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 June 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 Identification Number)
Organization)
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 August 6, 2001
- ------------------------------------ --------------------------------
Common Stock, par value $.01 50,098,146 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
June 30, 2001 and December 31, 2000
Consolidated Statements of Operations - 4
Three and six months ended June 30, 2001 and 2000
Consolidated Statements of Stockholders' Equity - 5
June 30, 2001 and December 31, 2000
Consolidated Statements of Cash Flows - 6
Six months ended June 30, 2001 and 2000
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
2
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
June 30, December 31,
2001 2000
------------------ ---------------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 120,632,000 $ 36,571,000
Investments 300,159,000 60,813,000
Receivables, net 30,101,000 21,905,000
Inventory (Note 2) 31,492,000 20,161,000
Other 4,341,000 1,579,000
------------------ ---------------------
Total current assets 486,725,000 141,029,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $20,195,000 and $18,905,000 33,529,000 29,730,000
INTANGIBLE ASSETS, net of accumulated
amortization of $7,400,000 and $1,679,000 (Note 3) 130,073,000 135,794,000
OTHER (Note 4) 15,618,000 1,882,000
------------------ ---------------------
$ 665,945,000 $ 308,435,000
================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,939,000 $ 3,590,000
Accrued expenses 35,113,000 32,758,000
Current portion of deferred revenues 1,198,000 1,469,000
Current portion of long-term debt (Note 4) 6,084,000 42,950,000
------------------ ---------------------
Total current liabilities 45,334,000 80,767,000
DEFERRED REVENUES 6,955,000 7,151,000
LONG-TERM DEBT (Note 4) 441,713,000 55,138,000
OTHER 112,000 186,000
------------------ ---------------------
Total liabilities 494,114,000 143,242,000
------------------ ---------------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized, 2,500,000
issued, 155,414 and 2,500,000 shares outstanding, liquidation
preference of $7,841,000 at June 30, 2001 2,000 25,000
Common stock, $.01 par value, 100,000,000 shares authorized,
50,074,347 and 42,478,225 shares issued 501,000 425,000
Additional paid-in capital 708,555,000 683,004,000
Treasury stock, 169,873 and 138,183 shares outstanding, at cost (5,869,000) (4,119,000)
Accumulated deficit (533,653,000) (515,543,000)
Accumulated other comprehensive income 2,295,000 1,401,000
------------------ ---------------------
Total stockholders' equity 171,831,000 165,193,000
------------------ ---------------------
$ 665,945,000 $ 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 Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2001 2000 2001 2000
----------- ------------- ------------ ------------
REVENUES: (Note 8)
Product sales $44,286,000 $ 18,372,000 $ 85,108,000 $ 34,583,000
Other revenues 11,913,000 5,013,000 18,163,000 8,457,000
----------- ------------ ------------ ------------
56,199,000 23,385,000 103,271,000 43,040,000
----------- ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of product sales 9,273,000 4,153,000 17,571,000 6,221,000
Research and development 21,245,000 16,061,000 40,514,000 30,642,000
Depreciation and amortization 3,546,000 965,000 7,035,000 1,468,000
Selling, general and administrative 26,956,000 21,156,000 51,663,000 38,812,000
----------- ------------ ------------ ------------
61,020,000 42,335,000 116,783,000 77,143,000
----------- ------------ ------------ ------------
LOSS FROM OPERATIONS (4,821,000) (18,950,000) (13,512,000) (34,103,000)
----------- ------------ ------------ ------------
OTHER INCOME AND EXPENSE
Interest income 3,039,000 7,382,000 4,546,000 11,421,000
Interest expense (4,136,000) (1,055,000) (5,456,000) (2,129,000)
Other expense (72,000) (719,000) (1,110,000) (891,000)
----------- ------------ ------------ ------------
(1,169,000) 5,608,000 (2,020,000) 8,401,000
----------- ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY GAIN, DIVIDENDS ON
PREFERRED STOCK AND CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE (5,990,000) (13,342,000) (15,532,000) (25,702,000)
Extraordinary gain on early extinguishment of debt (Note 4) 3,016,000 -- 3,016,000 --
----------- ------------ ------------ ------------
LOSS BEFORE DIVIDENDS ON PREFERRED STOCK AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (2,974,000) (13,342,000) (12,516,000) (25,702,000)
Dividends on convertible exchangeable preferred stock (Note 7) (3,328,000) (2,265,000) (5,594,000) (4,531,000)
----------- ------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (6,302,000) (15,607,000) (18,110,000) (30,233,000)
Cumulative effect of adopting Staff Accounting Bulletin 101 (SAB 101) -- -- -- (7,434,000)
----------- ------------ ------------ ------------
LOSS APPLICABLE TO COMMON SHARES $(6,302,000) $(15,607,000) $(18,110,000) $(37,667,000)
=========== ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss per common share before extraordinary gain and cumulative
effect of adopting SAB 101 $ (0.19) $ (0.39) $ (0.47) $ (0.76)
Extraordinary gain on early extinguishment of debt 0.06 - 0.07 -
Cumulative effect of adopting SAB 101 - - - (0.19)
----------- ------------ ------------ ------------
$ (0.13) $ (0.39) $ (0.40) $ (0.95)
=========== ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 47,725,000 40,427,000 45,229,000 39,536,000
=========== ============ ============ ============
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
Loss $ (12,516,000) (12,516,000) (12,516,000) --
--------------
Foreign currency translation gain 787,000
Unrealized investment gains 107,000
--------------
Other comprehensive income 894,000 894,000 -- 894,000
--------------
Comprehensive loss $ (11,622,000)
==============
Conversion of preferred stock into common stock -- -- --
Stock options and warrants exercised 22,072,000 -- --
Restricted stock award plan 2,900,000 -- --
Employee benefit plan 617,000 -- --
Dividends declared on convertible preferred stock (5,594,000) (5,594,000) --
Treasury stock acquired (1,750,000) -- --
Other 15,000 -- --
---------------- -------------- ----------
BALANCE, JUNE 30, 2001 $ 171,831,000 $(533,653,000) $2,295,000
================ ============== ==========
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)
Loss -- -- -- --
Foreign currency translation gain
Unrealized investment gains
Other comprehensive income -- -- -- --
Comprehensive loss
Conversion of preferred stock into common stock 65,000 (23,000) (42,000) --
Stock options and warrants exercised 11,000 -- 22,061,000 --
Restricted stock award plan -- -- 2,900,000 --
Employee benefit plan -- -- 617,000 --
Dividends declared on convertible preferred stock -- -- -- --
Treasury stock acquired -- -- -- (1,750,000)
Other -- -- 15,000 --
---------- ---------- -------------- -------------
BALANCE, JUNE 30, 2001 $501,000 $2,000 $708,555,000 $(5,869,000)
========== ========== ============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
5
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six Months Ended
June 30,
----------------------------------------
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss before preferred dividends $(12,516,000) $(33,136,000)
Adjustments to reconcile loss to net cash
used for operating activities:
Cumulative effect of adoption of SAB 101 -- 7,434,000
Depreciation and amortization 7,035,000 1,468,000
Non-cash interest expense 2,413,000 --
Non-cash compensation expense 3,517,000 3,053,000
Gain on extinguishment of debt (3,016,000) --
Other 216,000 (494,000)
(Increase) decrease in operating assets:
Receivables (8,214,000) (4,674,000)
Inventory (11,331,000) (10,207,000)
Other current assets (2,762,000) (692,000)
Other long-term assets 5,000 (698,000)
Increase (decrease) in operating liabilities:
Accounts payable (651,000) 2,293,000
Accrued expenses 3,419,000 1,642,000
Deferred revenues (467,000) (1,015,000)
Other long-term liabilities (74,000) (4,009,000)
------------- -------------
Net cash used for operating activities (22,426,000) (39,035,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,729,000) (4,581,000)
Acquistion of intangible assets -- (23,850,000)
Sales and maturities (purchases) of investments, net (239,239,000) 102,334,000
------------- -------------
Net cash (used for) provided by investing activities (243,968,000) 73,903,000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock options and warrants 20,115,000 20,895,000
Preferred dividends paid (6,656,000) (4,531,000)
Net proceeds from issuance of long-term debt 385,785,000 --
Principal payments on and retirements of long-term debt (49,576,000) (31,318,000)
------------- -------------
Net cash provided by (used for) financing activities 349,668,000 (14,954,000)
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 787,000 790,000
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 84,061,000 20,704,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 36,571,000 24,898,000
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 120,632,000 $ 45,602,000
============= =============
Supplemental disclosure of non-cash investing activities:
Capital lease additions $ 359,529 $ 617,438
============= =============
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 130 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
other 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
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(Unaudited)
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
$334,000 for the three months ended June 30, 2000 and $363,000 for the six
months ended June 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:
June 30, December 31,
2001 2000
---- ----
Raw material....................................................... $14,663,000 $ 6,401,000
Work-in-process.................................................... 6,922,000 5,325,000
Finished goods..................................................... 9,907,000 8,435,000
----------- -----------
$31,492,000 $20,161,000
=========== ===========
3. INTANGIBLE ASSETS
Intangible assets consisted of the following:
June 30, December 31,
2001 2000
---- ----
GABITRIL product rights.............................................. $ 71,982,000 $ 71,982,000
Novartis CNS product rights.......................................... 41,641,000 41,641,000
ACTIQ marketing rights............................................... 23,850,000 23,850,000
------------ ------------
137,473,000 137,473,000
Less accumulated amortization........................................ (7,400,000) (1,679,000)
------------ ------------
$130,073,000 $135,794,000
============ ============
8
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(Unaudited)
4. LONG-TERM DEBT
Long-term debt consisted of the following:
June 30, December 31,
2001 2000
---- ----
Capital lease obligations......................................... $ 2,131,000 $ 2,342,000
Mortgage and building improvement loans........................... 14,334,000 14,900,000
Abbott/Novartis obligations....................................... 31,332,000 80,846,000
Convertible subordinated notes.................................... 400,000,000 --
------------ ------------
Total debt........................................................ 447,797,000 98,088,000
Less current portion.............................................. (6,084,000) (42,950,000)
------------ ------------
Total long-term debt.............................................. $441,713,000 $ 55,138,000
============ ============
In May 2001, we made a payment of $24,000,000 to Abbott Laboratories due
under our licensing agreement. 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 $14,215,000 have been capitalized in other assets and will be amortized
over the term of the notes. As of June 30, 2001, the remaining balance to be
amortized is $13,741,000. 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.
5. 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,
9
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(Unaudited)
interference with economic relations, defamation and slander. We have filed a
motion to dismiss this complaint that is currently pending before the court. 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.
6. 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.
7. 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 are
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. As of June
30, 2001, 155,414 shares of preferred stock remained outstanding.
10
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(Unaudited)
8. REVENUES
Revenues consisted of the following:
Three months Six months
ended June 30, ended June 30,
2001 2000 2001 2000
---- ---- ----- ----
Product sales:
PROVIGIL................................. $29,848,000 $15,287,000 $ 56,872,000 $28,750,000
ACTIQ.................................... 9,764,000 3,085,000 16,346,000 3,993,000
GABITRIL................................. 4,674,000 -- 11,890,000 1,840,000
----------- ----------- ------------ -----------
Total product sales........................... 44,286,000 18,372,000 85,108,000 34,583,000
Other revenues................................ 11,913,000 5,013,000 18,163,000 8,457,000
----------- ----------- ------------ -----------
Total revenues................................ $56,199,000 $23,385,000 $103,271,000 $43,040,000
=========== =========== ============ ===========
Effective March 31, 2001, Cephalon and TAP Pharmaceuticals, Inc. mutually
agreed to terminate their Research, Development and Licensing Agreement dated
May 17, 1994, as amended. At June 30, 2001, $1,189,000 was receivable from TAP.
Other revenues for the three and six months ended June 30, 2001 includes
$3,500,000 in milestone revenue recognized upon receiving ACTIQ(R) marketing
authorization in certain European countries.
9. OTHER COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires presentation of the components of comprehensive
income (loss). Our comprehensive loss includes net loss, unrealized gains and
losses from foreign currency translation adjustments, and unrealized investment
gains and losses. Our total comprehensive loss is as follows:
Three months Six months
ended June 30, ended June 30,
2001 2000 2001 2000
---- ---- ---- ----
Loss before preferred dividends............. $(2,974,000) $(13,342,000) $(12,516,000) $(33,136,000)
Other comprehensive income (loss):
Foreign currency translation adjustment... (3,000) 648,000 787,000 790,000
Unrealized investment gains (losses)...... 2,000 39,000 107,000 (653,000)
----------- ------------ ------------ ------------
Other comprehensive loss.................... $(2,975,000) $(12,655,000) $(11,622,000) $(32,999,000)
=========== ============ ============ ============
11
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 attain 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 such sales and other revenue will
reach a level at which we will attain 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 attain 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
12
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 which 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 which 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
13
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 may not succeed in obtaining any extension for the
composition-of-matter patent, and we cannot guarantee that any of our patents
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 these patents 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 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 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 products. Although we employ a small number of
persons to coordinate and manage the activities undertaken by these 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, and are qualifying
14
additional manufacturers of finished product for PROVIGIL. Nevertheless, any
disruption in these activities could impede our ability to sell our products and
could reduce sales revenue.
A non-active ingredient used in PROVIGIL is no longer manufactured or
commercially available. At anticipated levels of demand, we have several years
supply of this ingredient. We have prepared new formulations of PROVIGIL that do
not include the now unavailable ingredient; however, the introduction of any
such new formulation requires regulatory approval. If we are unable to obtain
approval for our new formulation, 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 PROVIGIL.
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.
15
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
16
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. 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. Other factors that may cause our financial results to fluctuate
unexpectedly include 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.
To date, we have not been profitable and our accumulated deficit was
approximately $534 million at June 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 attain profitability, we cannot be sure that we
will ever achieve product and other revenue sufficient for us to attain 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 June
30, 2000 through August 6, 2001, our common stock traded at a high price of
$83.625 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 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
17
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 have
filed a motion to dismiss this complaint that is currently pending before the
court. 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
these materials and wastes, and we may be required to incur significant costs to
comply with both existing and future environmental laws and regulations.
18
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 June 30, 2001 compared to three months ended June 30, 2000
Revenues--Total revenues increased 140% to $56,199,000 in the second quarter
of 2001 as compared to $23,385,000 in the second quarter of 2000. This increase
was primarily due to a $25,914,000, or 141%, increase in product sales, of which
$14,561,000 was attributed to a PROVIGIL sales increase, $6,679,000 was
attributed to an ACTIQ sales increase, and $4,674,000 was attributed to a
GABITRIL sales increase. In addition, other revenues increased by $6,900,000, or
138%. This increase was due primarily to $3,500,000 in milestone revenue
recognized upon receiving ACTIQ(R) marketing authorization in certain European
countries, and $2,005,000 of revenues recognized under our collaboration with
Novartis Pharma AG.
Cost of Product Sales--The cost of product sales in the second quarter of
2001 decreased to 21% of net product sales from 23% in the second quarter of
2000 due primarily to a decrease in the cost of product sales of ACTIQ and to
the effect of a change in product mix.
Research and Development Expenses--For the quarter ended June 30, 2001,
research and development expenses increased 32% to $21,245,000 from $16,061,000
in the second quarter of 2000. This change primarily resulted from an increase
in expenditures associated with clinical development studies of PROVIGIL in
areas other than narcolepsy, an increase in expenditures associated with
regulatory and intellectual property fees and expenses, and an increase in drug
development and manufacturing expenditures for our compounds that have
progressed into later stages of development.
Depreciation and Amortization Expenses--The increase in depreciation and
amortization expenses from $965,000 in the second quarter of 2000 to $3,546,000
in the second quarter of 2001 is due primarily to amortization expense of
$2,421,000 for intangible assets acquired during 2000 relating to contracts with
Novartis and Abbott.
Selling, General and Administrative Expenses--Selling, general and
administrative expenses increased 27% to $26,956,000 for the quarter ended June
30, 2001 from $21,156,000 for the second quarter of 2000 primarily due to an
increase in selling and marketing expenses associated with the promotion and
support of our three major products: PROVIGIL, ACTIQ and GABITRIL.
19
Other Income and Expense--Other income and expense decreased by $6,777,000
from the second quarter of 2000 to the second quarter of 2001. Interest income
decreased as a result of 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. Interest expense
increased by $3,081,000 as compared to the prior period as a result of expense
recognized for 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.
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--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 are 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. As of June 30, 2001, 155,414 shares of preferred
stock remained outstanding.
Six months ended June 30, 2001 compared to six months ended June 30, 2000
Revenues--Total revenues increased 140% to $103,271,000 in the first half of
2001 as compared to $43,040,000 in the first half of 2000. This increase was
primarily due to a $50,525,000, or 146%, increase in product sales, of which
$28,122,000 was attributed to a PROVIGIL sales increase, $12,353,000 was
attributed to an ACTIQ sales increase, and $10,050,000 was attributed to a
GABITRIL sales increase. In addition, other revenues increased by $9,706,000, or
115%. This increase was due primarily to $3,500,000 in milestone revenue
recognized upon receiving ACTIQ(R) marketing authorization in certain European
countries, and $4,329,000 of revenues recognized under our collaboration with
Novartis Pharma AG.
Cost of Product Sales--The cost of product sales in the first half of 2001
increased to 21% of net product sales from 18% in the first half of 2000. This
increase is due primarily to PROVIGIL. 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 is partially offset by a decrease in the cost of product
sales of ACTIQ in the second quarter of 2001 and by the effect of a change in
product mix.
Research and Development Expenses--For the six month ended June 30, 2001,
research and development expenses increased 32% to $40,514,000 from $30,642,000
in the same period of 2000. This change primarily resulted from an increase in
expenditures associated with clinical development studies of PROVIGIL in areas
other than narcolepsy, an increase in expenditures associated with regulatory
and intellectual property fees and expenses, and an increase in drug development
and manufacturing expenditures for our compounds that have progressed into later
stages of development.
Depreciation and Amortization Expenses--The increase in depreciation and
amortization expenses from $1,468,000 in the first half of 2000 to $7,035,000 in
the first half of 2001 is due primarily to amortization expense of $5,282,000
for intangible assets acquired during 2000 relating to contracts with Novartis
and Abbott.
Selling, General and Administrative Expenses--Selling, general and
administrative expenses increased 33% to $51,663,000 for the six months ended
June 30, 2001 from $38,812,000 for the same period of 2000 primarily due to an
increase in selling and marketing expenses associated with the promotion and
support of our three major products: PROVIGIL, ACTIQ and GABITRIL.
20
Other Income and Expense--Other income and expense decreased by $10,421,000
from the first half of 2000 to the first half of 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 and due to higher average
investment balances and higher average rates of return in 2000 as compared to
2001. Interest expense increased as compared to the prior period as a result of
expense recognized for our obligation with both 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--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 are 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. As of June 30, 2001, 155,414 shares of preferred
stock 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 June 30, 2001 were $420,791,000,
representing 63% of total assets, and at December 31, 2000 were $97,384,000,
representing 32% of total assets.
Net Cash Used for Operating Activities
Net cash used for operating activities decreased to $22,426,000 in the first
half of 2001 as compared to $39,035,000 in the first half of 2000, due primarily
to a decrease in the net loss before preferred dividends of $20,620,000
resulting from an increase in product sales.
Net Cash (Used for) Provided by Investing Activities
A summary of net cash (used for) provided by investing activities is as
follows:
Six months ended
June 30,
2001 2000
---- ----
Purchases of property and equipment.......... $ (4,729,000) $ (4,581,000)
Acquisition of intangible assets............. -- (23,850,000)
Sales and maturities (purchases) of
investments, net............................ (239,239,000) 102,334,000
------------- ------------
Net cash (used for) provided by investing
activities.................................. $(243,968,000) $ 73,903,000
============= ============
21
--Acquisition of intangible assets
The acquisition of intangible assets in 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:
Six months ended
June 30,
2001 2000
---- ----
Proceeds from exercises of common stock options and warrants.......... $ 20,115,000 $ 20,895,000
Preferred dividends paid.............................................. (6,656,000) (4,531,000)
Net proceeds from issuance of long-term debt.......................... 385,785,000 --
Principal payments on and retirement of long-term debt................ (49,576,000) (31,318,000)
------------ ------------
Net cash provided by (used for) financing activities.................. $349,668,000 $(14,954,000)
============ ============
--Proceeds from exercises of common stock options and warrants
During the six months ended June 30, 2001, we received proceeds of
approximately $20,115,000 from the exercise of approximately 1,021,000 common
stock options. At June 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 4,249,000 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
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 are
initially permitted to redeem the preferred stock, we paid 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 aggregate
amount of $4,390,000.
--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 $14,215,000 have been capitalized and will be amortized
over the term of the notes.
22
--Principal payments on long-term debt
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.
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 have
filed a motion to dismiss this complaint that is currently pending before the
court. We believe that we have valid defenses to all claims raised in this
action. In any
23
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 June 30, 2001 were $420,791,000.
Since inception, we have 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 profitability in 2001. If our expectations
for product sales in 2001 are not realized, it may be difficult or impossible to
achieve profitability. 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. Effective March 31, 2001, Cephalon and TAP Pharmaceuticals, Inc.
mutually agreed to terminate their Research, Development and Licensing Agreement
dated May 17, 1994, as amended. At June 30, 2001, $1,189,000 was receivable from
TAP. 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 research 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. Additionally, we may also use the net proceeds to pay contractual
obligations including those incurred in connection with the Abbott transaction.
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 meet our anticipated debt service, 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 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.
24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Footnote 5 to the Notes to Consolidated
Financial Statements included herein is hereby incorporated by
reference.
Item 2. Changes in Securities and Use of Proceeds
In May 2001, we issued and sold in a private placement $300 million
aggregate principal amount of 5.25% Convertible Subordinated Notes due
2006. In connection with this private placement, we granted the
initial purchasers an option to purchase an additional $100 million in
aggregate principal amount of notes, which was exercised in June 2001,
bringing the total amount sold to $400 million in aggregate principal
amount of notes. The commissions, discounts and other debt issuance
costs in connection with this sale totaled $14.2 million.
The maturity date of the notes is May 1, 2006. We are obligated to
pay interest at a rate of 5.25% per year on each of May 1 and
November 1, beginning November 1, 2001.
The notes were issued and sold in transactions exempt from
registration requirements of the Securities Act of 1933, as amended,
to persons reasonably believed by the Initial Purchasers to be
"qualified institutional buyers" as defined in Rule 144A under the
Securities Act.
The notes are convertible into our common stock, at the option of
the holder, at a price of $74.00 per share, subject to adjustment upon
certain events (the "Conversion Price").
The notes are redeemable by us in cash at any time prior to May 5,
2003 if our stock price exceeds 150% of the Conversion Price for at
least 20 trading days in the consecutive 30-day trading period
immediately prior to our delivery of a redemption notice. If we redeem
all or some of the notes prior to May 5, 2003, we also will make an
additional payment to holders equal to $100.27 per $1,000 note, minus
the amount of any interest we have actually paid on the note. The
notes are also redeemable at any time on or after May 5, 2003 at
redemption prices of 103.15%, 102.10% and 100.05% for each of the
twelve month periods beginning May 1, 2003, 2004 and 2005,
respectively.
In certain circumstances, at the option of the holders, we may be
required to repurchase the notes at 105% of the principal amount of
the notes submitted for repurchase, plus accrued and unpaid interest.
At our option, instead of paying the repurchase price in cash, we may
pay the repurchase price in common stock, valued at 95% of the average
of the closing prices for the five trading days immediately before and
including the third trading day preceding the repurchase date.
On June 4, 2001, we filed a registration statement on Form S-3 to
register the resale of the notes and the shares of common stock
issuable upon conversion thereof, which was declared effective on
August 6, 2001.
25
Item 4. Submission of Matters to a Vote of Security Holders:
The following matters were considered at the annual meeting of
stockholders of Cephalon held in Malvern, Pennsylvania on May 17,
2001:
I. On the election of the following persons as directors:
Number of Votes
-------------------------------------
FOR WITHHELD
Dr. Frank Baldino, Jr. 35,547,795 107,938
William P. Egan 35,546,173 109,560
Dr. Robert J. Feeney 35,543,261 112,472
Martyn D. Greenacre 35,548,479 107,254
Kevin E. Moley 35,546,452 109,279
Dr. Horst Witzel 35,542,951 112,772
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During the second quarter of 2001, the Registrant filed the
following Current Reports on Form 8-K:
(i) On May 3, 2001, Cephalon, Inc. filed the Press Release dated
May 2, 2001 publicly announcing the private placement of $300
million of 5.25% Convertible Subordinated Notes due 2006.
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)
August 10, 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