IV controlled substance) and ACTIQ (Schedule II controlled substance).
The facilities used to manufacture, store and distribute our products are
subject to inspection by regulatory authorities at any time to determine
compliance with regulations. The current Good Manufacturing Practice and
controlled substance regulations are complex, and any failure to comply with
them could lead to remedial action, civil and criminal penalties and delays in
production of material.
Except for the in-house manufacture of ACTIQ for international markets, we
rely on third parties to manufacture our products. Abbott is required to supply
us with ACTIQ for the United States until at least March 2003. After that date,
we will have to make other arrangements for such supply, which could include the
manufacture of ACTIQ in-house for the United States, or establishing supply
arrangements with third parties. We also rely on third parties to distribute,
provide customer service activities and accept and process returns. In addition,
we depend upon sole suppliers for active drug substances contained in our
products, and we depend upon single manufacturers that are qualified to
manufacture finished commercial supplies of ACTIQ and GABITRIL. We have two
qualified manufacturers for finished commercial supplies of PROVIGIL. The
process of changing or adding a manufacturer or changing a formulation requires
prior FDA approval and is very time-consuming. If we are unable to manage this
process effectively, we could face supply disruptions that would result in
significant costs and delays, undermine goodwill established with physicians and
patients, and damage commercial prospects for our products.
15
Although we employ a small number of persons to coordinate and manage the
activities undertaken by third parties, we have relatively limited experience in
this regard. We maintain inventories of active drug substances and finished
products to protect against supply disruptions. Nevertheless, any disruption in
these activities could impede our ability to sell our products and could reduce
sales revenue.
The efforts of government entities and third party payors to contain or reduce
the costs of health care may adversely affect our sales and limit the commercial
success of our products.
In certain foreign markets, pricing or profitability of pharmaceutical
products is subject to various forms of direct and indirect governmental
control. In the United States, there have been, and we expect there will
continue to be, various federal and state proposals to implement similar
government controls. The commercial success of our products could be limited if
federal or state governments adopt any such proposals. In addition, in the
United States and elsewhere, sales of pharmaceutical products depend in part on
the availability of reimbursement to the consumer from third party payors, such
as government and private insurance plans. Third party payors increasingly
challenge the prices charged for products, and limit reimbursement levels
offered to consumers for such products. Third party payors could focus their
cost control efforts on our products, thereby limiting the commercial success of
the products.
We experience intense competition in our fields of interest, which may adversely
affect our business.
Large and small companies, academic institutions, governmental agencies, and
other public and private research organizations conduct research, seek patent
protection, and establish collaborative arrangements for product development in
competition with us. Products developed by any of these entities may compete
directly with those we develop or sell. Competing products may provide greater
therapeutic benefits for a specific indication, or may offer comparable
performance at a lower cost. Many of these companies and institutions have
substantially greater capital resources, research and development staffs and
facilities than we have, and substantially greater experience in conducting
clinical trials, obtaining regulatory approvals and manufacturing and marketing
pharmaceutical products. These entities represent significant competition for
us. In addition, competitors who are developing products for the treatment of
neurological or oncological disorders might succeed in developing technologies
and products that are more effective than any that we develop or sell or that
would render our technology and products obsolete or noncompetitive.
Competition and innovation from these or other sources potentially could
negatively affect sales of our products or make them obsolete. Advances in
current treatment methods also may adversely affect the market for such
products. In addition, we may be at a competitive marketing disadvantage
against companies that have broader product lines and whose sales personnel are
able to offer more complementary products than we can.
Our products contain controlled substances.
The active ingredients in PROVIGIL and ACTIQ are controlled substances
regulated by the DEA. As controlled substances, the manufacture, shipment, sale
and use of these products is subject to a high degree of regulation and
accountability. These regulations also are imposed on prescribing physicians
and other third parties, making the use of such products relatively complicated
and expensive. Future products also may contain substances regulated by the
DEA. In some cases, products containing controlled substances have generated
public controversy which, in extreme cases, has resulted in further restrictions
on marketing or even withdrawal of regulatory approval. In addition, negative
publicity may bring about rejection of the product by the medical community. If
the DEA or FDA withdrew the approval of, or placed additional significant
restrictions on, the marketing of any of our products, our business could be
materially and adversely affected.
16
We face significant product liability risks, which may have a negative effect on
our financial performance.
The administration of drugs to humans, whether in clinical trials or
commercially, can result in product liability claims whether or not the drugs
are actually at fault for causing an injury. Furthermore, our products may
cause, or may appear to have caused, serious adverse side effects (including
death) or potentially dangerous drug interactions that we may not learn about or
understand fully until the drug has been administered to patients for some time.
As our products are used more widely and in patients with varying medical
conditions, the likelihood of an adverse drug reaction may increase. Product
liability claims can be expensive to defend and may result in large judgments or
settlements against us, which could have a negative effect on our financial
performance. We maintain product liability insurance in amounts we believe to
be commercially reasonable, but claims could exceed our coverage limits.
Furthermore, we cannot be certain that we will always be able to purchase
sufficient insurance at an affordable price. Even if a product liability claim
is not successful, the adverse publicity and time and expense of defending such
a claim may interfere with our business.
The results and timing of our research and development activities, including
future clinical trials are difficult to predict, subject to future setbacks and,
ultimately, may not result in any additional pharmaceutical products, which may
adversely affect our business.
We are focused on the search for new pharmaceutical products. These
activities include engaging in discovery research and process development,
conducting preclinical and clinical studies, and seeking regulatory approval in
the United States and abroad. In all of these areas, we have relatively limited
resources and compete against larger multinational pharmaceutical companies.
Moreover, even if we undertake these activities in an effective and efficient
manner, regulatory approval for the sale of new pharmaceutical products remains
highly uncertain since the majority of compounds discovered do not enter
clinical studies and the majority of therapeutic candidates fail to show the
human safety and efficacy necessary for regulatory approval and successful
commercialization.
Preclinical testing and clinical trials must demonstrate that a product
candidate is safe and efficacious. The results from preclinical testing and
early clinical trials may not be predictive of results obtained in subsequent
clinical trials, and we cannot be sure that these clinical trials will
demonstrate the safety and efficacy necessary to obtain regulatory approval for
any product candidates. A number of companies in the biotechnology and
pharmaceutical industries have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials. In
addition, certain clinical trials are conducted with patients having the most
advanced stages of disease. During the course of treatment, these patients often
die or suffer other adverse medical effects for reasons that may not be related
to the pharmaceutical agent being tested. Such events can have a negative impact
on the statistical analysis of clinical trial results.
The completion of clinical trials of our product candidates may be delayed by
many factors. Once such factor is the rate of enrollment of patients. Neither
we nor our collaborators can control the rate at which patients present
themselves for enrollment, and we cannot be sure that the rate of patient
enrollment will be consistent with our expectations or be sufficient to enable
clinical trials of our product candidates to be completed in a timely manner or
at all. Any significant delays in, or termination of, clinical trials of our
product candidates may have a material adverse effect on our business.
We cannot be sure that we will be permitted by regulatory authorities to
undertake additional clinical trials for any of our product candidates, or that
if such trials are conducted, any of our product candidates will prove to be
safe and efficacious or will receive regulatory approvals. Any delays in or
termination of these clinical trial efforts may have a material adverse effect
on our business.
Our research and development and marketing efforts are often dependent on
corporate collaborators and other third parties who may not devote sufficient
time, resources and attention to our programs, which may limit our efforts to
successfully develop and market potential products.
Because we have limited resources, we have entered into a number of
collaboration agreements with other pharmaceutical companies. In some cases
these agreements call for our partner to control the supply of bulk or
17
formulated drugs for commercial use or for use in clinical trials; the design
and execution of clinical studies; the process of obtaining regulatory approval
to market the product; and/or the marketing and selling of any approved product.
In each of these areas, our partners may not support fully our research and
commercial interests since our program may compete for time, attention and
resources with the internal programs of our collaborators. As such, we cannot
be sure that our collaborators will share our perspectives on the relative
importance of our program, that they will commit sufficient resources to our
program to move it forward effectively, or that the program will advance as
rapidly as it might if we had retained complete control of all research,
development, regulatory and commercialization decisions. We also rely on
several of these collaborators and other third parties for the production of
compounds and the manufacture and supply of pharmaceutical products.
Additionally, we may find it necessary from time to time to seek new or
additional partners to assist us in commercializing our products. It is
uncertain whether we would be successful in establishing any such new or
additional relationships.
Our product sales and related financial results will fluctuate and these
fluctuations may cause our stock price to fall, especially if they are not
anticipated by investors.
A number of analysts and investors who follow our stock have developed models
to attempt to forecast future product sales and have established earnings
expectations based upon those models. These models, in turn, are based in part
on estimates of projected revenue and earnings that we disclose publicly.
Forecasting revenue growth is difficult, especially when there is little
commercial history and when the level of market acceptance of the product is
uncertain. Forecasting is further complicated by the difficulties in estimating
stocking levels at pharmaceutical wholesalers and at retail pharmacies and in
estimating potential product returns. As a result, it is likely that there will
be significant fluctuations in revenues, which may not meet with market
expectations and which also may adversely affect our stock price. There are a
number of other factors that may cause our financial results to fluctuate
unexpectedly, including the cost of product sales, achievement and timing of
research and development milestones, co-promotion and other collaboration
revenues, cost and timing of clinical trials, marketing and other expenses and
manufacturing or supply disruption.
We may incur additional losses.
Although the quarter ended September 30, 2001 was our first profitable quarter
from commercial operations since inception, our accumulated deficit was
approximately $512 million at September 30, 2001. Our losses have resulted
principally from costs incurred in research and development, including clinical
trials, and from selling, general and administrative costs associated with our
operations. While we seek to maintain profitability from commercial operations,
we cannot be sure that we will continue to achieve product and other revenue
sufficient for us to maintain this objective. We cannot be sure that we will
obtain required regulatory approvals, or successfully develop, commercialize,
manufacture and market any other product candidates.
The price of our common stock has been and may continue to be highly volatile.
The market price of our common stock is volatile, and we expect it to continue
to be volatile for the foreseeable future. For example, during the period
September 30, 2000 through November 5, 2001, our common stock traded at a high
price of $73.92 and a low price of $36.375. Negative announcements (such as
adverse regulatory decisions, disappointing clinical trial results, disputes
concerning patent or other proprietary rights, or operating results that fall
below the market's expectations) could trigger significant declines in the price
of our common stock. In addition, external events, such as news concerning our
competitors, changes in government regulations that may impact the biotechnology
or pharmaceutical industries or the movement of capital into or out of our
industry, also are likely to affect the price of our common stock.
We are involved in legal proceedings that, if adversely adjudicated or settled,
would impact our financial condition.
In August 1999, the U.S. District Court for the Eastern District of
Pennsylvania entered a final order approving the settlement of a class action in
which plaintiffs alleged that statements made about the results of certain
clinical studies of MYOTROPHIN were misleading. A related complaint has been
filed with the Court by a small number of plaintiffs who decided not to
participate in the settlement. This related complaint alleges that we are
liable under
18
common law for misrepresentations concerning the results of the MYOTROPHIN
clinical trials, and that we and certain of our current and former officers and
directors are liable for the actions of persons who allegedly traded in our
common stock on the basis of material inside information. We believe that we
have valid defenses to all claims raised in this action. Even if there is a
judgment against us in this case, we do not believe it will have a material
adverse effect on our financial condition or results of operations.
Due to our past involvement in promoting STADOL NS(R) (butorphanol tartrate)
Nasal Spray, a product of Bristol-Myers Squibb Company, we are co-defendants in
several product liability actions brought against Bristol-Myers. Although we
cannot predict with certainty the outcome of this litigation, we believe that
any expenses or damages that we may incur will be paid by Bristol-Myers under
the indemnification provisions of our co-promotion agreement. As such, we do
not believe that these actions will have a material adverse effect on our
financial condition or results of operations.
In February 2001, a complaint was filed in Utah state court by Zars, Inc. and
one of its research scientists, against us and our subsidiary Anesta Corp. The
plaintiffs are seeking a declaratory judgment to establish their right to
develop transdermal or other products containing fentanyl and other
pharmaceutically active agents under a royalty and release agreement between
Zars and Anesta. The complaint also asks for unspecified damages for breach of
contract, interference with economic relations, defamation and slander. We
believe that we have valid defenses to all claims raised in this action. In any
event, we do not believe any judgment against us will have a material adverse
effect on our financial condition or results of operations.
We may never obtain approval to market MYOTROPHIN, it may not be cost-effective
to pursue MYOTROPHIN for other indications, and therefore we may never derive
revenue from MYOTROPHIN.
We do not believe that the conditions for regulatory approval of MYOTROPHIN
imposed by the FDA can be met without conducting an additional Phase 3 study,
and we have no plans to conduct such a study at this time. However, we have had
discussions with certain physicians who are seeking to obtain governmental and
non-governmental funding to be used to conduct such a study. If this funding is
obtained and the study is undertaken, we would likely allow reference to our
Investigational New Drug Application, and supply MYOTROPHIN in quantities
sufficient to conduct the study in exchange for the rights to use any clinical
data generated by such study in support of FDA approval of our pending New Drug
Application. Even if an additional study is undertaken, the results will not be
available for several years and may not be sufficient to obtain regulatory
approval to market the product. If MYOTROPHIN is not approved for the treatment
of Amyotrophic Lateral Sclerosis then it is unlikely that we would pursue
approval for the use of MYOTROPHIN to treat other indications. Additionally, if
we do not obtain approval of MYOTROPHIN for ALS or pursue approval for other
indications, rights to the product may revert back to Cephalon Clinical
Partners, L.P.
Our dependence on key executives and scientists could impact the development and
management of our business.
We are highly dependent upon our ability to attract and retain qualified
scientific, technical and managerial personnel. There is intense competition
for qualified personnel in the pharmaceutical and biotechnology industries, and
we cannot be sure that we will be able to continue to attract and retain the
qualified personnel necessary for the development and management of our
business. Our research and development programs and our business might be
harmed by the loss of the services of existing personnel, as well as the failure
to recruit additional key scientific, technical and managerial personnel in a
timely manner. Much of the know-how we have developed resides in our scientific
and technical personnel and is not readily transferable to other personnel. We
do not maintain "key man" life insurance on any of our employees.
We may be required to incur significant costs to comply with environmental laws
and regulations and our compliance may limit any future profitability.
Our research and development activities involve the controlled use of
hazardous, infectious and radioactive materials that could be hazardous to human
health, safety or the environment. We store these materials and various wastes
resulting from their use at our facility pending ultimate use and disposal. We
are subject to a variety of federal, state and local laws and regulations
governing the use, generation, manufacture, storage, handling and disposal of
19
these materials and wastes, and we may be required to incur significant costs to
comply with both existing and future environmental laws and regulations.
We believe that our safety procedures for handling and disposing of these
materials comply with federal, state and local laws and regulations, but the
risk of accidental injury or contamination from these materials cannot be
eliminated. In the event of an accident, we could be held liable for any
resulting damages, which could adversely affect our financial condition or
results of operations.
Anti-takeover provisions may deter a third party from acquiring us, limiting our
stockholders' ability to profit from such a transaction.
Our Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock, $0.01 par value, of which 1,000,000 have been reserved for
issuance in connection with our stockholder rights plan, and to determine the
price, rights, preferences and privileges of those shares without any further
vote or action by our stockholders. Our stockholder rights plan could have the
effect of making it more difficult for a third party to acquire a majority of
our outstanding voting stock.
We are subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law, which prohibits us from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person becomes an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 could have the effect of delaying or preventing a
change of control of Cephalon. We also have adopted a "poison pill" rights plan
that will dilute the stock ownership of an acquirer of our stock upon the
occurrence of certain events. Section 203, the rights plan, and the provisions
of our certificate of incorporation, our bylaws and Delaware corporate law, may
have the effect of deterring hostile takeovers or delaying or preventing changes
in control of our management, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices.
RESULTS OF OPERATIONS
Three months ended September 30, 2001 compared to three months ended September
30, 2000
Three months
ended September 30,
2001 2000
---- ----
Product sales:
PROVIGIL......................................................... $53,694,000 $19,213,000
ACTIQ............................................................ 14,003,000 5,052,000
GABITRIL......................................................... 6,256,000 --
----------- -----------
Total product sales................................................. 73,953,000 24,265,000
Other revenues...................................................... 9,869,000 3,791,000
----------- -----------
Total revenues...................................................... $83,822,000 $28,056,000
=========== ===========
Revenues--Total revenues increased 199% to $83,822,000 in the third quarter of
2001 as compared to $28,056,000 in the third quarter of 2000. This increase was
primarily due to a $49,688,000, or 205%, increase in product sales, of which
$34,481,000 was attributed to a PROVIGIL sales increase, $8,951,000 was
attributed to an ACTIQ sales increase, and $6,256,000 was attributed to GABITRIL
sales. The PROVIGIL sales increase was primarily attributable to growth in
prescriptions and an increase in inventory stocking levels by both distribution
centers and retail pharmacies. In addition, other revenues increased by
$6,078,000, or 160%. This increase was due primarily to revenues recognized
under our research and development collaboration with H. Lundbeck A/S and under
our marketing collaboration with Novartis Pharma AG.
Cost of Product Sales-- The cost of product sales in the third quarter of 2001
decreased to 19% of net product sales from 22% in the third quarter of 2000 due
primarily to the effect of a change in product mix and a decrease in the cost of
product sales of ACTIQ.
20
Research and Development Expenses--For the quarter ended September 30, 2001,
research and development expenses increased 11% to $19,307,000 from $17,446,000
in the third quarter of 2000. This change primarily resulted from an increase in
expenditures associated with clinical development studies, an increase in
expenditures associated with regulatory and intellectual property fees and
expenses, and an increase in drug development and manufacturing expenditures
incurred under our joint collaborative research and development agreement with
Lundbeck.
Depreciation and Amortization Expenses--The increase in depreciation and
amortization expenses from $1,180,000 in the third quarter of 2000 to $3,663,000
in the third quarter of 2001 is due primarily to amortization expense of
$2,241,000 for intangible assets acquired during late 2000 relating to contracts
with Novartis and Abbott.
Selling, General and Administrative Expenses--Selling, general and
administrative expenses increased 17% to $23,236,000 for the quarter ended
September 30, 2001 from $19,941,000 for the third quarter of 2000 primarily due
to an increase in both marketing expenses and the size of our internal sales
force to promote and support our three major products: PROVIGIL, ACTIQ and
GABITRIL.
Other Income and Expense--Other income and expense decreased by $2,606,000
from the third quarter of 2000 to the third quarter of 2001. Interest income
increased by $1,265,000 from quarter to quarter as a result of higher average
investment balances, partially offset by lower average rates of return. Interest
expense increased by $5,312,000 as compared to the prior period as a result of
expense recognized on our obligations with Abbott and Novartis and interest
associated with the $400,000,000 convertible subordinated notes. Other expense
represents primarily the fluctuation in the currency exchange value of the pound
Sterling (GBP) relative to the U.S. dollar.
Dividends on Convertible Exchangeable Preferred Stock--In the third quarter of
2001, we recognized $70,000 of dividend expense associated with 155,414 shares
of preferred stock outstanding as of the August 1, 2001 record date. In
September 2001, these remaining shares of our convertible exchangeable preferred
stock were converted into an aggregate of 433,604 shares of our common stock.
Nine months ended September 30, 2001 compared to nine months ended September
30, 2000
Nine months
ended September 30,
2001 2000
---- ----
Product sales:
PROVIGIL......................................................... $110,566,000 $47,963,000
ACTIQ............................................................ 30,349,000 9,045,000
GABITRIL......................................................... 18,146,000 1,840,000
------------ -----------
Total product sales................................................. 159,061,000 58,848,000
Other revenues...................................................... 28,032,000 12,248,000
------------ -----------
Total revenues...................................................... $187,093,000 $71,096,000
============ ===========
Revenues--Total revenues increased 163% to $187,093,000 in the nine months
ended September, 30 2001 as compared to $71,096,000 in the nine months ended
September 30, 2000. This increase was primarily due to a $100,213,000, or 170%,
increase in product sales, of which $62,603,000 was attributed to a PROVIGIL
sales increase, $21,304,000 was attributed to an ACTIQ sales increase, and
$16,306,000 was attributed to a GABITRIL sales increase. The PROVIGIL sales
increase resulted from growth in prescriptions and an increase in inventory
stocking levels by both distribution centers and retail pharmacies. In addition,
other revenues increased by $15,784,000, or 129%. This increase was due
primarily to $4,250,000 in milestone revenue recognized upon receiving ACTIQ(R)
marketing authorization in certain European countries, and revenues recognized
under our marketing collaboration with Novartis Pharma AG.
Cost of Product Sales-- The cost of product sales for both nine month periods
presented is 20%. PROVIGIL cost of sales increased from period to period because
a significant portion of the PROVIGIL sold in the United States during the first
quarter of 2000 was produced prior to its December 1998 FDA approval and the
costs of producing that material were recorded as research and development
expense at the time the material was produced. This increase
21
from PROVIGIL was offset by a decrease in the cost of product sales of ACTIQ and
by the effect of a change in product mix.
Research and Development Expenses--For the nine months ended September 30,
2001, research and development expenses increased 24% to $59,821,000 from
$48,088,000 in the same period of 2000. This change primarily resulted from an
increase in expenditures associated with clinical development studies, an
increase in expenditures associated with regulatory and intellectual property
fees and expenses, and an increase in drug development and manufacturing
expenditures incurred by Lundbeck under our joint collaborative research and
development agreement.
Depreciation and Amortization Expenses--The increase in depreciation and
amortization expenses from $2,648,000 in the nine months ended September 30,
2000 to $10,698,000 in the nine months ended September 30, 2001 is due primarily
to amortization expense of $7,522,000 for intangible assets acquired during late
2000 relating to contracts with Novartis and Abbott.
Selling, General and Administrative Expenses--Selling, general and
administrative expenses increased 27% to $74,899,000 for the nine months ended
September 30, 2001 from $58,753,000 for the same period of 2000 primarily due to
an increase in both marketing expenses and the size of our internal sales force
to promote and support our three major products: PROVIGIL, ACTIQ and GABITRIL.
Other Income and Expense--Other income and expense decreased by $13,027,000
from 2000 to 2001. Interest income decreased due to the recognition of
$4,008,000 in the second quarter of 2000 for an interest penalty that had been
accrued but was subsequently waived on a loan obtained from the Commonwealth of
Pennsylvania. In addition, interest income decreased from period to period due
to lower average rates of return, offset by slightly higher average investment
balances, in 2001 as compared to 2000. Interest expense increased as compared
to the prior period as a result of expense recognized on our obligations with
Abbott and Novartis and interest associated with the $400,000,000 convertible
subordinated notes.
Extraordinary Gain on Early Extinguishment of Debt--In May 2001, we paid
$24,438,000 to Novartis Pharma AG for deferred obligations due to them under our
continuing November 2000 collaboration agreement. In connection with this
payment, we recorded an extraordinary gain on the early extinguishment of debt
of $3,016,000.
Dividends on Convertible Exchangeable Preferred Stock--Preferred dividends for
the 2001 period are less than the comparable 2000 period due to the May 2001 and
September 2001 conversions of the 2,500,000 shares of preferred stock into an
aggregate of 6,974,998 shares of our common stock. As of September 30, 2001, no
preferred shares remained outstanding.
Cumulative Effect of a Change in Accounting Principle--We adopted the U.S.
Securities and Exchange Commission's Staff Accounting Bulletin No. 101 (SAB 101)
on Revenue Recognition and, as a result, we recorded a charge of $7,434,000 in
the fourth quarter of 2000 to defer upfront license fees associated with our
collaborative alliances that were previously recognized in revenues. Under
guidance from SAB 101, results for 2000 have been restated to give effect for
the implementation of SAB 101 retroactively to January 1, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investments at September 30, 2001 were
$444,384,000, representing 65% of total assets, and at December 31, 2000 were
$97,384,000, representing 32% of total assets.
Net Cash Provided by (Used for) Operating Activities
Net cash provided by operating activities was $5,780,000 in the nine months
ended September 30, 2001 as compared to net cash used for operating activities
of $66,195,000 for the nine months ended September 30, 2000. This change is due
primarily to the change in net income (loss) before preferred dividends from a
net loss of $48,166,000 for the first nine months of 2000 to net income of
$9,061,000 for the first nine months of 2001 as a result of an increase in
product sales.
22
Net Cash (Used for) Provided by Investing Activities
A summary of net cash (used for) provided by investing activities is as
follows:
Nine months ended
September 30,
2001 2000
---- ----
Purchases of property and equipment.................................... $ (7,695,000) $ (5,896,000)
Acquisition of intangible assets....................................... -- (23,850,000)
Sales and maturities (purchases) of investments, net................... (340,325,000) 116,644,000
------------- ------------
Net cash (used for) provided by investing activities................... $(348,020,000) $ 86,898,000
============= ============
--Acquisition of intangible assets
The acquisition of intangible assets during the nine months ended September
20, 2000 represents payments made to reacquire the marketing rights to ACTIQ
from Abbott Laboratories.
Net Cash Provided by (Used for) Financing Activities
A summary of net cash provided by (used for) financing activities is as
follows:
Nine months ended
September 30,
2001 2000
---- ----
Proceeds from exercises of common stock options and warrants.......... $ 20,913,000 $ 24,007,000
Payments to acquire treasury stock.................................... (224,000) --
Preferred dividends paid.............................................. (6,797,000) (6,797,000)
Net proceeds from issuance of long-term debt.......................... 385,648,000 --
Principal payments on and retirement of long-term debt................ (51,779,000) (32,424,000)
------------ ------------
Net cash provided by (used for) financing activities.................. $347,761,000 $(15,214,000)
============ ============
--Proceeds from exercises of common stock options and warrants
During the nine months ended September 30, 2001, we received proceeds of
approximately $20,913,000 from the exercise of approximately 1,095,000 common
stock options. At September 30, 2001, warrants to purchase 265,800 shares of
our common stock at an exercise price of $10.08 per share and options to
purchase approximately 4,220,000 shares of our common stock at various exercise
prices were outstanding. The extent and timing of future warrant and option
exercises, if any, are primarily dependent upon the market price of our common
stock and general financial market conditions, as well as the exercise prices
and expiration dates of the warrants and options.
--Payments to acquire treasury stock
Under the Equity Compensation Plan, we may grant restricted stock awards to
employees. Upon vesting, shares of Cephalon common stock are withheld from the
employee's stock award and returned to the treasury for the corresponding dollar
value of payroll-related taxes.
--Preferred dividends paid
As of September 30, 2001 all 2,500,000 shares outstanding of our convertible
exchangeable preferred stock have been converted into an aggregate of 6,974,998
share of our common stock.
23
--Net proceeds from issuance of long-term debt
In the second quarter of 2001, we completed a private placement of
$400,000,000 of 5.25% convertible subordinated notes due 2006. Debt issuance
costs in the amount of $14,352,000 have been capitalized and will be amortized
over the term of the notes.
--Principal payments on long-term debt
In July 2001, we made a payment of $1,667,000 to retire a variable-rate term
note payable in connection with the remodeling of our facility in Salt Lake
City, Utah. In May 2001, we made a payment of $24,000,000 to Abbott Laboratories
due under our licensing agreement. Also in May 2001, we paid $24,438,000 to
Novartis Pharma AG for deferred obligations due to them under our continuing
November 2000 collaboration agreement. In the first quarter of 2000, we retired
$30,000,000 of revenue sharing notes issued in a private placement in 1999. In
addition, for all periods presented, principal payments on long-term debt
include payments on mortgage and building improvements loans and payments on
capital lease obligations.
Commitments and Contingencies
--Related Party
In August 1992, we exclusively licensed our rights to MYOTROPHIN for human
therapeutic use within the United States, Canada and Europe to Cephalon Clinical
Partners, L.P., or CCP. Development and clinical testing of MYOTROPHIN is
performed on behalf of CCP under a research and development agreement with CCP.
CCP has granted us an exclusive license to manufacture and market MYOTROPHIN
for human therapeutic use within the United States, Canada and Europe in return
for royalty payments equal to a percentage of product sales and a milestone
payment of approximately $16,000,000 that will be made if MYOTROPHIN receives
regulatory approval.
We have a contractual option to purchase all of the limited partnership
interests of CCP. To exercise this purchase option, we are required to make an
advance payment of $40,275,000 in cash or, at our election, shares of common
stock with a value of $42,369,000 or a combination thereof. The purchase option
will become exercisable upon the occurrence of certain events once sales
activity commences. Should we discontinue development of MYOTROPHIN or if we do
not exercise the purchase option, our license will terminate and all rights to
manufacture or market MYOTROPHIN in the United States, Canada and Europe will
revert to CCP, which may then commercialize MYOTROPHIN itself or license or
assign its rights to a third party. In that event, we would not receive any
benefits from such commercialization, license or assignment of rights.
--Legal Proceedings
In August 1999, the U.S. District Court for the Eastern District of
Pennsylvania entered a final order approving the settlement of a class action in
which plaintiffs alleged that statements made about the results of certain
clinical studies of MYOTROPHIN were misleading. A related complaint has been
filed with the Court by a small number of plaintiffs who decided not to
participate in the settlement. This related complaint alleges that we are
liable under common law for misrepresentations concerning the results of the
MYOTROPHIN clinical trials, and that we and certain of our current and former
officers and directors are liable for the actions of persons who allegedly
traded in our common stock on the basis of material inside information. We
believe that we have valid defenses to all claims raised in this action. Even
if there is a judgment against us in this case, we do not believe it will have a
material adverse effect on our financial condition or results of operations.
Due to our past involvement in promoting STADOL NS(R) (butorphanol tartrate)
Nasal Spray, a product of Bristol-Myers Squibb Company, we are co-defendants in
several product liability actions brought against Bristol-Myers. Although we
cannot predict with certainty the outcome of this litigation, we believe that
any expenses or damages that we may incur will be paid by Bristol-Myers under
the indemnification provisions of our co-promotion agreement. As such, we do
not believe that these actions will have a material adverse effect on our
financial condition or results of operations.
24
In February 2001, a complaint was filed in Utah state court by Zars, Inc. and
one of its research scientists, against us and our subsidiary Anesta Corp. The
plaintiffs are seeking a declaratory judgment to establish their right to
develop transdermal or other products containing fentanyl and other
pharmaceutically active agents under a royalty and release agreement between
Zars and Anesta. The complaint also asks for unspecified damages for breach of
contract, interference with economic relations, defamation and slander. We
believe that we have valid defenses to all claims raised in this action. In any
event, we do not believe any judgment against us will have a material adverse
effect on our financial condition or results of operations.
Outlook
Cash, cash equivalents and investments at September 30, 2001 were
$444,384,000. Although the third quarter of 2001 was the first quarter since our
inception to provide positive cash flows from commercial operations, we have
historically had negative cash flows from operations and have used the proceeds
of public and private placements of our securities to fund operations. We
currently believe that projected increases in sales of our three marketed
products, PROVIGIL, ACTIQ and GABITRIL, in combination with other revenues, will
allow us to achieve ongoing profitability including for the full year of 2001.
If our expectations for product sales in 2001 are not realized, it may be
difficult or impossible to achieve profitability for the full year. At this
time, we cannot accurately predict the effect of certain developments on product
sales such as the degree of market acceptance of our products, competition, the
effectiveness of our sales and marketing efforts and our ability to demonstrate
the utility of our products in indications beyond those already included in the
FDA approved labels. Other revenues include receipts from collaborative research
and development agreements and co-promotion agreements. The continuation of any
of our other agreements is subject to the achievement of certain milestones and
to periodic review by the parties involved.
We expect to continue to incur significant expenditures associated with
PROVIGIL, ACTIQ and GABITRIL. These expenditures include the costs associated
with manufacturing, selling and marketing our products and costs associated with
conducting additional clinical studies to explore the utility of these products
in treating disorders beyond those currently approved in their respective
labels. We also expect to continue to incur significant expenditures to fund
research and development activities for our other products in development. We
may seek sources of funding for a portion of these programs through
collaborative arrangements with third parties. However, because we intend to
retain a portion of the commercial rights to these programs, we still expect to
spend significant funds on our share of the cost of these programs.
In the second quarter of 2001, we completed a private placement of
$400,000,000 of 5.25% convertible subordinated notes due 2006. Interest on the
notes is payable each May 1 and November 1, beginning November 1, 2001. The
annual interest payments on the notes will be $21,000,000. We expect to use the
net proceeds of the offering for working capital and general corporate purposes,
which may include the acquisition of businesses, products, product rights or
technologies. Pending any use of the net proceeds, the funds have been invested
in accordance with our investment guidelines and interest income earned will be
used to offset, to the extent possible, the interest payments on the notes.
Based on our current level of operations and projected sales of our products
combined with other revenues and interest income, we believe that we will be
able to service our existing debt and meet our capital expenditure and working
capital requirements for the next several years. However, we cannot be sure
that our anticipated revenue growth will be realized or that we will continue to
generate positive cash flow from operations. We may need to obtain additional
funding for our operational needs, or for future significant strategic
transactions, and we cannot be certain that funding will be available on terms
acceptable to us, or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in quantitative and qualitative market
risk from the disclosure included in the Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Footnote 4 to the Notes to
Consolidated Financial Statements included herein is hereby
incorporated by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEPHALON, INC.
(Registrant)
November 13, 2001 By /s/ Frank Baldino, Jr.
------------------------
Frank Baldino, Jr., Ph.D.
Chairman and Chief Executive Officer
(Principal executive officer)
By /s/ J. Kevin Buchi
--------------------
J. Kevin Buchi
Senior Vice President and Chief Financial Officer
(Principal financial and accounting officer)
27