SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K A
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1998
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) For the transition period from
___________ to ___________
Commission File No. 0-16132
CELGENE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2711928
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(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
7 Powder Horn Drive
Warren, New Jersey 07059
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(Address of principal executive offices) (Zip Code)
(732) 271-1001
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Aggregate market value of voting stock held by non-affiliates of registrant as
of March 1, 1999: $146,007,577
Number of shares of Common Stock outstanding as of March 1, 1999: 16,753,028
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement pursuant to Regulation
14A, which statement will be filed not later than 120 days after the end of the
fiscal year covered by this Report, are incorporated by reference in Part III
hereof.
<PAGE>
CELGENE CORPORATION
ANNUAL REPORT ON FORM 10-K
This form 10-K A amends Celgene Corporation's 10K for the fiscal year ended
December 31, 1998 in the following respects: Exhibit 10-17, Agreement between
the Company and EntreMed, Inc., inadvertently excluded from the 10K filing, has
herewith been attached.
TABLE OF CONTENTS
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Item No. Page
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Part I
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1. Business 1
2. Properties 25
3. Legal Proceedings 25
4. Submission of Matters to a Vote of
Security Holders 25
Part II
5. Market for registrant's Common Equity
and Related Stockholder Matters 26
6. Selected Financial Data 27
7. Management's Discussion and Analysis
of Financial Condition and results of Operations 28
8. Financial Statements and Supplementary Data 32
9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure 33
Part III
10. Directors and Executive Officers of the
Registrant 33
11. Executive Compensation 35
12. Security Ownership of Certain Beneficial
Owners and Management 39
13. Certain Relationships and Related
Transactions 40
Signatures 41
Part IV
14. Exhibits, Financial Statements, and
Reports on Form 8-K F-1
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</TABLE>
PART I
ITEM 1. BUSINESS
Celgene Corporation ("Celgene" or the "Company") is a specialty pharmaceutical
company engaged in the development and commercialization of human
pharmaceuticals, largely focused on the immunology/oncology market and
agrochemicals. The initial therapeutic focus of the immunology/oncology program
is the development of small molecule pharmaceuticals that (1) have the potential
to selectively regulate Tumor Necrosis Factor alpha ("TNF-(alpha)"), a protein
whose overproduction has been linked to many chronic inflammatory and
immunological diseases and (2) the development of anti-angiogenic
pharmaceuticals having the ability to inhibit the growth of new blood vessels as
for example, in a growing tumor, and hence potentially be of value as
anti-cancer agents. The Company's lead pharmaceutical is THALOMID(TM), its
formulation of thalidomide, a potent anti-angiogenic agent and a down regulator
of TNF-(alpha) production. On July 16, 1998, the Company received approval from
the U.S. Food and Drug Administration ("FDA") to market THALOMID for the
treatment of erythema nodosum leprosum ("ENL"), an inflammatory complication of
leprosy. Additionally the Company has implemented clinical programs with the
objective of submitting additional New Drug Applications ("NDA") to market
THALOMID in the treatment of certain cancers and in the treatment of cachexia
(wasting) in patients with Acquired Immune Deficiency Syndrome ("AIDS").
Working with the FDA, Celgene has developed a comprehensive education program
and distribution system the "System for Thalidomide Education and Prescribing
Safety", or the S.T.E.P.S.(TM) program designed to support the safe and
appropriate use of thalidomide due to the drug's history of teratogenicity
(capacity to cause birth defects). This program has been made part of THALOMID's
label. Celgene is also developing novel and proprietary thalidomide analogues,
called IMiDs(TM) (Immunomodulatory Drugs) as well as a class of proprietary
immunotherapeutic pharmaceutical compounds called SelCIDs(TM) ("Selective
Cytokine Inhibitory Drugs"). These two classes of compounds are orally
administered small molecules that suppress excess TNF-(alpha) production as well
as having anti-angiogenic properties and are intended to treat chronic
inflammatory diseases, cancer and other disorders.
As part of its pharmaceutical program, Celgene is also developing chirally pure
versions of commercialized pharmaceuticals with an objective of developing
products having greater efficacy and fewer side effects than the existing
racemic versions. The Company's lead compound in this area is a chirally pure
version of dl-methylphenidate (currently marketed under the trade name
Ritalin(R)) for the treatment of Attention Deficit Hyperactivity Disorder
(ADHD). The Company initiated its Phase III pivotal trial program in the fourth
quarter of 1998. The Company previously completed a Phase I/II trial and
announced that its chirally pure version demonstrated statistically significant
efficacy versus placebo and preliminary indications of longer duration of action
relative to the racemic version.
The Company is also employing its biocatalytic chiral chemistry technology to
develop chirally pure agrochemicals with superior attributes and/or lower
manufacturing costs than the conventional, racemic equivalent.
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Celgene is developing compounds with the objective of producing an array of
novel, highly potent, selective, safe, orally administered drugs that have the
potential to regulate the overproduction of TNF-(alpha), as well as inhibiting
angiogenesis. Overproduction of TNF-(alpha) has been implicated in symptoms
associated with certain chronic inflammatory diseases. Chronic inflammatory and
immunological diseases collectively afflict millions of patients, and for the
most part are inadequately treated with existing therapies. The Company is
developing two new classes of compounds, IMiDs and SelCIDs, which have been
demonstrated in in vitro tests using human cells to be significantly more active
than thalidomide in suppressing TNF-(alpha) production and, in preclinical
tests, have not demonstrated teratogenicity. The initial therapeutic indications
targeted for the IMiDs and the SelCIDs include inflammatory bowel disease,
rheumatoid arthritis and oncological applications. The Company's first SelCID
was found to be well tolerated in two Phase I clinical trials in the United
Kingdom, and is entering a pilot study to assess its potential in Crohn's
disease in the United States. The United States Patent and Trademark Office
("U.S. PTO") has issued composition of matter patents to the Company relating to
certain of its novel IMiDs and SelCIDs.
Celgene's core chiral technology is based on biocatalysis, which involves the
identification and manipulation of enzymes to perform specialized chemical
reactions, such as the production of chirally pure compounds. Chirality refers
to the property of many chemical compounds to exist in two or more different
conformations that are mirror images of each other. While one conformation may
have beneficial effects, the other may be inactive or produce undesirable
effects. Chirally pure compounds contain only one of these conformations, and
thus may have attributes superior to those of the racemic mixture.
The Company is employing its biocatalytic chiral chemistry technology to develop
chirally pure versions of existing pharmaceutical products that may demonstrate
greater efficacy and/or fewer side effects. The Company filed Investigational
New Drug applications ("INDs") in the United States and Canada for a chirally
pure version of dl-methylphenidate, which has been used for decades in
formulations such as Ritalin(R), for the treatment of Attention Deficit
Hyperactivity Disorder ("ADHD") in children. The Company completed its Phase
I/II clinical trial of the drug and announced that its chirally pure version
demonstrated statistically significant efficacy versus placebo and preliminary
indications of longer duration of action relative to the racemic version and has
initiated pivotal Phase III trials. The Company is also developing a chirally
pure formulation of mexiletine for the treatment of neuropathic pain, a chronic
pain state frequently associated with trauma, spinal cord injury, and
complications of diabetes. Celgene recently reported that its chirally pure
formulation of mexiletine substantially reduced severe neuropathic pain in
established animal models.
Celgene, through its Celgro(TM) subsidiary, is also applying its chiral
technology to the production of chirally pure agrochemicals, in which the
Company's biocatalytic process can add significant value by substantially
lowering manufacturing costs and reducing environmental impact. In 1998, Celgro
entered into agreements with two leading agrochemical companies to develop
cost-effective processes for the production of chirally pure versions of certain
products currently produced by those firms. Each agreement provides that the
customer will fund a research and development program by Celgene relating to the
customer's product, make milestone payments to Celgene if certain benchmarks are
achieved and pay Celgene a royalty if the program leads to commercial sales.
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Celgene has established a sales and marketing organization to commercialize
THALOMID and employs approximately 32 persons in this capacity. The Company
intends to develop and market its own pharmaceuticals for indications with
smaller patient populations. The Company anticipates partnering with larger
pharmaceutical companies with respect to drugs for indications with larger
patient populations. The Company also may partner with companies for the
development and commercialization of the Company's chirally pure pharmaceuticals
and agrochemical products. Celgene expects that these arrangements typically
will include milestone payments, reimbursement of research and development
expenses and royalty arrangements.
PRODUCTS UNDER DEVELOPMENT
Celgene's portfolio of product candidates currently under development and
certain key clinical trials is set forth in the following table and further
described below:
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Product Indication/ Intended Use Status(1)
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THALOMID TM Erythema Nodosum Approved and marketed
Leprosum (ENL) 10/98
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Recurrent Aphthous Phase III study ongoing
Ulcers in HIV+ patients
----------------------------------------------------
AIDS-Cachexia Phase II/III trial
completed
Special trials ongoing
----------------------------------------------------
Multiple Myeloma Phase III trial protocol
in preparation
----------------------------------------------------
Lung Cancer NCI/Celgene pilot trial
being initiated
----------------------------------------------------
Head and Neck Cancer NCI/Celgene pilot trial
being initiated
----------------------------------------------------
Glioblastoma NCI/Celgene trial Phase
II ongoing
----------------------------------------------------
Crohn's Disease Pilot trial data under
review
Phase III protocol in
preparation
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SelCID CDC801 Crohn's Disease Phase II being initiated
Phase I studies completed
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SelCIDs TM (Selective Inflammatory Non-clinical tox
Cytokine Inhibitory Drugs) disease/oncology
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d-MPH (Chirally pure Attention Deficit Phase II trial completed
version of Hyperactivity Disorder Phase III trial ongoing
dl-methylphenidate)(2) (ADHD)
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IMiDs(TM) Inflammatory Non-clinical toxicology
(Immunomodulatory Drugs) disease/oncology for lead compound being
completed Phase I second
half of 1999
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</TABLE>
(1) See "Government Regulation" for a description of the meaning of terms used
to describe the status of the Company's product development activities.
(2) One commercial formulation of dl-methylphenidate is Ritalin(R).
IMMUNOLOGY/ONCOLOGY
General
Celgene is developing THALOMID (thalidomide) and two new classes (IMiDs and
SelCIDs) of orally available small molecule compounds with the objective of
producing an array of novel, highly
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potent, selective, safe, orally administered drugs that have the potential to
regulate the overproduction of TNF-(alpha) and are anti-angiogenic.
TNF-(alpha), produced primarily by certain white blood cells, is one of a number
of proteins called cytokines, which act as chemical messengers throughout the
body to regulate many aspects of the immune system. TNF-(alpha) is essential to
the mounting of an inflammatory response, which is the normal immune system
reaction to infection or injury, and rids the body of foreign agents and
promotes tissue repair. However, chronic or excessive production of TNF-(alpha)
has been implicated in the pathophysiology of a number of acute and chronic
inflammatory diseases. These disease states which are inadequately treated with
existing therapies, include diabetes (non-insulin dependent), Alzheimer's
Disease, inflammatory bowel disease, rheumatoid arthritis, cancer cachexia,
Parkinson's Disease, multiple sclerosis, and lupus.
Traditional therapies for these disease states include anti-inflammatory drugs
and immunosuppressive agents. These therapies, however, often fail to achieve
significant clinical benefits and can cause serious side effects such as severe
drops in certain blood counts, liver toxicity, osteoporosis, teratogenicity, and
various endocrine abnormalities. Newer therapies, which include monoclonal
antibodies and receptor-based therapies, also have not adequately addressed
these diseases. It is widely believed that selective down regulation of
TNF-(alpha) represents a promising new strategy for treating chronic
inflammatory diseases. In pursuit of this strategy, two broad classes of
compounds have been investigated: proteins and small synthetic molecules.
Investigational anti-TNF-(alpha) proteins, including anti-TNF-(alpha) antibodies
and TNF-(alpha) receptors, have demonstrated efficacy in the treatment such
chronic inflammatory diseases as rheumatoid arthritis, and Crohns' disease (a
severe manifestation of inflammatory bowel disease). While initial doses of
these anti-TNF-(alpha) proteins have been well tolerated and reduced disease
activity has been observed in clinical studies, they do exhibit certain
shortcomings linked to their nature as proteins. First, they are relatively
larger molecules that must be injected. Second, the period of efficacy of a
given dosage of a protein-based drug often declines with repeated
administration, rendering protein-based drugs more suitable for treatment of
acute pathological conditions rather than chronic disease states. This
limitation is due in part to increasing production by the patient's immune
system of antibodies that neutralize administered proteins. Varying degrees of
this immunogenic response have been observed in clinical trials of
anti-TNF-(alpha) antibodies.
There are a number of large protein based therapeutic products under development
by other companies for TNF-(alpha) modulation. At least one such product has
received approval from the FDA for the treatment of Crohn's disease. Antibody or
receptor-based products are also under development for diseases such as
rheumatoid arthritis, and asthma. However, small molecule drugs, if developed,
may prove to be preferable in the treatment of chronic inflammatory diseases,
due to factors such as oral dosing (versus injection), avoidance of undesirable
immune response leading to side effects and reduced efficacy, and lower cost of
therapy. The Company believes its small molecule immunotherapeutic compounds
have the potential to selectively modulate TNF-(alpha) while affording these
benefits.
In addition, research has indicated that Celgene's small molecule THALOMID is
anti-angiogenic. Angiogenesis is the fundamental biological process by which new
blood vessels are formed. Cancer
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cells which require oxygen and nutrients, initiate a biochemical mechanism that
stimulates angiogenesis, which in turn provides the cancerous cells with the
blood supply that they need. Inhibition of such angiogenesis could adversely
effect the graft of a tumor and hence be a potential anti-cancer therapy. Such
therapy could be also used in conjunction with radiation or more traditional
chemotherapeutic agents. Currently a number of anti-angiogenic agents are being
developed by a number of companies, however the Company believes that THALOMID
is the only approved anti-angiogenic agent on the market. Preliminary research
suggests that Celgene's small molecule immunotherapeutic compounds - some of
which are based on thalidomide's activity - also appear to have the potential to
inhibit such angiogenesis.
Thalidomide
The Company is currently developing THALOMID, its formulation of thalidomide, a
potent inhibitor of TNF-(alpha) and angiogenesis , for the treatment of a
variety of serious disease states for which there are currently no adequate
therapies. The Company's work with thalidomide was originally based on a
scientific collaboration with The Rockefeller University's Laboratory of
Cellular Physiology and Immunology ("Rockefeller"). In the early 1990s,
researchers at Rockefeller discovered that thalidomide is a selective modulator
of TNF-(alpha) , and therefore could be of potential benefit in many serious
immune related disease states, including cachexia and other AIDS-related
conditions. The Company believes that, in serious and debilitating disease
states, the risk of thalidomide's teratogenicity and other potential side
effects is outweighed by the gravity of the disease and the drug's potential
clinical benefits. Rockefeller has granted Celgene certain exclusive rights and
licenses to manufacture, use and sell thalidomide for treating the toxicity
associated with high concentrations of TNF-(alpha) in septic shock, cachexia and
HIV related disease states. Researchers at the Children's Hospital (affiliated
with Harvard University) discovered that thalidomide has anti-angiogenic action,
(and hence of potential use as an anti-cancer agent) and filed patents on this.
The patents (some of which have not issued in the U.S.) are exclusively licensed
to EntreMed, (a development stage biotechnology company). Celgene was granted an
exclusive sublicense of all of EntreMed's thalidomide patents in December 1998.
Thalidomide was developed initially as a sedative, and was also widely
prescribed by doctors in Europe in the late 1950s and early 1960s to pregnant
women for relief of morning sickness. After severe birth defects were later
observed with use of the drug, it was virtually removed from the world market.
Thalidomide was later discovered to have therapeutic effects in the treatment of
ENL in leprosy, a disease that is rare in the United States but common in many
parts of the developing world. Although the FDA had never approved the marketing
of thalidomide, the U.S. Public Health Service has been dispensing the drug for
the treatment of ENL for the past 25 years.
S.T.E.P.S.(TM) Program
Working with the FDA and other governmental agencies as well as certain advocacy
groups, the Company has designed and implemented a program, known as the System
for Thalidomide Education and Prescribing Safety ("STEPS") whose objective is
the safe and effective dispensing of THALOMID. This program includes
comprehensive physician, pharmacist, and patient education. Female patients are
required periodically to take pregnancy tests and to use contraception. All
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patients are also subject to requirements concerning informed consent and
participation in a confidential outcomes registry managed on Celgene's behalf by
an academic epidemiology research group. Physicians under the program are also
required to comply with the educational, contraception counseling, informed
consent, and pregnancy testing elements of the program. Dispensing pharmacists
are required to confirm that the physician is a registered participant in the
program, and that the patient has signed an informed consent. Automatic refills
are not permitted under the program, and prescriptions may not exceed four weeks
dosing. A new prescription is required every month.
Target Disease States for Thalidomide
Key indications for which the Company is currently testing or about to commence
testing THALOMID are set forth below. There can be no assurance that the Company
will eventually commercialize or pursue regulatory approval for THALOMID for any
of these indications.
<PAGE>
<TABLE>
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THALOMID(TM)
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Indication Status
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Erythema nodosum leprosum in leprosy (ENL) Approved and marketed
October 1998
- -----------------------------------------------------------------------------
Multiple Myeloma |X| Phase II data in review
|X| Phase III trial in
preparation
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Glioblastoma Phase II
|X| NCI/Celgene trial ongoing
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Crohn's Disease |X| Phase II data under review
|X| Phase III Protocol in
preparation
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Non-Small Cell Lung Cancer |X| Pilot study with NCI
being initiated
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Head and Neck Cancer |X| Pilot study with NCI
being initiated
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AIDS-related Cachexia Phase II/III trial completed.
Special studies ongoing
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
AIDS-related Recurrent aphthous Phase III trial ongoing
stomatitis (RAS)
- -----------------------------------------------------------------------------
</TABLE>
Thalidomide's immunological and anti-angiogenic properties are being
investigated as the basis for treatment of a variety of oncological diseases. A
number of trials are ongoing, some in cooperation with the National Cancer
Institute to evaluate the potential of the drug in cancer. Key investigations
include multiple myeloma and glioblastoma.
ONCOLOGY
Cancer tissue is highly vascularized. This observation has led to the
realization that blood vessels are essential for tumor growth, invasion, and
metastasis. Specifically, developing solid primary tumors are believed to remain
clinically insignificant, unless they can arrange to obtain nourishment from
their host. Biochemically, an invasive tumor acts by altering a complex system
of factors affecting vascular endothelial cells, causing the formation of new
vascular networks to spring from existing ones.
Almost three decades ago it was proposed that this tumor neovascularization or
angiogenesis could be a target of cancer therapy. Anti-angiogenic compounds were
believed to be able to work by reducing or halting remaining tumor growth and
could also be used in conjunction with more traditional chemotherapeutic agents.
Thalidomide was discovered to be anti-angiogenic at The Children's Hospital in
Boston. Celgene is currently working with the National Cancer Institute on a
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number of clinical investigators to assess the potential of the drug in the
treatment of various cancers.
Key areas of THALOMID clinical research are delineated below.
Multiple Myeloma
Multiple Myeloma is a malignant proliferation of plasma cells and plasmacytoid
cells. It is the second most common hematological malignancy and is invariably
fatal. Myeloma accounts for about 13% of hematological malignancies. The
prevalence of the disease is approximately 40,000 people in the United States
and the incidence approximately 4 per 100,000: approximately 14,400 new cases
are reported annually with approximately 11,000 deaths associated with the
disease every year.
THALOMID is being investigated at the University of Arkansas where an initial
report (in December at the American Society of Hematology) focused on a group of
patients with advanced disease and histories of extensive prior chemotherapeutic
interventions, radiation treatments and multiple bone marrow transplants who
received THALOMID, 33% of patients responded and saw substantial decreases
(50-100%) in serum M protein levels, an important marker of the progression of
the disease. These encouraging results have been extended to a larger patient
population where similar results are being observed.
Celgene's plan is to present the data from the University of Arkansas study to
the FDA and develop a regulatory/clinical program towards indication approval of
THALOMID for multiple myeloma.
Glioblastoma Multiforme
Glioblastomas are the most common brain tumors and account for 50% of all
gliomas. These tumors arise after age 50 in most patients. Radiation therapy and
chemotherapy are standard therapeutic regimens.
Studies at the New York University School of Medicine and at the Dana Farber
Institute have demonstrated the potential for further investigating thalidomide
as a treatment for glioblastoma. Additionally a trial has been initiated in
collaboration with the National Cancer Institute and the Radiation Therapy
Oncology Group a national cooperative research organization to investigate the
effect of THALOMID and radiation as co-therapy for the treatment of
glioblastoma.
Other Oncology Indications
THALOMID is currently being investigated for a wide array of cancers including
prostate, breast, colorectal, lung, head and neck, melanoma and leukemia. If
successful, these studies should establish proof of principle and facilitate
design of pivotal studies. The NCI is supporting a number of these trials, while
others are being run by key investigators who are experts in their field.
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IMMUNE MODULATION
Thalidomide has been shown to impact immune function markers both in vitro and
in vivo. Examples of such biological activities include the inhibition of the
inflammatory cytokine TNF(alpha), stimulation of the anti-inflammatory cytokine
IL-10, and activation of T-cell function. These types of activities could prove
to have therapeutic benefit in a variety of inflammatory, infectious and
autoimmune diseases. The two key areas of investigation at present involve
inflammatory bowel disease and serious complications associated with HIV/AIDs.
Erythema Nodosum Leprosum. ENL, a complication of leprosy, is a chronic
bacterial disease. Leprosy afflicts millions worldwide, although the disease is
relatively rare in the United States. Celgene does not plan to market THALOMID
outside the United States and Canada in the near term. ENL occurs in about 30%
of leprosy patients, and is characterized by cutaneous lesions, acute
inflammation, fever, and anorexia. On July 16, 1998, the Company received
approval from the FDA with respect to the Company's NDA for THALOMID in the
treatment of ENL.
Inflammatory Bowel Disease
Inflammatory bowel disease is characterized by serious chronic inflammation of
the wall or any part of the gastrointestinal tract and results in pain, bloating
and diarrhea. In addition, the chronic inflammation may result in abscesses and
fistula formation. The most serious form of inflammatory bowel disease is known
as Crohn's Disease and afflicts approximately 125,000 patients in the US.
A phase II pilot study using THALOMID in patients with severe Crohn's disease is
being concluded at the Cedar Sinai Medical Center. Preliminary data suggests
that thalidomide can not only provide clinical benefit, but potentially can also
be steroid sparing. This combination of effects could mean improvement over
current therapeutic options. A similar phase II pilot study has recently been
initiated using THALOMID for chronically active ulcerative colitis at Cedar
Sinai Medical Center. As many as 500,000 people suffer from ulcerative colitis
in the US.
HIV/AIDS
Cachexia. Cachexia is clinically defined as the involuntary loss of more than
10% of baseline body weight in the previous six months. Cachexia can markedly
diminish a patient's quality of life, may contribute directly to disease
progression, development of opportunistic infections and even death. The Company
announced in April 1997 that data from its Phase II/III trial of THALOMID in
HIV-associated weight loss showed "a statistically significant positive result"
in reaching the trial's primary endpoint, i.e. increase in body weight after
eight weeks of therapy. The double-blind placebo-controlled trial evaluated 102
AIDS patients who had lost an average of more than 10 percent of their body
weight.
Recurrent Aphthous Stomatitis. RAS is characterized by lesions of the oral
cavity, esophagus, and gastrointestinal tract and may interfere with normal
eating. The Company believes RAS afflicts an estimated 5,000 AIDS patients in
the U.S. Positive results have been reported in a study conducted by the AIDS
Clinical Trials Group of the National Institutes of Health using a formulation
of thalidomide manufactured by a third party. In mid-1997, the Company began a
pivotal clinical trial
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involving 84 patients for the evaluation of thalidomide in the treatment of RAS,
using the same principal investigator as the AIDS Clinical Trials Group study.
IMiDs
Celgene has designed and synthesized a number of novel structural analogues of
thalidomide called IMiDs (immunomodulatory drugs) which have been demonstrated
in in vitro tests to be substantially more potent than thalidomide. Certain
analogues have demonstrated equivalent ability to inhibit TNF-(alpha)
overproduction but in a dose as low as 1/10,000 of the dose of thalidomide.
There can be no assurance, however, that the same effect can be duplicated in in
vivo tests. Research on these compounds is now focused on evaluating the
toxicological profile of the lead candidates and on increasing the immunological
and anti-angiogenic activity and the potential elimination of thalidomide's side
effects including teratogenicity. The Company anticipates filing an IND
application for its lead analogue in 1999. The US patent and Trademark Office
has issued composition of matter patents to the Company relating to certain of
its IMiDs.
SelCIDs
The Company has designed, synthesized and tested a large number of SelCIDs
("Selective Cytokine Inhibitory Drugs"). These compounds have demonstrated the
ability to be highly specific inhibitors of TNF-(alpha) overproduction in in
vitro bioassays of human cells. In 1997, the Company announced that its SelCIDs
appear to have a specific inhibitory effect on the phosphodiesterase type 4
enzyme (PDE-4), which is linked to the overproduction of TNF-(alpha). Studies
have determined that many of the SelCIDs decrease synthesis of TNF-(alpha)
through selective inhibition of PDE-4. The Company believes that control of
TNF-(alpha) at its source, versus simple removal of circulating levels of the
cytokine, may facilitate more effective therapy without immune suppression.
There can be no assurance, however, that the same effect can be duplicated in in
vivo tests.
The Company's first SelCID was found to be well tolerated in a small human
safety trial in the United Kingdom in 1997. An expanded safety trial in the UK
confirmed this in 1998. The Company filed an IND for the treatment of Crohn's
Disease in the United States late in 1998. Unlike many existing drugs which
inhibit PDE-4, SelCIDs have not shown any evidence of acute emesis (nausea and
vomiting) in animal tests. If confirmed in humans at therapeutically effective
doses, this would indicate that they are a unique class of PDE-4 inhibitors. The
U.S. Patent and Trademark Office has issued composition of matter patents to the
Company relating to certain of its novel thalidomide analogues and SelCIDs.
CHIRAL CHEMISTRY
Celgene is applying its biocatalytic synthesis technology towards the
development of substantial business opportunities in human pharmaceuticals and
agrochemicals. The Company believes it has made significant progress over the
past two years towards the development of two principal opportunities: (i) the
development of chirally pure versions of existing racemic drugs whose
performance and/or safety profiles may be enhanced by eliminating chiral
impurities; and (ii) the development and production of chirally pure
agrochemicals.
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Chirality
Many human pharmaceuticals and agrochemicals exist in two or more different
three dimensional configurations that are identical in chemical structure but
are mirror images of each other. These conformations, known as stereoisomers,
generally interact differently with biological targets. In clinical
applications, one isomer may result in the desired therapeutic effect by
stimulating or inhibiting a targeted biological function, while the other isomer
may be inactive or cause undesirable side effects. In contrast to racemic
(compositions containing both isomers, i.e. chirally impure) pharmaceuticals,
the use of chirally pure pharmaceuticals can result in significant clinical
benefits such as reduced toxicity and increased efficacy. In agrochemical
applications, the use of chirally pure chemicals can result in a substantially
reduced volume of product required to achieve the desired benefit, thereby
potentially lowering manufacturing costs and reducing the environmental burden
as compared with racemic chemicals.
The worldwide market value of pharmaceuticals marketed in their chirally pure
form increased from approximately $7 billion in 1985 to approximately $50
billion in 1995. This increase was driven, in part, by the FDA's movement
towards requiring applicants, in connection with the submission of NDAs for
racemic compounds, to evaluate the racemic mixture as well as each stereoisomer,
as well as the greater selectivity of action of chirally pure drugs. Similarly,
agrochemicals are subject to complex and evolving environmental regulation in
the United States and abroad, including regulations establishing usage levels.
The Company believes that such regulatory constraints increase the commercial
opportunity for chirally pure agrochemicals which cause less environmental
impact, in terms of both their manufacture and use.
Celgene's Core Chiral Technology: Biocatalysis
Celgene's biocatalytic process enables the efficient production of chirally pure
compounds. This patented process is based primarily on the use of enzymes called
aminotransaminases, which are optimized by the Company through a variety of
techniques including genetic engineering. These enzymes catalyze the production
of only the desired stereoisomer of a chiral compound, and can be used in
conventional chemical synthesis reactors at room temperature.
The Company's biocatalytic process for producing chirally pure compounds differs
from the more common approach of producing racemic mixtures followed by
separating of the desired stereoisomer through resolution techniques such as
crystallization or chromatography. These traditional approaches to producing
chirally pure compounds can be cumbersome, result in low yields, use more raw
materials, involve the disposition of waste product, and are generally less
economical than the Company's process. The Company believes that its
biocatalytic process can be applied to the manufacture of a wide variety of
organic chemicals.
Chirally Pure Pharmaceuticals
Celgene believes there is a significant opportunity in developing chirally pure
versions of approved drugs currently sold in racemic form. Compounds that have
been approved and marketed have a significant body of information regarding
their safety and efficacy, and consequently: (i) the cost
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and duration of clinical trials may be reduced if reference may be made to data
used in the course of obtaining regulatory approval for the racemic parent
compound; (ii) the risk of not obtaining regulatory approval may be reduced, and
(iii) marketing risks may also be reduced due to the established market for the
parent compound.
The Company is developing chirally pure versions of currently marketed racemic
drugs as potentially improved pharmaceuticals with potential benefits such as
reduced side effects, lower dosage requirements, enhanced specificity, and
applications in new indications. The Company filed IND applications with the FDA
and the Health Protection Branch of Canada and completed a Phase I/II clinical
trial for a chirally pure version of dl-methylphenidate ("dl-MPH"), which has
been used for decades in formulations such as Ritalin for the treatment of ADHD
in children. One million American children are estimated to be treated with
dl-MPH in its racemic form. Total US sales in 1998 of the racemic version of the
drug were in excess of $300 million. The Company's study was designed to
evaluate the pharmacokinetics and potential benefits of its chirally pure
version of dl-MPH. The Company completed this trial in the fall of 1997 and
announced that its chirally pure version of dl-MPH demonstrated statistically
significant efficacy versus a placebo and preliminary indications of longer
duration of action relative to the racemic version. In addition, the Company has
commenced development of a controlled release version of chirally pure dl-MPH,
which may substantially improve administration of the drug. The Company has been
issued both use and process patents for both its chirally pure and controlled
release versions of dl-MPH. The Company initiated Phase III pivotal trials for
D-MPH in late 1998.
The Company is also investigating a chirally pure formulation of mexiletine for
the treatment of neuropathic pain, a chronic pain state frequently associated
with trauma, spinal cord injury, and complications of diabetes. Neuropathic pain
generally arises from injury to the peripheral or central nervous tissue. In
most cases, chronic neuropathic pain responds poorly to treatment with opiates
or nonsteroidal anti-inflammatory analgesics. Mexilitine is used primarily for
the treatment of cardiac arrhythmia. However, high doses of racemic oral
mexiletine are sometimes used by physicians as an adjuvant treatment for
neuropathic pain, presumably due to its ability to block sodium channels that
communicate pain signals through the nervous system. However, this off-label use
has been limited, due to the racemic effect on sodium channels in the heart and
the central nervous system that can lead to significant side effects. Celgene's
preliminary research indicates that the anti-arrhythmic effect is resident in
one isomer and the pain suppression capability in the other.
Celgene has reported that its chirally pure formulation of mexiletine
substantially reduced severe neuropathic pain in established animal models. The
study examined the effect of each of the two isomers of mexiletine, racemic
mexiletine, and lidocaine, a prototypical sodium channel blocker, on allodynia
(pain response elicited by light touch stimuli), in two established preclinical
models. Celgene, in collaboration with researchers at the Anesthesiology
Research Laboratory at the University of California in San Diego, determined
that one isomer of mexiletine is active in the reduction of neuropathic pain.
Formulation of a pharmaceutical with this single, selective isomer may help
avoid adverse effects on cardiac and other issues. A racemic formulation of
mexiletine is marketed by several companies as an anti-arrhythmic agent. The
Company has filed for appropriate patent coverage for chirally pure mexiletine
for neuropathic pain.
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Chirally Pure Agrochemicals
The Company's Celgro subsidiary is applying the Company's proprietary
biocatalytic synthesis technology to agrochemicals. Celgro's approach is to work
with agrochemical companies to adapt the Company's biocatalytic technology to
the manufacture of chirally pure versions of their existing crop protection
product, and then license the technology to these companies in exchange for
royalties. Celgro will also seek to develop chirally pure versions of existing
agrochemicals on its own, and then enter into license agreements with third
parties, who would manufacture and sell the agrochemicals and pay the Company
royalties. The Company believes that the agrochemical market presents a
substantial opportunity because many agrochemicals produced in racemic form,
could be manufactured in chirally pure form. As noted above, the Company entered
into research and development agreements with two leading agrochemical companies
in 1998.
The Company also believes that its chiral technology can be enabling in
agrochemical applications because it has the potential to significantly lower
manufacturing costs compared to conventional technologies and other chiral
technologies. Compared to the Company's biocatalytic process, conventional
technologies require more raw materials and greater plant capacity to produce
the same effective quantity of product, while other chiral technologies require
specialized equipment, more expensive chiral agents, more raw material, and
greater capacity for handling hazardous wastes produced in the separation
process. In addition, it is anticipated that the required application amount of
a chirally pure form of an agrochemical could be substantially less than the
racemic form, and achieve the same or better results, thereby reducing
environmental burden. Agrochemicals are highly price sensitive, and, therefore,
a process that produces chirally pure products at significant cost savings could
be in substantial demand.
PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to the Company's business. It
is the Company's policy to seek patent protection for its inventions, and also
to rely upon trade secrets, know-how, continuing technological innovations, and
licensing opportunities to develop and maintain its competitive position.
Under an agreement with The Rockefeller University ("Rockefeller"), the Company
has obtained certain exclusive rights and licenses to manufacture, use, and sell
products that are based on compounds identified in research carried out by
Rockefeller and the Company that can be used for treating toxicity associated
with high concentrations of TNF (the "Rockefeller License"). Rockefeller has
identified a method of using thalidomide and certain thalidomide-like compounds
to treat certain symptoms associated with abnormal concentrations of TNF-(alpha)
, including those manifested in septic shock, cachexia and HIV infection, and in
1995 was issued U.S. Patent No. 5,385,901 which claims such methods. This U.S.
Patent expires in 2012 and is included in the patent rights licensed to the
Company under the Rockefeller License. However, Rockefeller did not seek
corresponding patents in any other countries in respect of this invention. Under
the Rockefeller License, the Company is obligated to pay certain specified
royalties to Rockefeller on net sales of licensed products for covered
indications. The Rockefeller License is coterminous with the last to expire of
the licensed patents and is terminable by Rockefeller only in the event of a
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breach of the agreement's terms. Any termination of the Rockefeller License
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has been issued 28 U.S. Patents and has filed 15 U.S. Patent
applications. Of the issued U.S. Patents, 15 relate to immunotherapeutic and
chiral amine processes, compounds and uses. The Company's U.S. Patents expire
between 2001 and 2016. The Company has obtained patents in certain other
countries which correspond to some, but not all, of the Company's U.S. Patents.
The Company expects to continue to file patent applications covering the use of
its proprietary inventions.
Prior to the enactment in the United States of new laws adopting certain changes
mandated by the General Agreement on Tariffs and Trade ("GATT"), the exclusive
rights afforded by a U.S. Patent were for a period of 17 years measured from the
date of grant. Under these new laws, the term of any U.S. Patent granted on an
application filed subsequent to June 8, 1995, would terminate 20 years from the
date on which the patent application was filed in the United States or the first
priority date, whichever occurs first. Future patents granted on an application
filed before June 8, 1995, will have a term that terminates 20 years from such
date, or 17 years from the date of grant, whichever date is later.
Under the Drug Price Competition and Patent Term Restoration Act of 1984, a
U.S. Product patent or use patent may be extended for up to five years under
certain circumstances to compensate the patent holder for the time required for
FDA regulatory review of the product. The benefits of this act are available
only to the first approved use of the active ingredient in the drug product and
may be applied only to one patent per drug product. There can be no assurance
that the Company will be able to take advantage of this law.
The Company's success will depend, in part, on its ability to obtain and enforce
patents, protect trade secrets, obtain licenses to technology owned by third
parties when necessary, and conduct its business without infringing the
proprietary rights of others. The patent positions of pharmaceutical and
biotechnology firms, including the Company, can be uncertain and involve complex
legal and factual questions. In addition, the coverage sought in a patent
application can be significantly reduced before the patent is issued.
Consequently, the Company does not know whether any of its pending applications
will result in the issuance of patents or, if any patents are issued, whether
they will provide significant proprietary protection or commercial advantage, or
will be circumvented by others. Since patent applications in the United States
are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, the Company cannot be certain that it was the first to make the
inventions covered by each of its pending patent applications, or that it was
the first to file patent applications for such inventions. In the event a third
party has also filed a patent for any of its inventions, the Company may have to
participate in interference proceedings declared by the United States Patent and
Trademark Office to determine priority of invention, which could result in the
loss of any opportunity to secure patent protection for the invention and the
loss of any right to use the invention, and even if the eventual outcome is
favorable to the Company, such interference proceedings could result in
substantial cost to the Company. Protection of patent applications and
litigation to establish the validity and scope of patents, to assert patent
infringement claims against others and to defend against patent infringement
claims by others can be expensive and
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time-consuming. There can be no assurance that in the event that any claims with
respect to any of the Company's patents, if issued, are challenged by one or
more third parties, that any court or patent authority ruling on such challenge
will determine that such patent claims are valid and enforceable. An adverse
outcome in such litigation could cause the Company to lose exclusivity relating
to such patent claims. If a third party is found to have rights covering
products or processes used by the Company, then the Company could be forced to
cease using the technologies covered by the disputed rights, could be subject to
significant liabilities to such third party, and could be required to license
technologies from such third party. Also, different countries have different
procedures for obtaining patents, and patents issued by different countries
provide different degrees of protection against the use of a patented invention
by others. There can be no assurance, therefore, that the issuance to the
Company in one country of a patent covering an invention will be followed by the
issuance in other countries of patents covering the same invention, or that any
judicial interpretation of the validity, enforceability, or scope of the claims
in a patent issued in one country will be similar to the judicial interpretation
given to a corresponding patent issued in another country. Furthermore, even if
the Company's patents are determined to be valid, enforceable, and broad in
scope, there can be no assurance that competitors will not be able to design
around such patents and compete with the Company using the resulting alternative
technology. The Company does not currently have, nor does it intend to seek,
patent protection relating to the use of THALOMID to treat erythema nodosum
leprosum, an inflammatory complication of leprosy.
The Company also relies upon unpatented proprietary and trade secret technology
that it seeks to protect, in part, by confidentiality agreements with its
collaborative partners, employees, consultants, outside scientific
collaborators, sponsored researchers, and other advisors. There can be no
assurance that these agreements provide meaningful protection or that they will
not be breached, that the Company would have adequate remedies for any such
breach, or that the Company's trade secrets, proprietary know-how, and
technological advances will not otherwise become known to others. In addition,
there can be no assurance that, despite precautions taken by the Company, others
have not and will not obtain access to the Company's proprietary technology.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the manufacture and marketing of pharmaceuticals and
in the Company's ongoing research and development activities. All of the
Company's therapeutic products will require regulatory approval by governmental
agencies prior to commercialization. In particular, human therapeutic products
are subject to rigorous preclinical testing and clinical trials and other
pre-marketing approval requirements by the FDA and regulatory authorities in
other countries. In the United States, various federal, and in some cases state,
statutes and regulations also govern or impact upon the manufacturing, safety,
labeling, storage, record keeping, and marketing of such products. The lengthy
process of seeking required approvals, and the continuing need for compliance
with applicable statutes and regulations require the expenditure of substantial
resources. Regulatory approval, when and if obtained, may be limited in scope,
significantly limiting the indicated uses for which a product may be marketed.
Further, approved drugs, as well as their manufacturers, are subject to ongoing
review, and discovery of previously unknown problems with such products may
result in restrictions on their manufacture, sale or use or in their withdrawal
from the market. Any failure by the Company or its collaborators or licensees to
obtain or maintain, or any delay in
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obtaining regulatory approvals could adversely affect the marketing of any
products developed by the Company, and its ability to receive product revenue,
royalty revenue, or profit sharing payments.
The activities required before a pharmaceutical may be marketed in the United
States begin with preclinical testing not involving human subjects. Preclinical
tests include laboratory evaluation of product chemistry and animal studies to
assess the potential safety and efficacy of a product and its formulations. The
results of these studies must be submitted to the FDA as part of an
Investigational New Drug Application ("IND"), which must be reviewed by the FDA
primarily for safety considerations before proposed clinical trials in humans
can begin. Typically, clinical trials involve a three-phase process.
In Phase I, clinical trials are conducted with a small number of individuals to
determine the early safety and tolerability profile and the pattern of drug
distribution and metabolism within the body. In Phase II, clinical trials are
conducted with groups of patients in order to determine preliminary efficacy,
dosing regimes, and expanded evidence of safety. In Phase III, larger-scale,
multi-center, adequate and well-controlled, comparative clinical trials are
conducted with patients in order to provide enough data for the statistical
proof of efficacy and safety required by the FDA and others, however in some
limited circumstances Phase III trials may be modified to allow evaluation of
safety and efficacy in a less regimented manner, which may allow the Company to
rely on historical data relating to the previous use of certain pharmaceuticals.
In Phase IV, confirmatory trials are conducted after the FDA's approval of an
NDA or issuance of an approvable letter in order to resolve any open issues.
Monitoring of all aspects of the study to minimize risks is a continuing
process. Reports of all adverse events must be made to the FDA. The results of
the preclinical testing and clinical trials are then submitted to the FDA in the
form of an NDA for approval to commence commercial sales. In responding to an
NDA, the FDA may grant marketing approval, request additional information, or
deny the application if it determines that the application does not satisfy its
regulatory approval criteria. When an NDA is approved, to the manufacturer must
establish a system for obtaining reports of experience and side effects that are
associated with the drug and make appropriate submissions to the FDA.
Pursuant to the Orphan Drug Act, a sponsor may request the FDA to designate a
drug intended to treat a "rare disease or condition" as an "orphan drug." A
"rare disease or condition" is defined as one which affects less than 200,000
people in the United States, or which affects more than 200,000 people, but for
which the cost of development and making available the drug is not expected to
be recovered from sales of the drug in the United States. Upon the approval of
the first NDA for a drug designated as an orphan drug for a specified
indication, the sponsor of the NDA is entitled to exclusive marketing rights in
the United States for such drug for that indication for seven years. Orphan
drugs may also be eligible for federal income tax credits for costs associated
with the drug's development. Possible amendment of the Orphan Drug Act by the
United States Congress and possible reinterpretation by the FDA are the subject
of frequent discussion. FDA regulations reflecting certain definitions,
limitations and procedures went into effect in January 1993. Therefore, there is
no assurance as to the precise scope of protection that may be afforded by
orphan drug status in the future, or that the current level of exclusivity and
tax credits will remain in effect. The Company has received from the FDA orphan
drug designation for thalidomide for the treatment of ENL, AIDS cachexia,
mycobacterial infections and RAS. The Company also obtained orphan drug
designation in Kaposi's Sarcoma and Glioblastoma as part of its agreement with
Entremed. However, there can be no assurance that another company also holding
orphan drug designation will not receive approval prior to
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Celgene for the use of thalidomide for the treatment of one or more of these
indications, other than ENL. If such were to happen, Celgene's applications for
that indication could not be approved until the competing company's seven year
period of exclusivity expired.
Among the conditions for NDA approval is the requirement that the prospective
manufacturer's quality control and manufacturing procedures continually conform
with the FDA's current Good Manufacturing Practice regulations and guidelines
("GMP"). In complying with GMP, manufacturers must devote extensive time, money,
and effort in the area of production and quality control and quality assurance
to maintain full technical compliance. Manufacturing facilities and company
records are subject to periodic inspections by the FDA to ensure compliance.
Steps similar to those in the United States must be undertaken in virtually
every other country comprising the market for the Company's products before any
such product can be commercialized in those countries. The approval procedure
and the time required for approval varies from country to country and may
involve additional testing. There can be no assurance that approvals will be
granted on a timely basis, or at all. In addition, regulatory approval of prices
is required in most countries other than the United States. There can be no
assurance that the resulting prices would be sufficient to generate an
acceptable return to the Company.
COMPETITION
The pharmaceutical and agrochemical businesses in which the Company competes are
each highly competitive. The Company's competitors include major pharmaceutical
and chemical companies, many of which have considerably greater financial,
technical, and marketing resources than the Company. The Company also
experiences competition in the development of its products and processes from
universities and other research institutions and, in some instances, competes
with others in acquiring technology from such sources.
Competition in the pharmaceutical industry, and specifically in the
immunotherapeutic areas being addressed by the Company, is particularly intense.
Numerous companies, including Immunex Corp., and Centocor Corp., are pursuing
techniques to modulate TNF-(alpha) production through various combinations of
monoclonal antibodies, TNF-(alpha) receptors, and small molecule approaches. In
addition, a number of other companies are attempting to address, with other
technologies and products, the disease states currently being targeted by the
Company. Other companies are attempting to develop thalidomide for AIDS-related
and non AIDS-related indications. Andrulis Pharmaceuticals Corp., a small
privately held company, is attempting to develop thalidomide for the treatment
of AIDS-related complications.
Several companies have established chiral products and chiral technologies.
Sepracor Inc. and Chiroscience Group plc are actively developing chirally pure
versions of pharmaceuticals currently marketed in racemic form. Chiroscience has
completed Phase I trials in the United Kingdom for a chirally pure version of
dl-MPH and is working with Medeva Plc, a leading supplier of dl-MPH in the
United States, towards full clinical development. Chiroscience has also taken
certain steps to assert patent and proprietary rights with respect to its
formulation of a chirally pure version of dl-MPH. The agrochemical market is
large and, within this market, efforts are underway by the
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in-house development staffs of agrochemical companies to produce chirally pure
versions of their existing racemic crop protection agents.
The pharmaceutical and agrochemical industries have undergone, and are expected
to continue to undergo, rapid and significant technological change, and
competition is expected to intensify as technical advances in each field are
made and become more widely known. In order to compete effectively, the Company
will be required to continually upgrade its scientific expertise and technology,
identify and retain capable management, and pursue scientifically feasible and
commercially viable opportunities.
The Company's competition will be determined in part by the indications for
which the Company's products are developed and ultimately approved by regulatory
authorities. An important factor in competition will be the timing of market
introduction of the Company's or competitors' products. Accordingly, the
relative speed with which the Company can develop products, complete clinical
trials and approval processes, and supply commercial quantities of products to
the market will be expected to be important competitive factors. Competition
among products approved for sale will be based, among other things, on product
efficacy, safety, convenience, reliability, availability, price, and patent
position.
MANUFACTURING
THALOMID is formulated and encapsulated for the Company by Penn Pharmaceuticals
Ltd. of Great Britain ("Penn") in a special facility which has been certified by
the FDA, devoted exclusively to the production of THALOMID capsules. Both the
bulk manufacturing facility that produces the drug substance for THALOMID and
the Penn facility have been certified as GMP compliant. In certain instances,
the Company may be required to make substantial capital expenditures to access
additional manufacturing capacity.
SALES AND MARKETING
The Company currently intends to market itself pharmaceuticals it develops for
indications with smaller patient populations. For drugs with indications with
larger patient populations, the Company anticipates partnering with other
pharmaceutical companies. The Company also anticipates partnering with companies
for the development and commercialization of the Company's chirally pure
pharmaceutical and agrochemical products. Celgene expects that these
arrangements typically will include milestone payments, reimbursement of
research and development expenses and royalty arrangements. Celgene has
established a sales and marketing organization for THALOMID. A specialty
contract distributor distributes THALOMID in strict accordance with the
Company's program to promote the safe and effective dispensing and use of the
product.
EMPLOYEES
At February 28, 1999, the Company had 112 full time employees, 48 of whom were
engaged primarily in research and development activities, 33 of whom were
engaged in sales and marketing activities, and the remainder of whom were
engaged in executive and administrative activities. Of the Company's employees,
47 have advanced degrees, including 19 who have Ph.D. degrees. The
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Company also maintains consulting arrangements with a number of scientists at
various universities and other research institutions in Europe and the United
States.
Forward-Looking Statements
This Annual Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included or incorporated by reference in this
Annual Report which address activities, events or developments which the Company
expects or anticipates will or may occur in the future, including such things as
the attainment of pharmaceutical development milestones or the receipt of
regulatory approval or the entering into of licensing or partnership
arrangements and other similar matters, are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions and expected future developments as well as other factors it believes
are appropriate in the circumstances. However, whether actual results and
developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties which could cause actual results
to differ materially from the Company's expectations, including the risk factors
discussed below and elsewhere in this Annual Report and other factors, many of
which are beyond the control of the Company. Consequently, all of the
forward-looking statements made in this Annual Report are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations. The Company assumes no
obligation to update publicly any such forward-looking statements, whether as a
result of new information, future events or otherwise.
RISK FACTORS
Uncertainty of Product Development. Many of the Company's products and processes
are in the early or mid-stages of development and will require the commitment of
substantial resources, extensive research, development, preclinical testing,
clinical trials, manufacturing scale-up, and regulatory approval prior to
commercialization. The Company has not yet commercialized any of its products
other than THALOMID. All of the pharmaceutical products under development by the
Company will require further development, clinical testing, and regulatory
approvals, and there can be no assurance that commercially viable products will
result from these efforts.
Uncertainty Associated with Clinical Trials; Extensive Government Regulation; No
Assurance of Regulatory Approval. The preclinical development, clinical trials,
manufacturing, marketing, and labeling of pharmaceuticals are all subject to
extensive regulation by numerous governmental authorities and agencies in the
United States and other countries. There can be no assurance that the Company
will be able to obtain the necessary approvals required to market its products
in any of these markets. The testing, marketing, and manufacturing of the
Company's products, will require regulatory approval, including approval from
the FDA, and, in certain cases, from the U.S. Environmental Protection Agency
(the "EPA"), or governmental authorities outside of the United States that
perform roles similar to those of the FDA and EPA. It is not possible to predict
how long the approval processes for any of the Company's products will take or
whether any such approvals
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ultimately will be granted. Positive results in preclinical testing and/or early
phases of clinical studies are no assurance of success in later phases of the
approval process. In general, preclinical tests and clinical trials can take
many years, and require the expenditure of substantial resources, and the data
obtained from such tests and trials can be susceptible to varying interpretation
that could delay, limit, or prevent regulatory approval. Also, delays or
rejections may be encountered during any stage of the regulatory approval
process based upon the failure of the clinical or other data to demonstrate
compliance with, or upon the failure of the product to meet, the regulatory
agency's requirements for safety, efficacy, and quality or, in the case of a
product seeking an orphan drug indication, because another designee received
approval first; and those requirements may become more stringent due to changes
in regulatory agency policy, or the adoption of new regulations. Clinical trials
may also be delayed due to unanticipated side effects, the inability to locate,
recruit and qualify sufficient numbers of patients, lack of funding, the
inability to locate or recruit scientists, the redesign of clinical trial
programs, the inability to manufacture or acquire sufficient quantities of the
particular product candidate or any other components required for clinical
trials, changes in focus of the Company's or its collaborative partner's
development focus, and the disclosure of trial results by competitors. The scope
of any regulatory approval, when obtained, may significantly limit the indicated
uses for which a product may be marketed. Approved drugs and agrochemicals, as
well as their manufacturers, are subject to on-going review, and discovery of
previously unknown problems with such products may result in restrictions on
their manufacture, sale or use or in their withdrawal from the market. Delays in
obtaining, or the failure to obtain and maintain, necessary approvals from the
FDA, EPA, or other regulatory agencies for the Company's proprietary products,
would have a material adverse effect on the Company's business, financial
condition, and results of operations.
No Assurance of Market Acceptance. There can be no assurance that those of the
Company's products which receive regulatory approval, including THALOMID, or for
which no regulatory approval is required, will achieve market acceptance. A
number of factors render the degree of market acceptance of the Company's
products uncertain, including the extent to which the Company can demonstrate
such products' efficacy, safety, and advantages over competing products, as well
as the reimbursement policies of third party payors, such as government and
private insurance plans. In addition, there can be no assurance that the
Company's Celgro subsidiary will be able to negotiate a licensing agreement with
any agrochemical manufacturer on terms acceptable to the Company, or at all.
Failure of the Company's products to achieve market acceptance would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Risks of Product Liability and Availability of Insurance. The Company may be
subject to product liability or other claims based on allegations that the use
of its technology or products has resulted in adverse effects, whether by
participants in the Company's clinical trials or by patients. Thalidomide, when
used by pregnant women, has resulted in serious birth defects. Therefore,
necessary and strict precautions must be taken by physicians prescribing the
drug to women with childbearing potential, and there can be no assurance that
such precautions will be observed in all cases or, if observed, will be
effective. Use of thalidomide has also been associated, in a limited number of
cases, with other side effects, including nerve damage. Although the Company has
product liability insurance in force that it believes to be appropriate, there
can be no assurance that it will be able to obtain additional coverage as
required, or that such coverage will be adequate to protect the Company in the
event claims are asserted against it. The obligation to defend against or pay
any product liability claim
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may have a material adverse effect on the Company's business, financial
condition, and results of operations.
Dependence on Patent and Proprietary Rights. The Company's success will depend,
in part, on its ability to obtain and enforce patents, protect trade secrets,
obtain licenses to technology owned by third parties when necessary, and conduct
its business without infringing the proprietary rights of others. The patent
positions of pharmaceutical and biotechnology firms, including the Company, can
be uncertain and involve complex legal and factual questions. In addition, the
coverage sought in a patent application can be significantly reduced before the
patent is issued. Consequently, the Company does not know whether any of its
pending applications will result in the issuance of patents or, if any patents
are issued, whether they will provide significant proprietary protection or
commercial advantage, or will be circumvented by others. Since patent
applications in the United States are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature
often lag behind actual discoveries, the Company cannot be certain that it was
the first to make the inventions covered by each of its pending patent
applications, or that it was the first to file patent applications for such
inventions. In the event a third party has also filed a patent for any of its
inventions, the Company may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office to determine priority of
invention, which could result in the loss of any opportunity to secure patent
protection for the invention and the loss of any right to use the invention, and
even if the eventual outcome is favorable to the Company, such interference
proceedings could result in substantial cost to the Company. Protection of
patent applications and litigation to establish the validity and scope of
patents, to assert patent infringement claims against others and to defend
against patent infringement claims by others can be expensive and
time-consuming. There can be no assurance that in the event that any claims with
respect to any of the Company's patents, if issued, are challenged by one or
more third parties, that any court or patent authority ruling on such challenge
will determine that such patent claims are valid and enforceable. An adverse
outcome in such litigation could cause the Company to lose exclusivity relating
to such patent claims. If a third party is found to have rights covering
products or processes used by the Company, then the Company could be forced to
cease using the technologies covered by the disputed rights, could be subject to
significant liabilities to such third party, and could be required to license
technologies from such third party. Also, different countries have different
procedures for obtaining patents, and patents issued by different countries
provide different degrees of protection against the use of a patented invention
by others. There can be no assurance, therefore, that the issuance to the
Company in one country of a patent covering an invention will be followed by the
issuance in other countries of patents covering the same invention, or that any
judicial interpretation of the validity, enforceability, or scope of the claims
in a patent issued in one country will be similar to the judicial interpretation
given to a corresponding patent issued in another country. Furthermore, even if
the Company's patents are determined to be valid, enforceable, and broad in
scope, there can be no assurance that competitors will not be able to design
around such patents and compete with the Company using the resulting alternative
technology. The Company does not currently have, nor does it intend to seek,
patent protection relating to the use of THALOMID to treat erythema nodosum
leprosum, an inflammatory complication of leprosy. The Company also relies upon
unpatented proprietary and trade secret technology that it seeks to protect, in
part, by confidentiality agreements with its collaborative partners, employees,
consultants, outside scientific collaborators, sponsored researchers, and other
advisors. There can be no assurance that these agreements provide meaningful
protection or that they will not be breached, that the Company
20
<PAGE>
would have adequate remedies for any such breach, or that the Company's trade
secrets, proprietary know-how, and technological advances will not otherwise
become known to others. In addition, there can be no assurance that, despite
precautions taken by the Company, others have not and will not obtain access to
the Company's proprietary technology.
History of Operating Losses; Accumulated Deficit; Uncertainty of Future
Profitability; Capital Requirements; Uncertainty of Additional Funding. The
Company has sustained losses in each year since its incorporation in 1986. The
Company sustained a net loss of approximately $25.1 and 25.4 million for the
years ended December 31, 1998 and 1997, respectively, and had an accumulated
deficit of approximately $144.6 million at December 31, 1998. The Company
expects to make substantial expenditures to further develop its
immunotherapeutic and chiral products, and, based on these expenditures, it is
probable that losses will continue for at least the next 12 months. The Company
is currently utilizing its cash resources at a rate of approximately $1.5
million per month. The Company expects that its rate of spending generally will
remain high as the result of increased clinical trial costs and expenses
associated with the regulatory approval process and commercialization of
products now in development. In order to assure funding for the Company's future
operations the Company is likely to seek additional capital resources. These may
include the sale of additional securities under appropriate market conditions,
alliances or other partnership agreements with entities interested in and
possessing resources to support the Company's immunotherapeutic or chiral
programs, or other business transactions which would generate sufficient
resources to assure continuation of the Company's operations and research
programs in the long-term. However, no assurances can be given that the Company
will be successful in raising such additional capital or entering into a
business alliance. Further, there can be no assurance, assuming the Company
successfully raises additional funds or enters into a business alliance, that
the Company will achieve profitability or positive cash flow.
If the Company is unable to raise additional funds, the Company believes that
its current financial resources, could fund operations through 1999. The
Company's actual cash requirements may vary materially from those now planned
and will depend upon numerous factors, including the results of the Company's
development and commercialization programs, the timing and results of
preclinical and clinical trials, the timing and costs of obtaining regulatory
approvals, the level of resources that the Company commits to the development of
manufacturing, marketing, and sales capabilities, the ability of the Company to
license its biocatalytic chiral process technology to agrochemical companies,
the technological advances and activities of competitors, and other factors.
Intense Competition and Rapid Technological Change. The pharmaceutical and
agrochemical businesses in which the Company operates are highly competitive and
subject to rapid and profound technological change. The Company's present and
potential competitors include major chemical and pharmaceutical companies, as
well as specialized biotechnology firms in the United States and in other
countries. Most of these companies have considerably greater financial,
technical, and marketing resources than the Company. The Company also
experiences competition in the development of its products and processes from
universities and other research institutions and, in some instances, competes
with others in acquiring technology from such sources. The pharmaceutical and
agrochemical industries have undergone, and are expected to continue to undergo,
rapid and significant technological change, and the Company expects competition
to intensify as technical advances in each field are made and become more widely
known. There can
21
<PAGE>
be no assurance that others will not develop products or processes with
significant advantages over the products and processes that the Company is
seeking to develop. Any such development could have a material adverse effect on
the Company's business, financial condition, and results of operations.
Dependence on Sole Supplier of Raw Material and Sole Encapsulator for THALOMID.
The Company obtains all of its bulk drug material for THALOMID from a single
source. In addition, the Company currently relies on a single manufacturer to
encapsulate THALOMID. Because the FDA requires that all suppliers of
pharmaceutical bulk material and all manufacturers of pharmaceuticals for sale
in the United States achieve and maintain compliance with GMP, if the operations
of the sole supplier or the sole encapsulator were to become unavailable for any
reason, the required FDA review of the operations of a new supplier or new
encapsulator could cause a delay in the manufacture of THALOMID. Such a delay
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
Dependence on Collaborations and Licenses with Third Parties. The Company's
ability to fully commercialize its proprietary products, if developed, may
depend to some extent upon the Company's ability to enter into joint ventures or
other arrangements with established pharmaceutical companies with the requisite
experience and financial and other resources to obtain regulatory approval, and
to manufacture and market such products. Accordingly, the Company's success will
depend, in part, upon the subsequent success of such third parties in performing
preclinical testing and clinical trials, obtaining the requisite regulatory
approvals, scaling up manufacturing, successfully commercializing the licensed
product candidates and otherwise performing their obligations. There can be no
assurance that the Company will be able to enter into acceptable collaborative
and licensing arrangements on acceptable terms, if at all, that such
arrangements will be successful, that the parties with which the Company may
establish arrangements will perform their obligations, or that potential
collaborators will not compete with the Company by seeking alternative means of
developing therapeutics for the diseases targeted by the Company. There can be
no assurance that the Company's existing or future arrangements will lead to the
development of product candidates or compounds with commercial potential, that
the Company will be able to obtain or maintain proprietary rights or licenses
for the proprietary rights with respect to any technology or product candidates
or compounds developed in connection with these arrangements, or that the
Company will be able to ensure the confidentiality of any proprietary rights and
information developed in such arrangements or prevent the public disclosure
thereof.
Under an agreement with The Rockefeller University ("Rockefeller"), the Company
has obtained certain exclusive rights and licenses to manufacture, use, and sell
products that are based on compounds identified in research carried out by
Rockefeller and the Company that can be used for treating toxicity associated
with high concentrations of TNF-(alpha) (the "Rockefeller License"). The
Rockefeller License is terminable by Rockefeller in the event of a material
breach of the agreement's terms.
Lack of Manufacturing Capabilities. The manufacture of large quantities of
pharmaceuticals is a complex process, and all pharmaceutical manufacturing
facilities must comply with applicable regulations of the FDA. The Company
currently has no experience in, or its own facilities for, manufacturing any
products on a commercial scale. The Company currently obtains bulk drug
22
<PAGE>
material for THALOMID from a third-party and utilizes another manufacturer to
produce dosage form THALOMID. The Company intends to utilize outside
manufacturers if and when needed to produce the Company's other products on a
commercial scale. There can be no assurance that such manufacturers will meet
the Company's requirements for quality, quantity, or timeliness, or that these
manufacturers will achieve and maintain compliance with all applicable
regulations.
Limited Marketing Capabilities. The Company has established a sales and
marketing organization to commercialize THALOMID, and with respect to certain
other products, it may seek a corporate partner to provide such services. Any
delay in developing these resources may have an adverse impact on potential
sales. The Company has contracted with a specialty distributor to distribute
THALOMID. Failure of such specialty distributor to properly and continuously
perform its obligations under such agreement could have a material adverse
effect on the Company.
Dependence on Third-Party Reimbursement; Uncertainty of Product Pricing. Sales
of the Company's pharmaceutical products will depend, in part, on the extent to
which the costs of such products will be paid by health maintenance, managed
care, pharmacy benefit and similar health care management organizations, or
reimbursed by government health administration authorities, private health
coverage insurers, and other third party payors. These health care management
organizations and third party payors are increasingly challenging the prices
charged for medical products and services. Additionally, the containment of
health care costs has become a priority, and the prices of pharmaceutical and
biotechnology drugs have been targeted in this effort. There can be no assurance
that the Company's products will be considered cost effective by payors, that
reimbursement will be available or, if available, that the level of
reimbursement will be sufficient to allow the Company to sell its products on a
profitable basis.
Dependence on Key Personnel. The success of the Company will depend, in large
part, on its ability to continue to attract and retain highly skilled scientific
and management personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be able to attract and retain such
persons. The loss of the Company's executive officers or scientific personnel,
or the failure of the Company to attract and retain other highly skilled
personnel would have a material adverse effect on the Company's business,
financial condition, and results of operations. The Company does not maintain
key man life insurance coverage on the lives of any of its officers or key
employees.
Environmental/Safety Hazards. The Company uses certain hazardous materials in
its research and development activities. While the Company believes it is
currently in substantial compliance with the federal, state, and local laws and
regulations governing such use, there can be no assurance that accidental injury
or contamination will not occur. Any such accident or contamination could result
in substantial liabilities, which could exceed the Company's resources.
Additionally, there can be no assurance that the cost of compliance with
environmental and safety laws and regulations will not be greater than currently
expected.
Shares Eligible for Future Sale. Future sales of substantial amounts of Common
Stock could adversely affect the prevailing market price of the Company's Common
Stock. As of December 31, 1998, there were outstanding stock options for
approximately 2,428,113 shares of Common Stock, of which approximately 1,567,534
were currently exercisable, and warrants either outstanding or
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<PAGE>
issuable upon demand that are exercisable for 639,967 shares of Common Stock. In
addition, the 9.25% convertible note can be converted after one year (September
16, 1999) to 795,455 shares of common stock. All shares of Common Stock referred
to in this paragraph would be freely tradable upon issuance.
Potential Fluctuations in Quarterly Operating Results. The Company has
historically experienced, and expects to continue for the foreseeable future to
experience, significant fluctuations in its quarterly operating results. This
fluctuation is due to a number of factors, many of which are outside the
Company's control, including the timing of receipt of certain research and
development payments. Future operating results will depend on many factors,
including demand for the Company's products, regulatory approvals, the timing of
the introduction and market acceptance of new products by the Company or
competing companies, the Company's ability to control costs and its ability to
attract and retain highly qualified scientific and management personnel. Such
quarterly fluctuations in operating results may result in volatility of the
Company's stock price.
Volatility of Stock Price. There has been significant volatility in the market
prices for publicly traded shares of specialty pharmaceuticals companies,
including those of the Company. There can be no assurance that the price of the
Common Stock will remain at or exceed current levels. Factors such as
announcements of technical or product developments by the Company or its
competitors, market conditions for specialty pharmaceuticals stocks in general,
governmental regulation, healthcare legislation, public announcements regarding
medical advances in the treatment of the disease states that the Company is
targeting, or patent or proprietary rights developments may have a significant
impact on the market price of the Common Stock.
Anti-Takeover Effects of Shareholder Rights Plan; Certain Charter and By-law
Provisions; Delaware Law. The Board of Directors has adopted a shareholder
rights plan (the "Rights Plan"), the purpose of which is to protect stockholders
against unsolicited attempts to acquire control of the Company that do not offer
a fair price to all stockholders. The Plan is not intended to prevent, and
should not prevent, an offer to acquire the Company at a price and on terms that
are in the best interests of all stockholders, or a negotiated transaction to
sell the Company for a purchase price determined by the Board to be in the
Company's and its stockholders' best interests, nor should it have a material
adverse affect on the ability of a person or group to obtain representation on
or control of the Board through a proxy contest. Nonetheless, the Rights Plan
may have the effect of dissuading a potential acquirer from making an offer for
all the outstanding shares of Common Stock at a price that represents a premium
to the then current trading price.
Moreover, the Board of Directors has the authority to issue, at any time,
without further stockholder approval, up to 5,000,000 shares of preferred stock,
and to determine the price, rights, privileges, and preferences of those shares.
Such issuance could adversely affect the holders of Common Stock, and could
discourage a third party from acquiring a majority of the Company's outstanding
voting stock.
Additionally, the Board of Directors of the Company has adopted certain
amendments to the Company's By-laws intended to strengthen the Board's position
in the event of a hostile takeover attempt. The By-law provisions have the
following effects: (1) they provide that only persons who are nominated in
accordance with the procedures set forth in the By-laws shall be eligible for
24
<PAGE>
election as directors of the Corporation, except as may be otherwise provided in
the By-laws; (2) they provide that only business brought before the annual
meeting by the Board of Directors or by a stockholder who complies with the
procedures set forth in the By-laws may be transacted at an annual meeting of
stockholders; (3) they provide that only the Chairman of the Board, if any, the
Chief Executive Officer, the President, the Secretary, or a majority of the
Board of Directors may call special meetings of the stockholders of the Company;
(4) they establish a procedure for the Board of Directors to fix the record date
whenever stockholder action by written consent is undertaken, and (5) they
require a vote of holders of two-thirds of the outstanding shares of Common
Stock to amend certain By-law provisions. Furthermore, the Company is subject to
the provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section 203, a
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
Absence of Cash Dividends on Common Stock. The Company has never declared or
paid cash dividends on its Common Stock, and does not anticipate doing so in the
foreseeable future.
ITEM 2. PROPERTIES
The Company leases a 44,500 square foot laboratory and office facility in
Warren, New Jersey under a lease with an unaffiliated party which has a term
ending in May 2002 with one five-year renewal option. The Company also
sub-leases 17,500 square feet in a facility located in Annandale, New Jersey
that houses the Company's Celgro subsidiary. The facility consists of office and
laboratory space and is leased under a sub-lease which expires in September
1999. The Company believes that its laboratory facilities are adequate for its
research and development activities for at least the next 12 months.
Approximately 12,500 square feet of this facility are subleased, for a period
not to exceed three years, to Cambrex Corporation, which purchased the Company's
chiral intermediate business.
ITEM 3. LEGAL PROCEEDINGS
The Company is not engaged in any legal proceedings. The Company believes it is
currently in substantial compliance with all federal, state and local
environmental laws.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the fourth
quarter of 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "CELG." The following table sets forth, for the periods, indicated the
intra-day high and low sale prices per share of Common Stock on the Nasdaq
National Market:
--------------------------------------------------------------
High Low
--------------------------------------------------------------
1998
--------------------------------------------------------------
Fourth Quarter $ 17 1/4 $ 7 1/2
--------------------------------------------------------------
Third Quarter 15 4 1/8
--------------------------------------------------------------
Second Quarter 11 1/2 8 1/4
--------------------------------------------------------------
First Quarter 11 5/8 6 15/16
--------------------------------------------------------------
1997
--------------------------------------------------------------
Fourth Quarter $ 13 3/8 $ 7 3/4
--------------------------------------------------------------
Third Quarter 12 1/2 6 3/4
--------------------------------------------------------------
Second Quarter 7 7/8 4 7/8
--------------------------------------------------------------
First Quarter 12 3/8 7
--------------------------------------------------------------
1996
--------------------------------------------------------------
Fourth Quarter 12 1/4 7 7/8
--------------------------------------------------------------
Third Quarter 11 7/8 6
--------------------------------------------------------------
Second Quarter 18 1/8 11 1/8
--------------------------------------------------------------
First Quarter 19 11 1/8
--------------------------------------------------------------
The last reported sales price per share for the Common Stock on the Nasdaq
National Market on March 15, 1999 was $13.1875. As of March 15, 1999, there were
approximately 460 holders of record of the Company's Common Stock. The Company
has never declared or paid any cash dividends on its common stock. The Company
currently intends to retain any future earnings for funding growth and
therefore, does not anticipate paying any cash dividends on its common stock in
the foreseeable future.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included elsewhere in this Annual Report. The data
set forth below with respect to the Company's Statement of Operations for the
years ended December 31, 1996, 1997 and 1998 and the balance sheet data as of
December 31, 1997 and 1998 are derived from the Company's Consolidated Financial
Statements which have been audited by KPMG LLP, independent accountants, and
which are included elsewhere in this Annual Report and are qualified by
reference to such Consolidated Financial Statements and Notes thereto. Other
information has been derived from other audited financial statements. The
historical results are not necessarily indicative of future results of
operations.
<TABLE>
<CAPTION>
Year ended December 31,
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Operations Data:
Total Revenues $ 98,000 $ 472,000 $ 881,665 $ 1,122,193 $ 3,800,490
Loss from continuing operations (5,710,781) (8,366,380) (17,057,521) (25,019,844) (32,022,873)
Discontinued operations
Loss from operations (4,502,446) (2,150,143) (761,460) (427,183) (59,837)
Gain on sale of chiral assets -- -- -- -- 7,014,830
Net loss applicable to common stockholders (10,213,227) (10,516,523) (21,609,639) (26,921,501) (25,092,528)
- -----------------------------------------------------------------------------------------------------------------------------------
Per share of common stock-basic and diluted
Loss from continuing operations $ (0.73) $ (1.04) $ (1.81) $ (2.05) $ (1.98)
Discontinued operations
Loss from operations (0.57) (0.27) (0.08) (0.03) (0.00)
Gain on sale of chiral assets -- -- -- -- 0.43
Net loss applicable to common shareholders (1.30) (1.30) (2.29) (2.20) (1.55)
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 7,853,000 8,073,000 9,450,000 12,215,000 16,160,000
Dividends -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Cash and cash equivalents, and
marketable securities $ 8,500,086 $ 11,712,905 $ 17,814,984 $ 13,583,445 $ 5,123,843
Assets held for disposal -- -- -- 485,170 --
Total Assets 11,547,930 14,211,218 20,937,862 18,217,456 11,927,997
Convertible debentures -- 4,592,366 2,026,043 -- --
Convertible note -- -- -- -- 8,348,959
Accumulated deficit (60,472,877) (70,989,400) (92,599,039) (119,520,540) (144,613,068)
Stockholders' equity (deficit) 10,004,066 7,142,501 16,065,009 15,425,092 (3,732,624)
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The progenitor to Celgene was organized in 1980 as a unit of Celanese
Corporation, a major chemical company. Celgene's initial mandate was to apply
biotechnology to the production of fine and specialty chemicals. Following the
1986 merger of Celanese Corporation with American Hoechst Corporation, Celgene
was spun out as a separate company. In 1987, Celgene completed an initial public
offering of its common stock, and commenced the development of chemical and
biotreatment processes for the chemical and pharmaceutical industry. Celgene
discontinued the biotreatment operations in 1994 to focus on its targeted small
molecule immunotherapeutic compound development and biocatalytic chiral
chemistry synthesis platforms.
Since 1990, the Company's revenues have been generated primarily through the
research and development relating to, and supply of, chirally pure intermediates
to pharmaceutical companies for use in new drug development and, to a lesser
degree, from agrochemical research and development contracts. However, as the
Company developed its immunotherapeutic program, sales of chirally pure
intermediates became a less integral part of the Company's strategic focus.
Accordingly, on January 9, 1998 the Company completed the sale of its Chiral
Intermediate business to Cambrex Corporation for $15.0 million. The terms
provided for a payment of $7.5 million at closing and the present value
equivalent of $7.5 million in future royalties, with certain minimum royalty
payments in the third through the sixth years after closing.
In late September, 1998, the Company, after receiving final FDA approval,
commenced sales of its first commercial product, THALOMID (thalidomide).
The Company has sustained losses in each year since its incorporation in 1986.
In 1998, the Company had a loss from continuing operations of $32.0 million, and
at December 31, 1998, had an accumulated deficit of $144.6 million. The Company
expects to make substantial expenditures to further its immunotherapeutic
program, to commercialize THALOMID and to expand the chiral crop protection
business, and, based on these expenditures, it is likely that losses will
continue for at least the next 12 months.
Subject to the risks described elsewhere in this Annual Report the Company
believes that there are significant market opportunities for the products and
processes under development by the Company. To address these opportunities in a
timely and effective manner, the Company intends to seek out collaborations and
licensing arrangements with third parties. The Company has entered into
agreements covering the manufacture and distribution for the Company of certain
compounds, such as THALOMID, and research and development by the Company
covering processes for producing chirally pure crop protection agents for
license to agrochemical manufacturers.
Celgene has established a sales and marketing organization to commercialize
THALOMID and currently employs 35 persons in this capacity. The Company intends
to develop and market its own pharmaceuticals for indications with smaller
patient populations. For drugs with indications for larger patient populations,
the Company anticipates partnering with other pharmaceutical companies. The
Company also anticipates partnering with companies for the development and
commercialization of the Company's chirally pure pharmaceutical and agrochemical
products. Celgene expects that these arrangements typically will include
milestone payments, reimbursement of research and development expenses and
royalty arrangements.
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<PAGE>
Future operating results will depend on many factors, including demand for the
Company's products, regulatory approvals, the timing of the introduction and
market acceptance of new products by the Company or competing companies, partner
support payments, the Company's ability to control costs, and its ability to
attract and retain highly qualified scientific and management personnel.
Results of Operations
Fiscal Years Ended December 31, 1998,1997 and 1996
Total revenues. Total revenues increased by 245% to approximately $3.8
million from approximately $1.1 million in 1997. This was due to product sales
of approximately $3.3 million of THALOMID which, as noted, was approved in 1998
by the FDA and a decrease in research contracts of approximately $.6 million due
to completion of a contract at the end of 1997 with a major agrochemical
company. The Company's revenues for 1997 represented an increase of 27% over
1996 revenues of approximately $882,000. Revenues were primarily from product
sales in 1998 and research contracts for the years 1997 and 1996.
Cost of Goods Sold. Cost of goods sold in 1998 was approximately
$282,000 and relates to THALOMID, the Company's first commercial product,
launched in late September 1998. The cost of goods sold is lower than expected
as raw material, formulation and encapsulation costs of the product were
expensed as research and development cost prior to receiving FDA approval.
Research and development expenses. Research and development expenses
for 1998 increased by 14% to approximately $19.8 million from approximately
$17.4 million in 1997. This increase was due to an increase of approximately
$1.5 million for the Company's chiral pharmaceutical program primarily for
clinical trials and preclinical toxicology studies and approximately $780,000
due to the Company's immunotherapeutic program, primarily clinical trials for
potential new NDA filings for THALOMID.
Research and development expenses for 1997 increased by 15% to
approximately $17.4 million from approximately $15.2 million in 1996. This
increase was due to an increase of approximately $823,000 of expenses associated
with the Company's chiral pharmaceutical program primarily in clinical trials
and $1.3 million of expenses associated with the Company's Celgro subsidiary.
The increase in expenses for Celgro was primarily facility and personnel charges
related to establishing a separate location for the chiral agrochemical
business.
Selling, general and administrative expenses. Selling, general and
administrative expenses for 1998 increased by 78% to approximately $16.2 million
from approximately $9.1 million in 1997. This was primarily due to sales and
marketing expenses, $4.8 million, in anticipation of the THALOMID product launch
as well as post launch selling activities. Other increases were related to the
necessary infrastructure costs required to support the commercial operations
including Medical Affairs and Drug Safety costs of $928,000, information systems
development cost and additional finance personnel, $423,000, and other
administrative expenses such as legal, consulting and investor relations of
approximately $900,000.
Selling, general and administrative expenses for 1997 increased by 143%
to approximately $9.1 million from approximately $3.8 million in 1996. This was
primarily due to the formation of a sales and marketing organization in
anticipation of the THALOMID product launch as well as an increase in certain
support functions resulting from the anticipated transition to a commercial
operation. Major increases were as follows: sales and marketing expenses of $3.4
million for sales force recruiting and training and other pre-launch expenses;
Medical Affairs and Safety costs of $425,000; additional finance personnel and
information
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<PAGE>
systems development costs of $366,000; executive and administrative costs for
the new Celgro subsidiary of $487,000 and other administrative expenses such as
legal, consulting and investor relations of approximately $600,000.
Interest income and interest expense. Interest income for 1998
increased by 42% to approximately $705,000 from approximately $496,000 in 1997.
The increase was due to higher average cash balances in 1998. Interest income
for 1997 decreased by 62% from approximately $1.3 million in 1996. This decrease
was attributable to lower average cash balances in 1997. Interest expense for
1998 increased 129% to approximately $256,000 from $112,000 due primarily to the
interest expenses associated with the 9.5% convertible note issued in September
1998. Interest expense in 1997 decreased 65% from approximately $324,000 in
1996. The decrease was due to the conversion to equity of the 8% Convertible
Debentures issued in 1995.
Loss from continuing operations. The loss from continuing operations
increased 28% to approximately $32.0 million from approximately $25.0 million in
1997. The increase was due primarily to spending related to the launch of
THALOMID and ongoing research programs in Chiral Pharmaceuticals and
Immunotherapeutics as described above. The net loss from continuing operations
for 1997 increased by 46% from approximately $17.1 million in 1996 reflecting
increased spending in immunotherapeutics, the start of a THALOMID marketing
organization and the start of the chiral pharmaceutical development program.
Loss from discontinued operations. The loss from discontinued
operations decreased to $60,000 in 1998 from $427,000 in 1997 due to the fact
that the chiral intermediate business was sold in early January 1998. The
Company recorded a gain on the sale of the chiral intermediate assets of
approximately $7.0 million. The loss from discontinued operations decreased by
44% in 1997 from $761,000 in 1996. The reduced loss was primarily a result of an
increase in revenues from $1.4 million in 1996 to $2.1 million in 1997.
Liquidity and Capital Resources
Since inception, the Company has financed its working capital
requirements primarily through private and public sales of its debt and equity
securities, income earned on the investment of the proceeds from the sale of
such securities, and revenues from research contracts and product sales. The
Company has raised approximately $99.5 million in net proceeds from three public
and three private offerings, including its initial public offering in July 1987.
In July 1995, the Company issued and sold in a private placement
offering $12.0 million aggregate principal amount of 8% Convertible Debentures
due July 31, 1997 for total net proceeds, after offering costs, of approximately
$11.0 million. As of December 31, 1998, all of the 8% convertible Debentures had
been converted into Common Stock. In March 1996, the Company issued and sold in
a private placement offering 503 shares of Series a Convertible Preferred Stock
at $50,000 per share, for total gross proceeds of approximately $25.2 million
and net proceeds, after offering costs, of approximately $23.8 million. As of
December 31, 1998 all shares had been converted to Common Stock.
In September 1998, the Company issued a convertible note in the amount
of $8.75 million to an institutional investor. The note has a five year term and
a coupon rate of 9.25% with interest payable on a semi-annual basis. The debt
contains a conversion feature that allows the note holder to convert the debt
into common shares after one year at $11 per share, a 25% premium to the market
price at closing.
30
<PAGE>
The Company's net working capital at December 31, 1998 decreased by 81%
to approximately $2.5 million (primarily cash and cash equivalents) from
approximately $13.4 million at December 31, 1997. The decrease in working
capital was primarily due to the increased rate of spending as previously
discussed.
Cash and cash equivalents decreased by $10.5 million in 1998 while
marketable securities increased by $2.1 million from 1997. This reflects the
receipt in December 1997 of funds from public offering of Company common stock,
which were not yet invested in marketable securities and the higher rate of
spending in 1998. Current research commitments for 1999 are approximately
$750,000, primarily to Rockefeller University ($504,000) and Glasgow University
($200,000). In addition a contract with Boston University entered into in 1997
for the prescription-monitoring program associated with the sales of THALOMID
was renewed for 1999. The commitment for 1999 is $1.2 million.
The Company expects that its rate of spending will increase as the
result of increased clinical trial costs and expenses associated with the
regulatory approval process and commercialization of products now in development
and increased commercial costs related to the launch of
THALOMID(TM)(thalidomide). In order to assure funding for the Company's future
operations, the Company is likely to seek additional capital resources. However,
no assurances can be given that the Company will be successful in raising
additional capital. If the Company is unable to raise additional funds, the
Company believes that its current financial resources including the proceeds of
$15.0 million from the convertible note issued in January 1999 as well as
revenues from the sales of THALOMID could fund operations based on budgeted
levels of research and development, sales and marketing, and administrative
activities through 1999.
As of December 31, 1998, the Company had for federal income tax
purposes a net operating loss carryforward of approximately $135.0 million. If
not utilized to offset future taxable income, such loss carryforward will expire
between 2002 and 2013. Certain events, including any sales by the Company of
shares of its stock and/or transfers of a substantial number of shares of Common
Stock by the current stockholders, may restrict the ability of the Company to
utilize its net operating loss carryforward.
Year 2000 Computer Systems Compliance
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 (Y2K) to mean
the year 1900 instead. If not corrected, those programs could cause date-related
transaction failures. The Company's Chief Information Officer, in conjunction
with outside consultants is in the process of remediating or replacing the
Company's systems.
As the Company was transitioning from a research and development
company to a commercial operation, the Company had already begun an assessment
of Information Technology needs to support the evolving structure. During 1998,
the Company replaced all personal computers, with the exception of several
computers connected to laboratory analytic equipment, with Year 2000 compliant
machines. The Company is in the process of upgrading internal applications to
ensure Y2K compliance. The Company believes that all critical systems and
software have been addressed and an assessment as to the date critical nature of
the laboratory computers will be complete with a plan to replace those machines
if necessary by the end of 1999. The Company has spent less than $1.0 million on
the systems upgrades to date. Additional expenditures are expected to be less
than $500,000. The Company uses outside vendors to produce, encapsulate,
package, process orders, invoice and maintain accounts receivable records for
THALOMID. The Company is in the process of receiving certifications from such
vendors. Most responses to date indicate the systems are or will be Y2K
compliant before the end of 1999.
31
<PAGE>
Because the Company's Y2K compliance is dependent upon key third
parties also being Year 2000 compliant on a timely basis, there can be no
guarantee that the Company's efforts will prevent a material adverse impact on
its results of operations, financial condition or cash flows. If the Company's
systems or those of key third parties are not fully Y2K functional, disruptions
in operations could occur. Such disruptions could result in delays in the
distribution of product, errors in customer order taking, disruption of clinical
activities or delays in product development. These consequences could have a
material adverse impact on the Company's results of operations, financial
condition and cash flows. The Company is in the process of developing
contingency plans aimed at ameliorating such disruptions, to the extent
practicable.
The statements contained in the foregoing Year 2000 readiness
disclosure are subject to protection under the Year 2000 Information and
Readiness Disclosure Act.
Subsequent Events
On January 20, 1999, the Company issued a $15.0 million convertible
note to an institutional investor. The note has a five year term and a coupon
rate of 9% with interest payable on a semi-annual basis. The debt contains a
conversion feature that allows the note holder to convert the debt into shares
of common stock after one year at a conversion price of $18 per share. The
Company can redeem the note after three years, (two years if the stock trades at
225% of the conversion price for a period of 20 consecutive trading days), at
103% of the principal amount. This note was issued at a discount and net
proceeds after costs were $14.25 million.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which becomes effective beginning January 1,
2000. SFAS No. 133 requires a company to recognize all derivative instruments as
assets or liabilities in its balance sheet and measure them at fair value. The
Company does not expect the adoption of this Statement to have a material impact
on the financial statements.
The American Institute of Certified Public Accountants issued Statement
of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use and SOP 98-5, Reporting on the Costs of Start-up
Activities, which are effective for the 1999 financial statements. The Company
does not expect adoption of these SOPs to have a material impact on the
financial statements.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company does not use derivative financial instruments. The
Company's convertible notes have a fixed interest rate, so the Company is not
exposed to changes in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Part IV, Item 14 of this Report.
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John W. Jackson 54 Chairman of the Board and
Chief Executive Officer
Sol J. Barer, Ph.D. 51 President, Chief Operating
Officer, and a Director
Frank T. Cary 78 Director
Arthur Hull Hayes, Jr., M.D. 66 Director
Richard C. E. Morgan 54 Director
Walter L. Robb, Ph.D. 71 Director
Lee J. Schroeder 70 Director
Gilla Kaplan, Ph.D. 51 Director
Jack L. Bowman 66 Director
</TABLE>
John W. Jackson has been Chairman of the Board and Chief Executive Officer of
the Company since January 1996. Mr. Jackson was founder and President of Gemini
Medical, a consulting firm which specialized in services and investment advice
to start-up medical device and biotechnology companies, from February 1991 to
January 1996. Previously, Mr. Jackson had been President of the worldwide
Medical Device Division of American Cyanamid, a major pharmaceutical company,
from February 1986 to January 1991 and served in various international
positions, including Vice President-International for American Cyanamid from
1978 to 1986. Mr. Jackson served in several human health marketing positions at
Merck & Company, a major pharmaceutical company, from 1971 to 1978.
Sol J. Barer has been President of the Company since October 1993 and Chief
Operating Officer and a director of the Company since March 1994. Dr. Barer was
Senior Vice President--Science and Technology and Vice President/General
Manager--Chiral Products of the Company from October 1990 to October 1993 and
Vice President--Technology of the Company from September 1987 to October 1990.
Dr. Barer received a Ph.D. in organic and physical chemistry from Rutgers
University.
Frank T. Cary has been Chairman of the Executive Committee of the Board of
Directors of the Company since July 1990 and has been a director of the Company
since 1987. From 1973 to 1981, Mr. Cary was Chairman of the Board and Chief
Executive Officer of International Business Machines Corporation. Mr. Cary also
is a director of Cygnus Therapeutic Systems Inc., ICOS Corporation, Lincare
Inc., SPS Transaction Services, Inc., Lexmark International Inc., SEER
Technologies, Inc., Vion Pharmaceuticals Inc. and Teltrend, Inc.
33
<PAGE>
Arthur Hull Hayes, Jr., a director of the Company since 1995, has been President
and chief operating officer of MediScience Associates, Inc., a consulting
organization that works with pharmaceutical firms, biomedical companies and
foreign governments, since July 1991. Dr. Hayes has also been a partner in Issue
Sphere, a public affairs firm that focuses on health science issues, since
November 1995, as well as a professor in medicine, pharmacology and family and
community medicine at New York Medical College and clinical professor of
medicine and pharmacology at the Pennsylvania State University College of
Medicine. From 1986 to 1990, Dr. Hayes was President and Chief Executive Officer
of E.M. Pharmaceuticals, a unit of E. Merck AG and from 1981 to 1983 was
Commissioner of the U.S. Food and Drug Administration. Dr. Hayes also is a
director of Myriad Genetics, Inc., NaPro BioTherapeutics, Inc. and Premier
Research Worldwide.
Richard C. E. Morgan, a director of the Company since 1987 has been the Managing
Member of Amphion Partners LLC (formerly Wolfensohn Partners, L.P.), since 1986.
Between January 1996 and January 1998, Mr. Morgan was a partner of Jackson Hole
Management Company, Inc. Mr. Morgan also is Chairman of the Board of Directors
and Chief Executive Officer of AXCESS, Inc.; a director of SEQUUS
Pharmaceuticals, Inc.; Chairman of the Board of Directors of Quidel Corp.; a
director of ChromoVision Medical Systems, Inc.; and a director of Indigo, N.V.
Walter L. Robb, a director of the Company since 1992, has been a private
consultant and President of Vantage Management Inc., a consulting and investor
services company, since January 1993. Mr. Robb was Senior Vice President for
Corporate Research and Development of General Electric Company, and a member of
its Corporate Executive Council from 1986 to December 1992. Mr. Robb also is
Chairman of the Board of Directors of Neopath, Inc. and a director of Marquette
Electronics, Inc., Cree Research Inc., and Mechanical Technology, Inc.
Lee J. Schroeder, a director of the Company since 1995, has been President of
Lee Schroeder & Associates, Inc., pharmaceutical business consultants, since
1985. Mr. Schroeder was President of Fox Meyer Lincoln from 1983 to 1985, and
was an Executive Vice President of Sandoz, Inc. from 1981 to 1983. Mr. Schroeder
also is a director of Harris Technology Group, Inc., Bryan Memorial Hospital,
MGI Pharmaceutical, Inc., Ascent Pediatrics, Inc., and Interneuron
Pharmaceuticals, Inc.
Gilla Kaplan, Ph.D., a director of the Company since April 1998, is an
immunologist in the Laboratory of Cellular Physiology and Immunology at The
Rockefeller University in New York where she was appointed Assistant Professor
in 1985 and Associate Professor in 1990. Dr. Kaplan is a member of numerous
professional societies and has been the organizer of several major symposia on
tuberculosis. Dr. Kaplan has served as an advisor to the Global Program for
Vaccines and Immunization of the World Health Organization, has participated in
several NIH peer review panels, is on the Editorial Board of Microbial Drug
Resistances, and Tubercle and Lung Disease. Dr. Kaplan is the author of more
than 100 scientific publications and has received international recognition for
her work. In 1995, she gave the Special Honorary Lecture at the American Society
for Microbiology and in 1997 was appointed a Fellow of the American Academy of
Microbiology.
Jack L. Bowman, a director of the Company since April 1998, served as Company
Group Chairman of Johnson & Johnson from 1987 to 1994. From 1983 to 1987 Mr.
Bowman served as Executive Vice President of American Cyanamid. Mr. Bowman is
also a director of NeoRx Corporation, Cell Therapeutics, Inc., CytRx
Corporation, Cellegy Pharmaceuticals and Targeted Genetics.
34
<PAGE>
Election of Directors
Each director holds office (subject to the Company's By-Laws) until the next
annual meeting of stockholders and until such director's successor has been
elected and qualified. There are no family relationships between any of the
directors and executive officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth information about the compensation paid, or
payable, by the Company for services rendered in all capacities to the Chief
Executive Officer of the Company and each of the most highly paid executive
officers of the Company who earned more than $100,000, for each of the last
three fiscal years in which such officers were executive officers for all or
part of the year.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------------------- ----------------------------------------------
Other Annual Restricted Securities All Other
Name and Compensation Stock Underlying Compensation
Principal Position Year Salary ($) Bonus ($) ($) Award(s) ($) Options # ($)
------------------ ---- ---------- --------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
John W. Jackson 1998 285,000 79,800 19,200 0 100,000 13,390(4)
Chairman and 1997 270,000 97,200 9,500(3) 0 0 13,390(4)
Chief Executive 1996 243,429(1) 105,625(2) 4,750(3) 0 250,000 0
Officer
Sol J. Barer, Ph.D. 1998 243,333 51,100 19,200 0 50,000 0
President and Chief 1997 232,500 63,647 9,500(3) 0 0 0
Operating Officer 1996 216,667 50,000 4,750(3) 0 72,500 0
</TABLE>
(1) Mr. Jackson commenced his employment with the Company on January 11, 1996.
(2) Mr. Jackson's bonus consisted of $50,000 in cash and 5,000 shares of
unrestricted stock, valued at $55,625 on the date of grant.
(3) Reflects matching contributions under the Company's 401K plan. (4) Reflects
life insurance premiums for a life insurance policy for Mr. Jackson.
Employment Agreements and Termination of Employment Arrangements
John W. Jackson and Sol J. Barer (each an "Executive") are employed
pursuant to substantially similar employment agreements (the "Employment
Agreements") providing for their continued employment until September 30, 2000
(the period during which Executive is employed is referred to as the "Employment
Period"). The Employment Period shall be automatically renewed for successive
one-year terms unless the Company or Executive gives written notice to the other
at least one year prior to the expiration of the Employment Period. The
Employment Agreements provide Messrs. Jackson and Barer with a base salary
(which may be increased by the Board of Directors, or a committee thereof) of
$270,000 and $235,000, respectively, per annum. In addition, each of the
Employment Agreements provides for an annual bonus in such amount as may be
determined by the Board of Directors, or a committee thereof. The Employment
Agreements also provide that Messrs. Jackson and Barer are entitled to continue
to participate in all group health and insurance programs and all other fringe
benefit or retirement plans which are generally available to the Company's
employees. Each of the Employment Agreements provides that if the Executive is
terminated by the Company without cause, he shall be entitled to receive a
lump-sum payment in an amount equal to the greater of (A) twelve months salary
at the rate being paid on the date of such termination or (B) salary at such
rate for the unexpired term of the Employment Agreement. Each Employment
Agreement also provides that if Executive is terminated without cause or if
Executive terminates his employment within 30 days of having actual knowledge of
the occurrence of any of the following events: (i) Executive not maintaining his
position with the Company as Chief Executive Officer (in the case of Mr.
Jackson) and Chief
35
<PAGE>
Operating Officer (in the case of Mr. Barer), (ii) a significant change in the
duties normally attached to such Executive's position, (iii) a good faith
determination by such Executive that, as a result of a change in control, such
Executive is unable to carry out the duties of such position and (iv) a breach
by the Company of any material term of such Executive's Employment Agreement,
the Executive shall be paid in a lump-sum an amount of cash equal to 2.99 times
Executive's "base amount," as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code").
If during the two-year period following a change in control (as defined
in the Company's 1992 Long-Term Incentive Plan) of the Company, (i) there is a
change in an employee's title or a significant change in the nature or scope of
his employment or duties and such person terminates his employment within 90
days following such change or (ii) an employee's employment by the Company is
terminated without cause (as defined), then all of the options held by such
employee then outstanding will become immediately and fully exercisable, and all
restrictions applicable to restricted stock automatically will terminate.
Stock Options
The following table sets forth information for each of the named
executive officers with respect to the value of options exercised during the
year ended December 31, 1998 and the value of outstanding and unexercised
options held as of December 31, 1998. There were no SARs exercised during 1998
and none were outstanding as of December 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired Value at December 31, 1998 at December 31, 1998
on Exercise Realized ------------------------------- --------------------------------
Name ($) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John W. Jackson -- -- 283,333 66,667 $ 805,064 $ 454,136
Sol J. Barer, Ph.D. -- -- 250,746 33,334 $1,289,901 $ 227,071
</TABLE>
(1) Represents the difference between the closing market price of the Common
Stock as reported by Nasdaq on December 31, 1998 of $15.375 per share and the
exercise price per share of in-the-money options multiplied by the number of
shares underlying the in-the-money options.
Compensation Committee Report
The Compensation Committee determines the Company's executive
compensation policies. The Compensation Committee determines the compensation of
the Company's executive officers and approves and oversees the administration of
incentive compensation programs for all employees including executive officers.
The Compensation Committee is composed solely of outside directors.
Executive Compensation Policies and Programs
The Company's executive compensation program is part of a company-wide
program covering all employees. The program's goals are to attract, retain, and
motivate employees, and it utilizes incentives such that employees and
stockholders share the same risks. The compensation program is designed to link
compensation to performance.
A portion of each employee's compensation relates to the grant of stock
options, and such grants are based on the successful attainment of strategic
corporate, business unit, and individual goals. As
36
<PAGE>
the Company has not as yet attained significant commercial revenues, goals are
set which relate to the successful attainment of strategic events.
The Company does not have a pension plan or other capital accumulation
program. Grants of stock options are therefore of great importance to executives
as well as all employees. Any long-term value to be derived from such grants
will be consistent with stockholder gains.
Executive and employee compensation includes salary, employment-related
benefits, and long-term incentive compensation:
Salary. Salaries are set competitively relative to the biotechnology
and pharmaceutical industries--industries with which the Company competes for
its highly skilled personnel. Individual experience and performance is
considered when setting salaries within the range for each position. Annual
reviews are held and adjustments are made based on attainment of individual
goals.
Benefits. All employees are eligible for similar benefits, such as
health, disability, and life insurance.
Long-Term Incentive Compensation. An incentive compensation program is
established annually. The purpose of this program is to provide financial
incentives to executives and employees to achieve annual corporate, business
unit, and individual goals. The incentive program also aligns executive and
employee interests with those of stockholders by using grants of stock options.
Such grants vest over time thereby encouraging continued employment with the
Company. The size of grants is tied to comparative biotechnology industry
practices. To determine such comparative data, the Company relies on outside
compensation consultants, the Company's auditors, and third party industry
surveys.
Under the Company's 1998 incentive program, it was agreed, subject to
the achievement of certain goals in 1998 by the Company, that the Company would
grant at a future date options to purchase shares of common stock. A similar
incentive program has been designed for 1999 based on attainment of corporate,
business unit, and individual goals. The program is open to all regular
full-time employees, other than the executive officers of the Company.
Chief Executive Officer Compensation. Pursuant to Mr. Jackson's
contract with the Company entered into on September 30, 1997, Mr. Jackson
received base salary of $285,000 for 1998. Mr. Jackson also received a bonus of
$79,800 for 1998. Factors considered in determining Mr. Jackson's bonus included
the successful attainment of several important milestones in the development of
the Company's products, as well comparisons to total compensation packages of
chief executive officers at corporations within the Company's industry that are
of comparable size.
Members of the Compensation Committee
Richard C. E. Morgan, Chairman
Frank T. Cary
Jack L. Bowman
Lee J. Schroeder
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee are Richard C. E.
Morgan, Chairman, Frank T. Cary, Jack L. Bowman, and Lee J. Schroeder. Each is
an outside director of the Company.
37
<PAGE>
Director Compensation
Directors do not receive salaries or cash fees for serving as directors
nor do they receive any cash compensation for serving on committees; however,
all members of the Board of Directors who are not employees of the Company
("Non-Employee Directors") are reimbursed for their expenses for each meeting
attended and are eligible to receive stock options pursuant to the 1995
Non-Employee Directors' Plan (the "1995 Directors' Plan").
The 1995 Directors' Plan was adopted by the Board of Directors on
April 5, 1995, and approved by the Company's stockholders at the 1995 Annual
Meeting of Stockholders. The 1995 Directors' Plan provides for the granting to
Non-Employee Directors of non-qualified options to purchase an aggregate of not
more than 250,000 shares (subject to adjustment in certain circumstances) of
Common Stock.
Under the 1995 Directors' Plan, each Non-Employee Director as of
April 5, 1995 was granted a non-qualified option to purchase 20,000 shares of
Common Stock, and each new Non-Employee Director upon the date of his election
or appointment will be granted a non-qualified option to purchase 20,000 shares
of Common Stock. These initial options vest in four equal annual installments
commencing on the first anniversary of the date of grant, assuming the
Non-Employee Director remains a director.
Upon the date of each Annual Meeting of Stockholders, each Non-Employee
Director is granted a non-qualified option to purchase 10,000 shares of Common
Stock (or a pro rata portion thereof if the director did not serve the entire
year since the date of the last annual meeting). These options vest in full on
the date of the first Annual Meeting of Stockholders held following the date of
the grant, assuming the Non-Employer Director is a director on that date.
All options granted pursuant to the 1995 Directors' Plan will expire no
later than 10 years from the date of grant and no options may be granted after
June 16, 2005. If a Non-Employee Director terminates his service on the Board of
Directors for any reason, options which were exercisable on the date of
termination and which have not expired may be exercised at any time until the
date of expiration of such options. In addition, if there is a change of control
and within two years thereafter a director is removed without cause (as defined)
or is not nominated for election by the Company's stockholders, all unvested
portions of a stock option will automatically vest.
In 1998, pursuant to the 1995 Directors' Plan, each of Messrs. Cary,
Hayes, Morgan, Robb and Schroeder received an option to purchase 10,000 shares
of Common Stock at an exercise price of $10.688 per share, the fair market value
of the stock on the date of the grant. Dr. Kaplan and Mr. Bowman each received
an option to purchase 20,000 shares of common stock at an exercise price of
$10.625 as new non-employee directors and 1,700 shares at an exercise price of
$10.688 as the pro-rata share for time served since the date of the last annual
meeting.
38
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The table below sets forth the beneficial ownership of the Common Stock
as of March 26, 1998 (i) by each director, (ii) by each of the named executive
officers (iii) by all directors and executive officers of the Company as a
group, and (iv) by all persons known by the Board of Directors to be beneficial
owners of more than five percent of the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name Beneficial Ownership Class
---- -------------------- -----
<S> <C> <C>
John W. Jackson 305,733(1)(2) 1.8%
Sol J. Barer, Ph.D. 250,761(2) 1.5%
Frank T. Cary 118,000(1) *
Arthur Hull Hayes, Jr., M. D. 35,000(1) *
Richard C. E. Morgan 320,055(1)(3) 1.9%
Walter L. Robb, Ph.D. 97,000(1) *
Lee J. Schroeder 46,000(1) *
Gilla Kaplan 20,000 *
Jack L. Bowman 6,000 *
All directors and current
executive officers of
the Company as a group
(nine persons) 1,198,549(4) 6.8%
Donald P. Moriarty and
William P. Scully (5) 1,355,500(5) 8.1%
c/o McGrath, Doyle & Phair
150 Broadway
New York, NY 10038
Frontier Capital Management
Company, Inc. (6) 938,050(6) 5.6%
99 Summer Street
Boston, MA 02110
</TABLE>
* Less than one percent (1%).
(1) Includes shares of Common Stock which the directors and executive officers
have the right to acquire through the exercise of options within 60 days of
March 26, 1998, as follows: John W. Jackson--283,333; Sol J. Barer-- 250,746;
Frank T. Cary--81,000; Arthur Hull Hayes, Jr.--35,000; Richard C. E.
Morgan--61,000 shares; Walter L. Robb --54,000, and Lee J. Schroeder--46,000;
Gilla Kaplan --20,000 and Jack Bowman --5,000. Does not include shares of Common
Stock which the directors and executive officers had the right to acquire
through the exercise of options not exercisable within 60 days of March 26,
1998, as follows: John W. Jackson--136,667; Sol J. Barer-- 68,334; Frank T.
Cary--10,000; Arthur Hull Hayes, Jr.--15,000; Richard C. E. Morgan--10,000;
Walter L. Robb-- 10,000, and Lee J. Schroeder--10,000; Gilla Kaplan --16,700;
and Jack L. Bowman --16,700.
39
<PAGE>
(2) Includes with respect to Mr. Jackson 400 shares owned by the son of Mr.
Jackson, as to which shares Mr. Jackson disclaims beneficial ownership; includes
with respect to Dr. Barer 15 shares owned by the daughter of Dr. Barer, as to
which shares Dr. Barer disclaims beneficial ownership.
(3) Includes 252,055 shares of Common Stock owned by Amphion Ventures, L.P. of
which Amphion Partners, LLC is the general partner. Mr. Morgan is a managing
member of Amphion Ventures, LLC. Mr. Morgan's indirect pecuniary interest in
these shares of Common Stock, within the meaning of Rule 16a-1(a)(2)(ii)(B)
under the Securities Exchange Act of 1934, is significantly less than the amount
disclosed. Mr. Morgan otherwise disclaims beneficial ownership of such shares of
Common Stock owned by Amphion Ventures, L.P.
(4) Includes or excludes, as the case may be, shares of Common Stock as
indicated in the preceding footnotes.
(5) Information regarding Donald P. Moriarty and William P. Scully was obtained
from a Schedule 13D, as amended, filed by them with the Securities and Exchange
Commission. Such Schedule 13D states that Messrs. Moriarty and Scully are deemed
to be the beneficial owners of and to have shared dispositive power over all
such shares of Common Stock, and that such shares are held by Mr. Moriarty, Mr.
Scully, their family members, and Twin Oaks Partners, a partnership in which
Messrs. Moriarty and Scully are general partners.
(6) Information regarding Frontier Capital Management Company, Inc. was obtained
from a Schedule 13G, filed by it with the Securities and Exchange Commission.
Such Schedule 13G states that Frontier Capital Management Company, Inc. is the
beneficial owner of and has the sole dispositive power over all such shares of
Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(a) See Index to Consolidated Financial Statements immediately following
Exhibit Index.
(b) Current Report on Form 8-K filed November 18, 1997 with respect to Item 2.
(c) Exhibits
See Exhibit Index immediately following signature pages.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CELGENE CORPORATION
By /s/ Sol J. Barer
----------------
Sol J. Barer
President and
Chief Operating Officer
Date: April 5, 1999
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John W. Jackson Chairman of the Board and Chief March 31, 1999
- ------------------- Executive Officer
John W. Jackson
/s/ Sol J. Barer Director March 31, 1999
- -------------------
Sol J. Barer
/s/ Jack L. Bowman Director March 31, 1999
- -------------------
Jack L. Bowman
/s/ Frank T. Cary Director March 31, 1999
- -------------------
Frank T. Cary
/s/ Arthur Hull Hayes, Jr. Director March 31, 1999
- -------------------
Arthur Hull Hayes, Jr.
/s/ Gilla Kaplan Director March 31, 1999
- -------------------
Gilla Kaplan
/s/ Richard C. E. Morgan Director March 31, 1999
- -------------------
Richard C. E. Morgan
/s/ Walter L. Robb Director March 31, 1999
- -------------------
Walter L. Robb
/s/ Lee J. Schroeder Director March 31, 1999
- -------------------
Lee J. Schroeder
/s/ James R. Swenson Controller (Chief Accounting Officer) March 31, 1999
- -------------------
James R. Swenson
</TABLE>
The foregoing constitutes a majority of the directors.
41
<PAGE>
Celgene CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
Consolidated Statements of Operations-Years Ended December 31, 1996, 1997, and 1998 F-4
Consolidated Statements of Stockholders' Equity(deficit)-Years Ended December 31, 1996,
1997 and 1998 F-5
Consolidated Statements of Cash Flows-Years Ended December 31, 1996, 1997 and 1998 F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of directors and Stockholders
Celgene CORPORATION:
We have audited the accompanying consolidated balance sheets of Celgene
Corporation and subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Celgene
Corporation and subsidiary as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Short Hills, New Jersey
February 11, 1999
F-2
<PAGE>
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31,
1997 1998
------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,583,445 $ 3,066,953
Marketable securities available for sale -- 2,056,890
Accounts receivable, net of allowance of $43,386 in 1998 1,430,384 2,662,389
Inventory -- 1,571,408
Other current assets 353,266 229,060
Assets held for disposal 485,170 --
------------- -------------
Total current assets 15,852,265 9,586,700
Plant and equipment, net 2,286,024 2,262,130
Other assets 79,167 79,167
------------- -------------
Total assets $ 18,217,456 $ 11,927,997
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (deficit)
Current liabilities:
Accounts payable $ 842,262 $ 3,848,853
Accrued expenses 1,388,933 3,041,859
Capitalized lease obligations 210,499 225,372
------------- -------------
Total current liabilities 2,441,694 7,116,084
Capitalized lease obligation-net of current portion 350,670 195,578
Long term convertible note -- 8,348,959
------------- -------------
Total liabilities 2,792,364 15,660,621
------------- -------------
Stockholders' equity (deficit):
Preferred stock, $.01 par value per share
5,000,000 shares authorized; Series A convertible,
redeemable, cumulative preferred; 74 shares issued and
outstanding at December 31,1997, plus $329,455 accretion
premium; none outstanding at December 31, 1998 4,029,455 --
Common stock, $.01 par value per share
20,000,000 shares authorized at December 31,1997 and
30,000,000 shares authorized at December 31,1998;
issued and outstanding 15,427,949 and 16,612,973 shares at
December 31,1997 and December 31,1998, respectively 154,279 166,130
Common stock in treasury, at cost - 22,888 shares at
December 31, 1997 and none at December 31, 1998 (76,535) --
Additional paid-in capital 130,838,433 140,714,314
Accumulated deficit (119,520,540) (144,613,068)
------------- -------------
Total stockholders' equity (deficit) 15,425,092 (3,732,624)
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 18,217,456 $ 11,927,997
============= =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
Celgene Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For Years Ended December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Product Sales $ 65,000 $ -- $ 3,265,490
Research contracts 816,665 1,122,193 535,000
------------ ------------ ------------
Total revenues 881,665 1,122,193 3,800,490
Expenses:
Cost of goods sold -- -- 282,307
Research and development 15,152,735 17,380,390 19,771,953
Selling, general and administrative 3,770,781 9,145,456 16,218,486
------------ ------------ ------------
Total expenses 18,923,516 26,525,846 36,272,746
------------ ------------ ------------
Operating loss (18,041,851) (25,403,653) (32,472,256)
Other Income and Expense:
Interest income 1,308,243 495,580 705,215
Interest expense 323,913 111,771 255,832
------------ ------------ ------------
Loss from continuing operations (17,057,521) (25,019,844) (32,022,873)
Discontinued operations (note 10)
Loss from operations (761,461) (427,183) (59,837)
Gain on sale of chiral assets -- -- 7,014,830
------------ ------------ ------------
Net loss (17,818,982) (25,447,027) (25,067,880)
Accretion of premium payable
on preferred stock and warrants (note 7) 1,012,881 521,397 24,648
Deemed dividend for preferred stock
conversion discount (note 7) 2,777,777 953,077 --
------------ ------------ ------------
Net loss applicable to common
shareholders $(21,609,640) $(26,921,501) $(25,092,528)
============ ============ ============
Per share basic and diluted (note 2):
Loss from continuing operations $ (1.81) $ (2.05) $ (1.98)
Discontinued operations:
Loss from operations (0.08) (0.03) (0.00)
Gain on sale of chiral assets 0.43
------------ ------------ ------------
Net loss applicable to common stockholders $ (2.29) $ (2.20) $ (1.55)
============ ============ ============
Weighted average number of shares of
common stock outstanding 9,450,000 12,215,000 16,160,000
============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1996 and 1997
<TABLE>
<CAPTION>
Common Stock Preferred Stock Treasury Stock Additional
------------ --------------- -------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996 8,807,863 $ 88,079 - $ - (24,271) $ (243) $ 78,064,288
Exercised stock options 42,069 420 337,521
Repurchase of shares (5,714) (99,996)
Amortization of deferred compensation
Conversion of convertible debentures 372,681 3,727 2,645,388
Issuance of preferred stock,net 503 25,150,000 (1,320,375)
Conversion of preferred stock 1,388,809 13,888 (236) (12,141,309) 12,127,421
Preferred stock lock-up warrants 138,156
Accretion of premium on preferred stock 874,725
Deemed dividend for preferred stock
conversion discount 2,777,777
Comprehensive Income (Loss):
Net loss
Net change in unrealized gain (loss) on
investment securities
Total comprehensive income (loss)
------------------------------------------------------------------------------------
Balances at December 31, 1996 10,611,422 106,114 267 13,883,416 (29,985) (100,239) 94,770,176
Exercised stock options 2,986 30 20,187
Shares issued in lieu of cash bonus 5,000 50 55,575
Amortization of deferred compensation
Conversion of convertible debenture 441,248 4,412 2,326,892
Issuance of Series B Preferred Stock-net 5,000 4,046,923 793,825
Conversion of preferred stock 2,166,193 21,662 (5,180) (14,654,071) 14,632,409
Accretion of premium on preferred stock 521,397
Redemption of preferred stock (13) (721,287)
Deemed dividend on Series B Preferred
Stock and fair value of warrants 953,077
Comprehensive Income (Loss):
Net loss
Net change in unrealized gain (loss) on
investment securities
Total comprehensive income (loss)
Treasury shares issued 7,097 23,704 55,250
Issuance of common stock,net 2,201,100 22,011 18,184,119
------------------------------------------------------------------------------------
Balances at December 31, 1997 15,427,949 154,279 74 4,029,455 (22,888) (76,535) 130,838,433
<CAPTION>
Accumulated
Other
Unamortized Comprehensive
Deferred Accumulated Income
Compensation Deficit (Loss) Total
------------ ------- ------ -----
<S> <C> <C> <C> <C>
Balances at January 1, 1996 $ (7,085) $ (70,989,400) $ (13,138) $ 7,142,501
Exercised stock options 337,941
Repurchase of shares (99,996)
Amortization of deferred compensation 5,952 5,952
Conversion of convertible debentures 2,649,115
Issuance of preferred stock,net 23,829,625
Conversion of preferred stock -
Preferred stock lock-up warrants (138,156) -
Accretion of premium on preferred stock (874,725) -
Deemed dividend for preferred stock
conversion discount (2,777,777) -
Comprehensive Income (Loss):
Net loss (17,818,981) (17,818,981)
Net change in unrealized gain (loss) on
investment securities 18,852 18,852
----------------
Total comprehensive income (loss) (17,800,129)
------------------------------------------------------------
Balances at December 31, 1996 (1,133) (92,599,039) 5,714 16,065,009
Exercised stock options 20,217
Shares issued in lieu of cash bonus 55,625
Amortization of deferred compensation 1,133 1,133
Conversion of convertible debenture 2,331,304
Issuance of Series B Preferred Stock-net 4,840,748
Conversion of preferred stock -
Accretion of premium on preferred stock (521,397) -
Redemption of preferred stock (721,287)
Deemed dividend on Series B Preferred -
Stock and fair value of warrants (953,077) -
Comprehensive Income (Loss): -
Net loss (25,447,027) (25,447,027)
Net change in unrealized gain (loss) on
investment securities (5,714) (5,714)
--------------
Total comprehensive income (loss) (25,452,741)
--------------
Treasury shares issued 78,954
Issuance of common stock,net 18,206,130
------------------------------------------------------------
Balances at December 31, 1997 - (119,520,540) - 15,425,092
</TABLE>
See accompanying notes to financial statements
(continued)
F-5
<PAGE>
Consolidated Statements of Stockholders' Equity (Deficit) (continued)
Year ended December 31, 1998
<TABLE>
<CAPTION>
Common Stock Preferred Stock Treasury Stock Additional
----------------- ---------------- ------------------ Paid-in
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,1997 15,427,949 $ 154,279 74 $ 4,029,455 (22,888) $ (76,535) $ 130,838,433
Exercised stock options 283,120 2,831 2,028,715
Exercise of warrants 118,230 1,183 986,883
Costs related to secondary offering (73,136)
Conversion of preferred stock 575,669 5,757 (74) (4,054,103) 4,048,346
Accretion of premium on preferred stock 24,648
Shares issued for employee benefit plans 8,317 83 22,888 76,535 387,070
Stock purchase 199,688 1,997 2,498,003
Net loss and comprehensive loss
---------------------------------------------------------------------------------------
Balances at December 31,1998 16,612,973 $ 166,130 - $ - - $ - $ 140,714,314
=======================================================================================
<CAPTION>
Accumulated
Other
Unamortized Comprehensive
Deferred Accumulated Income
Compensation Deficit (Loss) Total
------------ ------- ------ -----
<S> <C> <C> <C> <C>
Balances at December 31,1997 $ - $ (119,520,540) $ - $ 15,425,092
Exercised stock options 2,031,546
Exercise of warrants 988,066
Costs related to secondary offering (73,136)
Conversion of preferred stock -
Accretion of premium on preferred stock (24,648) -
Shares issued for employee benefit plans 463,688
Stock purchase 2,500,000
Net loss and comprehensive loss (25,067,880) (25,067,880)
--------------------------------------------------------------
Balances at December 31,1998 $ - $ (144,613,068) $ - $ (3,732,624)
==============================================================
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (17,057,521) $(25,019,844) $(32,022,873)
Adjustments to reconcile loss from continuing
operations to net cash used in operating
activities:
Depreciation 362,590 380,364 812,555
Provision for losses on accounts receivable -- -- 43,386
Amortization of convertible debt costs 234,540 126,577 --
Amortization of deferred compensation 5,952 1,133 --
Interest on convertible debentures 323,914 68,736 --
Issuance of stock award -- 55,625 --
Shares issued for employee benefit plans -- 78,954 463,688
Change in current assets & liabilities:
Increase in Inventory -- -- (1,571,408)
Increase(decrease) in accounts payable
and accrued expenses 216,226 (379,091) 4,659,517
(Increase)decrease in accounts receivable 18,646 (1,051,789) (1,275,391)
(Increase)decrease in other assets (256,586) 150,304 124,206
------------- ------------ ------------
Net cash used in continuing operations (16,152,239) (25,589,031) (28,766,320)
Net cash used in discontinued operations (491,872) (302,996) (59,837)
------------- ------------ ------------
Net cash used in operating activities (16,644,111) (25,892,027) (28,826,157)
------------- ------------ ------------
Cash flows from investing activities:
Capital expenditures (1,340,232) (1,240,775) (788,661)
Proceeds from sales and maturities of marketable
securities available for sale 137,051,037 47,470,593 8,559,604
Purchases of marketable securities
available for sale (142,548,468) (30,584,284) (10,616,494)
Proceeds from sale of chiral assets -- -- 7,500,000
------------- ------------ ------------
Net cash provided by (used in) investing activities (6,837,663) 15,645,534 4,654,449
------------- ------------ ------------
Cash Flows from financing activities:
Net proceeds from secondary offering -- 18,206,130 --
Costs related to secondary offering -- -- (73,136)
Proceeds from sale of stock -- -- 2,500,000
Proceeds from exercise of common stock
options and warrants 237,946 20,217 3,019,612
Redemption of Series A preferred stock -- (721,287) --
Net proceeds from issuance of preferred stock 23,829,624 4,840,748 --
Capital lease buyout -- -- (400,414)
Capital lease funding -- 561,169 260,195
Proceeds from convertible note, net -- -- 8,348,959
------------- ------------ ------------
Net cash provided by financing activities 24,067,570 22,906,977 13,655,216
------------- ------------ ------------
Net (decrease) increase in cash and cash
equivalents 585,796 12,660,484 (10,516,492)
Cash and cash equivalents at beginning of year 337,165 922,961 13,583,445
------------- ------------ ------------
Cash and cash equivalents at end of year $ 922,961 $ 13,583,445 $ 3,066,953
============= ============ ============
</TABLE>
See accompanying notes to financial statements
(continued)
F-7
<PAGE>
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Non-cash investing activity:
Change in net unrealized gain(loss) on
marketable securities available for sale $ 18,852 $ (5,714) $ -
=========== =========== ==========
Non - cash financing activities:
Issuance of common stock upon the conversion
of convertible debentures and accrued interest
thereon, net $ 2,649,115 $ 2,331,304 $ -
=========== =========== ==========
Accretion of premium payable on preferred
stock and warrants $ 1,012,881 $ 521,397 $ 24,648
=========== =========== ==========
Deemed dividend for preferred stock conversion
discount $ 2,777,777 $ 953,077 $ -
=========== =========== ==========
Issuance of common stock upon the conversion
of convertible preferred stock and accrued
accretion thereon, net $12,141,309 $14,654,071 $4,054,103
=========== =========== ==========
Issuance of common stock upon exercise of options
through the return of common stock previously
outstanding $ 99,996 $ - $ -
=========== =========== ==========
Interest paid $ - $ 20,599 $ 19,766
=========== =========== ==========
</TABLE>
See accompanying notes to financial statements
F-8
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(1) NATURE OF BUSINESS AND LIQUIDITY
Celgene Corporation and its subsidiary Celgro (collectively "Celgene" or the
"Company") is a specialty pharmaceutical company engaged in the development and
commercialization of human pharmaceuticals and agrochemicals, and employs two
broad technology platforms: (i) small molecule immunotherapeutic compound
development and (ii) biocatalytic chiral chemistry. The initial therapeutic
focus of the immunology program is the development of small molecule
pharmaceuticals that have the potential to selectively regulate Tumor Necrosis
Factor alpha(TNF-(alpha)), a protein whose overproduction has been linked to
many chronic inflammatory and immunological diseases. The Company's lead
compound in immunology is THALOMID(TM), its formulation of thalidomide, a potent
yet selective inhibitor of TNF-(alpha). On July 16, 1998 the Company received an
approval from the U.S. Food and Drug Administration ("FDA") to market THALOMID
for the treatment of erythema nodosum leprosum ("ENL"), an inflammatory
complication of leprosy, and commenced sales at the end of September, 1998. The
Company expects to submit an additional New Drug Application ("NDA") in 2000 to
market THALOMID in the treatment of multiple myeloma, a blood related cancer .
Celgene has further applied its expertise in small molecule chemistry to develop
novel and proprietary thalidomide analogues, called IMiDs(TM) (Immunomodulatory
Drugs) as well as a class of proprietary immunotherapeutic pharmaceutical
compounds called SelCIDs (TM) ("Selective Cytokine Inhibitory Drugs"). These two
classes of compounds are orally administered small molecules that are highly
specific for the suppression of TNF-(alpha) and are intended to treat chronic
inflammatory diseases and other disorders.
The Company expects that its rate of spending will increase as the result of
increased clinical trial costs and expenses associated with the regulatory
approval process and commercialization of products now in development and
increased commercial costs related to the launch of THALOMID. In order to assure
funding for the Company's future operations, the Company may need to seek
additional capital resources. However, no assurances can be given that the
Company will be successful in raising additional capital. The Company believes
that its current financial resources including $15.0 million received in January
1999 for a convertible note issued to an institutional investor plus the
revenues from the sales of Thalomid will fund operations through 1999.
The consolidated financial statements include the parent Company and its
subsidiary Celgro. All inter-company transactions have been eliminated. The
preparation of the consolidated financial statements requires management to make
estimates and assumptions that affect reported amounts and disclosures. Actual
results could differ from those estimates. The Company is subject to certain
risks and uncertainties such as uncertainty of product development,
uncertainties regarding regulatory approval, no assurance of market acceptance
of products, risk of product liability, uncertain scope of patent and
proprietary rights, intense competition, and rapid technological change.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash Equivalents
At December 31, 1997 and 1998, cash equivalents consisted principally of funds
invested in money market funds, and United States government securities such as
treasury bills and notes.
(b) Marketable Securities
The Company has classified all of its marketable securities as securities
available for sale at December 31, 1998. Such securities were to be held for an
indefinite period of time and were intended to be used to meet the ongoing
liquidity needs of the Company. Realized gains and losses are included in
operations and are measured using the specific cost identification method.
(c) Inventory
Inventories are priced at lower of cost or market using the first-in, first-out
(FIFO) method. The cost of inventory reflects primarily the packaging costs for
a significant portion of the finished goods inventory. Prior to FDA approval,
the raw material, formulation and encapsulation costs are recorded as Research
and Development expense.
F-9
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Long-Lived Assets
Plant and equipment are stated at cost. Depreciation of plant and equipment is
provided using the straight-line method. The estimated useful lives of fixed
assets are as follows:
Laboratory equipment and machinery 5-10 years
Furniture and fixtures 5-10 years
Amortization of leasehold improvements is calculated using the straight-line
method over the term of the lease or the life of the asset, whichever is
shorter. Maintenance and repairs are charged to operations as incurred, while
renewals and improvements are capitalized.
The Company reviews long-lived assets for impairment whenever events or changes
in business circumstances occur that indicate that the carrying amount of the
assets may not be recoverable. The Company assesses the recoverability of
long-lived assets held and to be used based on undiscounted cash flows and
measures the impairment, if any, using discounted cash flows.
(e) Research and Development Costs
All research and development costs are expensed as incurred.
(f) Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement carrying amounts and tax
bases of assets and liabilities using enacted tax rates in effect for all years
in which the temporary differences are expected to reverse.
Research and development tax credits will be recognized as a reduction of the
provision for income taxes when realized.
(g) Revenue Recognition
Revenue from the sale of products is recognized upon product shipment. Revenue
under research contracts is recorded as earned under the contracts, generally as
services are provided. Revenue is recognized immediately for nonrefundable
license fees when agreement terms require no additional performance on the part
of the Company.
(h) Stock Options
The Company generally does not record compensation cost for the issuance of
employee stock options since the options are generally issued with an exercise
price equal to the market price at the date of grant. For the fair value of the
employee stock options issued in 1996, 1997 and 1998, see note 7.
(i) Earnings per Share
"Basic" earnings per common share equals net income divided by weighted average
common shares outstanding during the period. "Diluted" earnings per common share
equals net income divided by the sum of weighted average common shares
outstanding during the period plus common stock equivalents if dilutive. The
Company's basic and diluted per share amounts are the same since the assumed
exercise of stock options, warrants, conversion of convertible debentures and
preferred stock are all anti-dilutive. The amount of common stock equivalents
excluded from the calculation were 3,738,168 in 1996, 3,770,954 in 1997, and
3,863,535 in 1998.
F-10
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting and presentation of comprehensive income and
its components in a full set of financial statements. Comprehensive income
(loss) consists of net losses and net unrealized gains (losses) on securities
and is presented in the statements of stockholders' equity (deficit). The
Statement requires only additional disclosures in the financial statements; it
does not affect the Company's financial position or results of operations. Prior
year financial statements have been reclassified to conform to the requirements
of SFAS No. 130.
(k) Presentation
In connection with the disposition of the Company's chiral intermediate
operation (see note 9), the 1996, 1997, and 1998 financial results applicable to
continuing operations exclude amounts from this discontinued operation.
(l) Fair Value of Financial Instruments
The fair value, which is the carrying value, of marketable securities available
for sale is based on quoted market prices. The convertible debentures
approximate fair value due to interest rates approximating market rates. For all
other financial instruments their carrying value approximates fair value due to
the short maturity of these instruments.
(3) INVENTORY
<TABLE>
<CAPTION>
December 31,
1998
--------------
<S> <C>
Raw materials $ 440,400
Work in process 535,494
Finished gods 595,514
==============
Total $1,571,408
==============
</TABLE>
Inventory costs prior to FDA approval of THALOMID on July 16, 1998 were expensed
as research and development costs.
(4) PLANT AND EQUIPMENT
Plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
------------------ ------------------
<S> <C> <C>
Leasehold improvements $ 3,957,366 $ 4,008,246
Laboratory equipment and machinery 4,430,336 4,874,733
Furniture and fixtures 437,478 470,667
Leased Equipment 415,109 675,304
------------------ ------------------
9,240,289 10,028,950
Less: accumulated depreciation 6,954,265 7,766,820
------------------ ------------------
$ 2,286,024 $ 2,262,130
================== ==================
</TABLE>
F-11
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(5) ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
------------------ ------------------
<S> <C> <C>
Professional and consulting fees $ 235,000 $ 787,381
Accrued compensation 1,041,772 1,650,048
Other 112,161 604,430
------------------ ------------------
$ 1,388,933 $ 3,041,859
================== ==================
</TABLE>
(6) CONVERTIBLE DEBT
On September 16, 1998 the Company issued a convertible note to an institutional
investor in the amount of $8,750,000. The note has a five year term and a coupon
rate of 9.25% with interest payable on a semi-annual basis. The note contains a
conversion feature that allows the note holder to convert the note into common
shares after one year at $11 per share. The Company can redeem the note after
three years at 103% of the principal amount, (two years if the Company's stock
trades at $24.75 or higher for a period of 20 consecutive trading days). This
note was issued at a discount of $437,500 which is being amortized over three
years.
During 1995, the Company issued and sold in an offering pursuant to Regulation
S, 8% Convertible Debentures due July 31, 1997 in the aggregate principal amount
of $12,000,000, and received net proceeds, after offering costs, of $11,022,570.
The recorded value of the debentures at the date of issuance was discounted to
produce a market interest rate of approximately 13.5%. As of December 31, 1997,
all convertible debentures in the aggregate principal amount of $12,000,000,
plus accrued interest, had been converted into a total of 1,709,845 shares of
common stock.
(7) STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock
On March 13, 1996, in a private placement, the company completed the sale of 503
shares of Series A Convertible Preferred Stock, par value $.01 per share (the
"Preferred Stock"), at an issue price of $50,000 per share. The Company received
net proceeds, after offering costs, of $23,829,625. The Preferred Stock, plus
accretion at a rate of 4.9% per year, was convertible at the option of the
holders thereof, into common stock of the Company at a conversion price per
share of common stock equal, generally, to the lesser of (i) $18.81 or (ii) 90%
of the average closing price per share of the common stock for the seven trading
days immediately prior to the date of conversion. As a result of the issuance of
securities with variable conversion features the Company recognized the value of
the discount to market conversion feature as a deemed dividend.
In connection with the private placement, the Company also granted to certain
executives and affiliates of the placement agent warrants, valued at $60,168, to
purchase an aggregate of 66,853 shares of common Stock at an exercise price of
$20.52, subject to proportional adjustment in the event that the Company
undertakes a stock split, stock dividend, recapitalization or similar event.
These warrants are exercisable for a period of five years from the date of
issuance. These warrants are all outstanding at December 31, 1998.
F-12
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(7) STOCKHOLDERS' EQUITY, Continued
As of December 31, 1998, all of the shares of the Series A Preferred Stock (503
shares), with their respective accrued accretion, had been converted or redeemed
into 3,342,202 shares of common stock. Through December 31, 1998 the Company had
accrued $1,420,770 representing accretion of the premium on the Preferred Stock.
The Company agreed to reduce the maximum conversion price of 58 shares to $8.50
per share of common stock from $18.81 for holders who agreed to a lock-up ending
on December 1, 1997. During 1996 the Company had also issued warrants valued at
$138,156, that entitle certain stockholders of the Series A Preferred Stock to
purchase 153,507 shares of common stock at an exercise price of $11.50. The
warrants were issued in exchange for the deferral of conversion for 90 days. At
December 31, 1998, all these warrants either expired or were exercised for 3,418
shares of common stock.
Series B Convertible Preferred Stock
On June 9, 1997, in a private placement, the Company completed the sale of 5,000
shares of Series B Convertible Preferred Stock (the "Series B Preferred"), par
value $.01 per share, at an issue price of $1,000 per share. The Company
received net proceeds, after offering costs of $4,840,748. Shares could be
converted at an initial conversion price of $6.50 per share. As of December 31,
1998, all shares of the Series B Preferred had been converted into 788,469
shares Common Stock.
Upon request of the purchasers of the Series B Preferred, the Company is
required to issue warrants to acquire a number of shares of Common Stock equal
to (i) 1,500,000 divided by the Conversion Price in effect on the Issuance Date
(230,769 warrants as of December 31, 1998) plus (ii) 37.5% of the conversion
shares issuable on such issuance date upon conversion of all shares of Series B
Preferred Stock issued through the issuance date (288,461 warrants as of
December 31, 1998). All such warrants will have a term of four years from the
issuance date and an exercise price equal to 115% of the conversion price in
effect on the issuance date ($6.50 at December 31, 1998). The fair value of
warrants at the issuance date was $1.28 per warrant. As of December 31, 1998 no
warrants have been issued.
Through December 31, 1998, the Company had recorded $953,077 representing
accretion of the deemed dividend on the Series B Preferred Stock. The deemed
dividend represents the difference between the Series B Preferred Stock
conversion price and the Company's Common Stock fair market value at the date of
issuance.
Preferred Stock
The Board of Directors has the authority to issue, at any time, without further
stockholder approval, up to 5,000,000 shares of preferred stock, and to
determine the price, rights, privileges, and preferences of those shares.
Rights Plan
During 1996, the Company adopted a shareholder rights plan ("Rights Plan"). The
Rights Plan involves the distribution of one "Right" as a dividend on each
outstanding share of the Company's common stock to each holder of record on
September 26, 1996. Each Right shall entitle the holder to purchase one-tenth of
a share of common stock. The Rights trade in tandem with the common stock until,
and are exercisable upon, certain triggering events, and the exercise price is
based on the estimated long term value of the Company's common stock.
F-13
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(8) STOCK BASED COMPENSATION
(a) Stock Options
The Company has two incentive plans that provide for the granting of options,
restricted stock awards, stock appreciation rights, performance awards and other
stock-based awards to employees and officers of the Company to purchase not more
than an aggregate of 1,400,000 shares of common stock under the 1992 plan and
1,500,000 shares of common stock under the 1998 plan, subject to adjustment
under certain circumstances. The Management Compensation and Development
Committee of the Board of Directors (the "Committee") determines the type,
amount and terms, including vesting, of any awards made under the Incentive
Plan. The plans terminate in 2002 and 2008 respectively.
With respect to options granted under the incentive plans, the exercise price
may not be less than the fair market value of the common stock on the date of
grant. In general, each option granted under the Plans vests evenly over a three
or four year period and expires 10 years from the date of grant, subject to
earlier expiration in case of termination of employment. The vesting period for
options and restricted stock awards granted under the Plans is subject to
certain acceleration provisions if a change in control, as defined in the Plans,
occurs.
On June 16, 1995, the stockholders of the Company approved the 1995 Non-Employee
Directors' Incentive Plan, which provides for the granting of non-qualified
stock options to purchase an aggregate of not more than 350,000 shares of common
stock (subject to adjustment under certain circumstances) to directors of the
Company who are not officers or employees of the Company ("Non-Employee
Directors"). Each new Non-Employee Director, upon the date of his election or
appointment, receives an option to purchase 20,000 shares of common stock.
Additionally, upon the date of each annual meeting of stockholders, each
continuing Non-Employee Director receives an option to purchase 10,000 shares of
common stock (or a pro rata portion thereof if he has served less than one
year). The shares subject to each non-employee director's option grant of 20,000
shares vest in four equal annual installments commencing on the first
anniversary of the date of grant. The shares subject to an annual meeting option
grant vest in full on the date of the first annual meeting of stockholders held
following the date of grant. All options are granted at an exercise price that
equals the fair market value of the Company's common stock at the grant date and
expire 10 years after the date of grant. This plan terminates in 2005.
The weighted-average fair value per share for stock options granted was $3.97
for the 1998 options, $3.93 for the 1997 options, and $5.01 for those granted in
1996. The company estimated the fair values using the Black-Scholes option
pricing model and used the following assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- ----
<S> <C> <C> <C>
Risk-free interest rate 6.38% 6.37% 5.68%
Expected stock price volatility 62% 55% 66%
Expected term until exercise (years) 2.22 3.09 2.86
Expected dividend yield 0% 0% 0%
</TABLE>
The Company does not record compensation expense for stock option grants. The
following table summarizes results as if compensation expense was recorded for
the annual option grants under the fair value method:
F-14
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(8) STOCK BASED COMPENSATION (Continued)
<TABLE>
<CAPTION>
(thousands of dollars, except per share data) 1996 1997 1998
--------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Net loss applicable to common shareholders:
As reported $(21,610) $(26,922) $(25,093)
Pro forma $(23,515) $(28,652) $(26,745)
Per share basic and diluted:
As reported $ (2.29) $ (2.20) $ (1.55)
Pro forma $ (2.49) $ (2.35) $ (1.66)
</TABLE>
The pro forma effects on net loss and loss per share for 1996, 1997 and 1998 may
not be representative of the pro forma effects in future years since
compensation cost is allocated on a straight-line basis over the vesting periods
of the grants, which extends beyond the reported years.
The following table summarizes the stock option activity for both Plans:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------
Shares Available Weighted Average
for Grant Shares Price per Share
-------------------- ------ -----------------------------
<S> <C> <C> <C>
Balance January 1, 1996 1,201,913 1,415,341 $ 7.70
Expired (126,126) -- --
Granted (679,037) 679,037 13.25
Exercised -- (42,069) 8.03
Cancelled 46,095 (46,095) 6.40
---------- --------- -----
Balance December 31, 1996 442,845 2,006,214 9.60
Authorized 500,000 -- --
Expired (74,797) -- --
Granted (492,775) 492,775 9.39
Exercised -- (6,986) 7.83
Cancelled 142,027 (142,027) 9.36
--------- --------- ------
Balance December 31, 1997 517,300 2,349,976 9.59
Authorized 1,620,000 -- --
Expired (85,095) -- --
Granted (559,983) 559,983 8.87
Exercised -- (283,120) 7.18
Cancelled 198,726 (198,726) 10.74
--------- --------- ------
Balance December 31, 1998 1,690,948 2,428,113 $ 9.62
=========== ========== ======
</TABLE>
F-15
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(8) STOCK BASED COMPENSATION (Continued)
The following table summarizes information concerning options outstanding under
the Plans at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------ -----------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Exercise Remaining Exercisable Exercise
Exercise Price at 12/31/98 Price Term (yrs.) at 12/31/98 Price
-------------- ----------- ----- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
5.00- 9.00 1,350,740 $ 7.48 5.6 863,361 $ 7.12
9.01-13.00 610,644 10.74 7.6 298,854 10.81
13.01-18.00 466,729 14.31 6.9 405,319 14.12
---------- -------- --- ---------- -------
2,428,113 $ 9.62 6.6 1,567,534 $ 9.63
========== ======== === ========== =======
</TABLE>
On January 22, 1999 the Company granted options to purchase approximately
105,000 shares to certain members of management exercisable at $16.50 (market
price at the date of grant). These options vest evenly over three years and have
a ten year term. Also on January 22, 1999, the Company granted options to
purchase approximately 140,000 shares to certain employees at an exercise price
of $16.50. The options vest equally over four years and have a ten year term.
(b) Stock Awards
On January 1, 1997, the Company awarded 5,000 shares to the Company's Chairman
and CEO, which were immediately vested. the fair value of $55,625 for this award
was expensed.
(c) Warrants
In connection with the retention of an investment firm to assist in the sale and
issuance of 8% Convertible Debentures, the Company in August, 1995 granted to
such firm warrants to purchase until July 31, 2000, 105,000 shares of common
stock at a price of $9.60 per share. As of December 31, 1998, 40,188 warrants
were outstanding.
In connection with the retention of an investment firm to assist in the sale and
issuance of the Series A Preferred Stock, the Company, in March, 1996 granted to
such firm warrants to purchase until March 10, 2001, 66,853 shares of common
stock at a price of $20.52. These warrants were outstanding as of December 31,
1998.
During 1997, the Company issued to certain stockholders of the Series A
Convertible Preferred Stock warrants valued at $7,826, to purchase 8,696 shares
of common stock at an exercise price of $11.50. The warrants were issued in
exchange for the deferral of conversion for 90 days. These warrants are
exercisable for a period of two years from the date of issuance and these
warrants were outstanding as of December 31, 1998.
In connection with the retention of a consultant to provide strategic
development services, the Company, in December 1997, granted to such consultant
warrants to purchase until December 24, 1999, 5,000 shares of common stock at a
price of $12.00. these warrants were outstanding as of December 31, 1998.
F-16
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(9) INCOME TAXES
At December 31, 1997 and 1998, the tax effects of temporary differences that
give rise to deferred tax assets are as follows:
<TABLE>
<CAPTION>
Deferred Assets: 1997 1998
------------ ------------
<S> <C> <C>
Federal and state net operating loss carryforwards $ 44,334,000 $ 54,779,000
Research and experimentation tax credit carryforwards 2,735,000 3,235,000
Plant and equipment, principally due to differences in depreciation 753,000 772,000
Patents, principally due to differences in amortization 68,000 62,000
Accrued expenses 385,000 665,000
------------ ------------
Total deferred tax assets 48,275,000 59,513,000
Valuation allowance (48,275,000) (59,513,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. At December 31,
1998, the Company had net operating loss carryforwards of approximately
$135,000,000 that will expire in the years 2001 through 2012. The Company also
has research and experimentation credit carryforwards of approximately
$3,235,000 that expire in the years 2001 through 2018. Ultimate
utilization/availability of such net operating losses and credits may be
curtailed if a significant change in ownership occurs.
(10) DISCONTINUED OPERATION
On January 9, 1998, the Company concluded an agreement with Cambrex Corporation
for Cambrex to acquire Celgene's chiral intermediate business for approximately
$15 million. The Company received $7.5 million upon the closing of the
transaction, and will receive future royalties with a present value not
exceeding $7.5 million, with certain minimum royalty payments in the third
through sixth year following the closing of the transaction. Included in the
transaction are the rights to Celgene's enzymatic technology for the production
of chirally pure intermediates for the pharmaceutical industry, including the
current pipeline of third party products and the equipment and personnel
associated with the business.
Revenues relative to the chiral intermediate business were approximately $1.4
million, and $2.1 million for 1996 and 1997, respectively. Direct expenses
related to the chiral intermediate business were $2.2 million and $2.5 million
for 1996 and 1997, respectively.
(11) MARKETABLE SECURITIES AVAILABLE FOR SALE
Marketable securities available for sale at December 31, 1998 include debt
securities with maturities ranging from March, 1999 to October, 2002. Marketable
securities at December 31, 1998 include Corporate Bonds ($1,006,890) and US
Government and agency obligations ($1,050,000). The carrying value equaled fair
market value. There were no marketable securities at December 31, 1997.
(12) COMMITMENTS AND CONTINGENCIES
(a) Leases
Celgene leases its main laboratory and office facilities in Warren Township, New
Jersey. The current lease term for the main laboratory and office space expires
in 2002 and has one five-year renewal option. Annual payments are $330,000. The
lease provides that at the end of each five-year term, the rent will be
increased based upon the change in the consumer price index, but in no case
shall the increase be greater than 20%. Celgene is also required to pay
additional amounts for real estate taxes, utilities, and maintenance. Total
rental expense amounted to $453,000, $477,000 and $486,000 in 1996, 1997 and
1998, respectively. Celgene
F-17
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
has subleased 12,500 square feet of this facility to Cambrex Corporation for up
to three years for the Chiral Intermediate business which Cambrex purchased on
January 9, 1998.
In January, 1997 the Company entered into a sub-lease agreement to lease an
additional 18,000 square feet of laboratory and office space in Annandale, New
Jersey. The sub-lease agreement is for a two year term, expiring in February,
1999. Annual payments are $227,500.
In July, 1997, the Company entered into an equipment leasing agreement; under
the agreement, the Company can lease up to $1,000,000 of equipment for a three
year term after which the Company can purchase the equipment for a nominal
value. Through December 31, 1998, the Company has leased $675,000 of laboratory
equipment under this agreement. Under this capital lease, the Company is
committed to 36 monthly payments of approximately $21,000.
(b) Employment Agreements
Celgene has employment agreements with certain officers and employees. The
related outstanding commitments over the next two years are approximately $1.6
million, of which $1.0 million is due in 1999. Employment contracts provide for
an increase in compensation reflecting annual reviews and related salary
adjustments.
(c) Contracts
Pursuant to the terms of a research and development agreement with The
Rockefeller University, the Company has the world-wide exclusive license to
manufacture and market any drugs, including Thalomid, which may result from the
research performed at Rockefeller and funded by the Company. Rockefeller is
entitled to receive royalties based on commercial sales of any such drugs for
certain indications for ten years after the first sale. Under terms of the
current research agreement extension, the Company is committed to pay
Rockefeller $504,000 annually for research.
In December 1995 the Company entered into an agreement with Penn Pharmaceutical,
Ltd. of Great Britain ("Penn") for the production of Thalomid. Annual facility
payments are approximately $480,000, which commenced in December, 1996. Penn
will manufacture Thalomid and sell it exclusively to the Company. The agreement
has been renewed for 1999, for facility payments of approximately $480,000.
In October 1997, the Company entered into a contract with Boston University to
manage the surveillance registry which is intended to monitor compliance to the
requirements of the Company's S.T.E.P.S. program (prescription safety and
education program) for all Thalomid patients. The contract has been renewed for
1999. Under the terms of the agreement quarterly payments of approximately
$300,000 are required. The contract is renewable for one year terms upon
agreement of both parties.
In December 1997, the Company entered into a research agreement with the
University of Glasgow for clinical testing and evaluation of certain of
Celgene's patented compounds. Under terms of the agreement, Celgene would pay
the University approximately $200,000 in two annual installments. The term of
the agreement is for two years.
In June 1998, the Company entered into a research agreement with a contract
research organization to manage the pivotal clinical trial for d-methylphenidate
encompassing four separate protocols. The agreement is for approximately two
years and is estimated at approximately $3.0 million over the life of the
agreement.
In December 1998, the Company entered into an exclusive license agreement with
EntreMed, Inc. whereby EntreMed granted to Celgene an exclusive license to its
patent and technology rights for thalidomide. In return EntreMed will receive
royalties on all sales of Thalomid.
In December 1998, the Company entered into a one year clinical trial agreement
with the University of Arkansas for Medical Science to collaborate on clinical
trials for multiple myeloma under four separate protocols. The commitment for
1999 is $200,000.
F-18
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
The Company has various other research and consulting agreements totaling
approximately $336,000 for 1999.
(d) Contingencies
The Company believes it maintains insurance coverage adequate for its current
needs.
The Company's operations are subject to environmental laws and regulations which
impose limitations on the discharge of pollutants into the air and water and
establish standards for the treatment, storage and disposal of solid and
hazardous wastes. The Company reviews the effects of such laws and regulations
on its operation and modifies its operations as appropriate. The Company
believes that it is in substantial compliance with all applicable environmental
laws and regulations.
(e) Concentration of Market Risk
Sales to one chain pharmacy and three wholesalers accounted for 27%, 18%, 15%,
and 14% of sales respectively, in 1998. The direct sales to the chain pharmacy
were for the initial stocking order. All future sales will be through
wholesalers.
One customer accounted for 100% of the research contract revenue in 1996 and
1997. Three customers accounted for 37%, 28% and 24% of 1998 research contract
revenue.
(13) SUBSEQUENT EVENT
On January 20, 1999, the Company issued a $15.0 million convertible note to an
institutional investor. The note has a five year term and a coupon rate of 9%
with interest payable on a semi-annual basis. The debt contains a conversion
feature that allows the note holder to convert the debt into shares of common
stock after one year at a conversion price of $18 per share. The Company can
redeem the note after three years, (two years if the stock trades at 225% of the
conversion price for a period of 20 consecutive trading days), at 103% of the
principal amount. Net proceeds after issuance at a discount were $14.25 million.
F-19
<PAGE>
(c) Exhibit Index.
3.1 Certificate of Incorporation of the Company, as amended (incorporated
by reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1, dated July 24, 1987).
3.2 Bylaws of the Company (incorporated by reference to the Company's
Current Report on Form 8K, dated September 16, 1996).
10.1 Lease Agreement, dated January 16, 1987, between the Company and Powder
Horn Associates (incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-1, dated July 24, 1987).
10.2 1992 Long-Term Incentive Plan (incorporated by reference to Exhibit A
to the Company's Proxy Statement, dated May 30, 1997).
10.3 1995 Non-Employee Directors' Incentive Plan (incorporated by reference
to Exhibit B to the Company's Proxy Statement, dated May 30, 1997).
10.4 Agent's Warrant issued in connection with the placement of 8%
Convertible Debentures (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10Q for the quarter ended June
30, 1995).
10.5 Agent's Warrant issued in connection with the placement of Series A
Convertible Preferred Stock (incorporated by reference to the Company's
Annual Report on Form 10K for the year ended December 31, 1995).
10.6 Form of Lock-Up Warrant issued to certain holders of Series A
Convertible Preferred Stock (incorporated by reference to the Company's
Registration Statement on Form S-3 dated November 25, 1997 (No.
333-38891)).
10.7 Form of Warrant to be issued in connection with the issuance of Series
B Convertible Preferred Stock (incorporated by reference to Exhibit
10.2 to the Company's Current Report on Form 8K dated June 10, 1997).
10.8 Rights Agreement, dated as of September 16, 1996, between Celgene
Corporation and American Stock Transfer & Trust Company (incorporated
by reference to the Company's Registration Statement on Form 8A, filed
on September 16, 1996).
10.9 Form of indemnification agreement between the Company and each officer
and director of the Company (incorporated by reference to Exhibit 10.12
to the Company's Annual Report on Form 10K for the year ended December
31, 1996).
10.10 Form of Employment Agreement dated September 30, 1997 between the
Company and John W. Jackson (incorporated by reference to the Company's
Registration Statement on Form S-3 dated November 25, 1997 (No.
333-38891)).
10.11 Form of Employment Agreement dated September 30, 1997 between the
Company and Sol J. Barer (incorporated by reference to the Company's
Registration Statement on Form S-3 dated November 25, 1997 (No.
333-38891)).
F-20
<PAGE>
10.12 Manufacturing Agreement between Penn Pharmaceuticals Limited and the
Company (incorporated by reference to the Company's Registration
Statement on Form S-3 dated November 25, 1997 (No.
333-38891)).
10.13 Celgene Corporation Replacement Stock Option Plan (incorporated by
reference to Exhibit 99.1 of the Company's Registration Statement on
Form S-3 dated May 18, 1998 (No. 333-52963)).
10.14 Form of Stock Option Agreement to be issued in connection with the
Celgene Corporation Replacement Stock Option Plan (incorporated by
reference to Exhibit 99.2 of the Company's Registration Statement on
Form S-3 dated May 18, 1998 (No. 333-52963)).
10.15 1998 Long Term-Incentive Plan (incorporated by reference to Exhibit A
to the Company's Proxy Statement, dated May 18, 1998).
10.16 Stock Purchase Agreement dated June 23, 1998 between the Company and
Biovail Laboratories Incorporated (incorporated by reference to the
Company's Current Report on Form 8K filed on July 17, 1998 (No.
000-16132)).
10.17 Agreement dated December 9, 1998 between the Company and EntreMed, Inc.
(certain portions of the agreement have been omitted and filed
separately with the United States Securities and Exchange Commission
pursuant to a request for confidential treatment.
23.1 Consent of KPMG LLP
27. Financial Data Schedule
AGREEMENT
by and between
ENTREMED, INC.
and
CELGENE CORPORATION
Omitted portions (indicated by asterisks*) have been separately filed with the
United States Securities and Exchange Commission pursuant to a request for
confidential treatment.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
1 - DEFINITIONS...................................................................................................2
<S> <C> <C>
1.1 AFFILIATE.......................................................................................2
1.2 CALENDAR QUARTER................................................................................2
1.3 CELGENE DEVELOPED INTELLECTUAL PROPERTY.........................................................2
1.4 CELGENE DEVELOPED PATENT RIGHTS ................................................................2
1.5 CELGENE DEVELOPED TECHNOLOGY RIGHTS ............................................................3
1.6 CELGENE EXISTING INTELLECTUAL PROPERTY..........................................................3
1.7 CELGENE EXISTING PATENT RIGHTS..................................................................3
1.8 CELGENE EXISTING TECHNOLOGY RIGHTS .............................................................3
1.9 CMCC AGREEMENT .................................................................................3
1.10 ENTREMED DEVELOPED PATENT RIGHTS ...............................................................4
1.11 ENTREMED DEVELOPED TECHNOLOGY RIGHTS ...........................................................4
1.12 ENTREMED EXISTING PATENT RIGHTS.................................................................4
1.13 ENTREMED EXISTING TECHNOLOGY RIGHTS.............................................................4
1.14 ENTREMED INTELLECTUAL PROPERTY..................................................................5
1.15 FIELD ..........................................................................................5
1.16 FIRST COMMERCIAL SALE ..........................................................................5
1.17 NCI AGREEMENT...................................................................................5
1.18 NDA ............................................................................................6
1.19 NET SALES ......................................................................................6
1.20 PATENT RIGHT(s) ................................................................................7
1.21 PRODUCT.........................................................................................7
1.22 SUBLICENSEE.....................................................................................8
1.23 TECHNOLOGY RIGHTS...............................................................................8
1.24 TERRITORY ......................................................................................8
1.25 THALIDOMIDE ....................................................................................8
1.26 THIRD PARTY(IES) ...............................................................................8
1.27 VALID CLAIM ....................................................................................8
2 - GRANT.........................................................................................................9
2.1 Grant of ENTREMED EXISTING PATENT RIGHTS and ENTREMED EXISTING TECHNOLOGY RIGHTS................9
2.2 Grant of ENTREMED DEVELOPED PATENT RIGHTS and ENTREMED DEVELOPED TECHNOLOGY RIGHTS..............9
2.3 CELGENE'S Right To Sublicense..................................................................10
2.4 Assignment Of Investigational New Drug and
Orphan Drug Status Applications................................................................10
2.5 Assignment Of Agreements.......................................................................11
2.6 Technology Transfer............................................................................11
<PAGE>
2.7 Understanding Regarding CMCC AGREEMENT. .......................................................12
3 - DUE DILIGENCE................................................................................................13
3.1 In the United States...........................................................................13
3.2 Outside the United States......................................................................15
3.3 For PRODUCTS For Use In Animals................................................................17
3.4 No Other ENTREMED Rights.......................................................................17
3.5 Co-Promotion By CELGENE And ENTREMED...........................................................17
3.6 Establishment Of A Scientific Committee........................................................19
4 - ROYALTIES....................................................................................................21
4.1 Royalty Payments...............................................................................21
4.2 Sublicensing Payments and Royalties. .........................................................22
4.3 Later-Issued VALID CLAIM.......................................................................23
4.4 No Multiple Royalties..........................................................................24
4.5 THIRD PARTY Sales..............................................................................24
4.6 Recordkeeping..................................................................................25
4.7 Quarterly Payments and Reports.................................................................25
4.8 Accounting Reports.............................................................................26
5 - CONFIDENTIALITY..............................................................................................26
5.1 Confidential Information. .....................................................................26
5.2 Non-Confidential Information...................................................................27
5.3 Disclosure To THIRD PARTIES. ..................................................................28
5.4 Disclosure To Sublicensees. ...................................................................28
5.5 Public Statements..............................................................................28
6 - ADVERSE MEDICAL EXPERIENCES..................................................................................29
6.1 Adverse Medical Experience Reporting. .........................................................29
7 - PATENTS......................................................................................................29
7.1 Patent Prosecution.............................................................................29
7.2 Cooperation In Prosecution.....................................................................29
7.3 Infringement and Declaratory Judgment Actions..................................................30
8 - REPRESENTATIONS AND WARRANTIES...............................................................................32
8.1 By Both Parties................................................................................32
8.2 By ENTREMED....................................................................................32
9 - INDEMNIFICATION AND INSURANCE................................................................................34
9.1 By CELGENE. ...................................................................................34
9.2 By ENTREMED. .................................................................................35
9.3 Conditions to Indemnification. ................................................................36
<PAGE>
10 - ASSIGNMENT AND SUCCESSORS...................................................................................37
10.1 By Either Party................................................................................37
10.2 By CELGENE.....................................................................................37
10.3 CELGENE As Guarantor...........................................................................37
10.4 Binding Effect.................................................................................37
11 - FORCE MAJEURE...............................................................................................38
12 - TERMINATION.................................................................................................38
12.1 Term. ........................................................................................38
12.2 By Reason Of FDA Action........................................................................38
12.3 Termination Of Royalty Obligations. ..........................................................38
12.4 Breach.........................................................................................39
12.5 Insolvency. ..................................................................................41
12.6 Work-In-Progress. .............................................................................41
12.7 Survival.......................................................................................41
12.8 Reversion of Rights............................................................................41
13 - GENERAL PROVISIONS..........................................................................................42
</TABLE>
<PAGE>
AGREEMENT
This Agreement is effective this 9th day of December, 1998 (the
"EFFECTIVE DATE") by and between CELGENE CORPORATION, a Delaware corporation
located at 6 Powder Horn Drive, Warren, New Jersey 07059 ("CELGENE"), and
ENTREMED, INC., a Delaware Corporation located at 9610 Medical Center Drive,
Rockville, Maryland 20850 ("ENTREMED").
WHEREAS, CELGENE is a company that develops, manufactures, markets and
sells pharmaceutical products for healthcare, and that has developed and owns
certain patents, patent applications, proprietary technology, know-how, and
United States Food and Drug Administration ("FDA") filings relating to PRODUCTS,
as hereinafter defined; and
WHEREAS, ENTREMED is the owner or exclusive licensee of certain PATENT
RIGHTS as hereinafter defined, TECHNOLOGY RIGHTS, as hereinafter defined, and
FDA filings related to PRODUCTS, and has certain rights and obligations relating
to PRODUCTS pursuant to agreements with THIRD PARTIES, as hereinafter defined;
and
WHEREAS, CELGENE desires to obtain assignments and/or exclusive rights
in the TERRITORY in and to all of ENTREMED's PATENT RIGHTS, TECHNOLOGY RIGHTS,
rights by agreement, and FDA filings, whether presently existing or subsequently
developed, for the commercial development, use, and sale of PRODUCTS; and
WHEREAS, ENTREMED is willing to grant the assignments and/or exclusive
rights desired by CELGENE, as set forth herein, in order to transfer its entire
present and future right, title and interest in PRODUCTS to CELGENE.
NOW, THEREFORE, in consideration of the mutual promises and other good
and valuable
<PAGE>
consideration, the parties agree as follows:
SECTION 1 - DEFINITIONS
The terms used in this Agreement have the following meaning:
1.1 The term "AFFILIATE" as applied to either party shall mean any
company or other legal entity other than the party in question
in whatever country organized, controlling controlled by or
under common control with that party. The term "control" means
ownership or control, directly or indirectly, of at least
fifty percent (50%) of the outstanding stock or voting rights
entitled to elect directors.
1.2 The term "CALENDAR QUARTER" shall mean the period of three
(3) consecutive calendar months ending on March 31, June
30, September 30 or December 31, as the case may be.
1.3 The term "CELGENE DEVELOPED INTELLECTUAL PROPERTY" shall mean
CELGENE DEVELOPED PATENT RIGHTS and CELGENE DEVELOPED
TECHNOLOGY RIGHTS.
1.4 The term "CELGENE DEVELOPED PATENT RIGHTS" shall mean any
United States or foreign patents or patent applications filed
by CELGENE, or an AFFILIATE, successor or assign thereof at
any time subsequent to the EFFECTIVE DATE, in which CELGENE
has a transferrable interest, relating to a modification of a
PRODUCT described in any ENTREMED INTELLECTUAL PROPERTY or a
method of using such PRODUCT, which modification is (a)
necessary for the manufacture, use, or sale of such PRODUCT,
and (b) then currently in use by CELGENE at the time ENTREMED
exercises its rights under Section 0(b), for the manufacture,
use, or sale of such PRODUCT.
<PAGE>
1.5 The term "CELGENE DEVELOPED TECHNOLOGY RIGHTS" shall mean any
TECHNOLOGY RIGHTS developed, obtained, or acquired by CELGENE
or an AFFILIATE, successor or assign thereof at any time
subsequent to the EFFECTIVE DATE, in which CELGENE has a
transferrable interest, relating to a modification of a
PRODUCT described in any ENTREMED INTELLECTUAL PROPERTY or a
method of using or use of such PRODUCT, which modification is
(a) necessary for the manufacture, use, or sale of such
PRODUCT, and (b) then currently in use by CELGENE at the time
ENTREMED exercises its rights under Section 0(b), for the
manufacture, use, or sale of such PRODUCT.
1.6 The term "CELGENE EXISTING INTELLECTUAL PROPERTY" shall mean
CELGENE EXISTING PATENT RIGHTS and CELGENE EXISTING TECHNOLOGY
RIGHTS.
1.7 The term "CELGENE EXISTING PATENT RIGHTS" shall mean the
United States and foreign patents and patent applications
relating to PRODUCTS in which CELGENE has an interest, jointly
or solely, as owner, assignee, or licensee, whether exclusive
or nonexclusive, as of the EFFECTIVE DATE.
1.8 The term "CELGENE EXISTING TECHNOLOGY RIGHTS" shall mean any
TECHNOLOGY RIGHTS developed, obtained, or acquired, solely or
jointly, exclusively or non-exclusively, by CELGENE or an
AFFILIATE, successor or assign thereof as of the EFFECTIVE
DATE.
1.9 The term "CMCC AGREEMENT" shall mean that certain License
Agreement entered into by and between ENTREMED and Children's
Medical Center Corporation ("CMCC"), dated May 26, 1994, as
amended to the date hereof, attached hereto as Exhibit A.
1.10 The term "ENTREMED DEVELOPED PATENT RIGHTS" shall mean any
United
<PAGE>
States or foreign patent applications relating to PRODUCTS
assigned to, licensed to or filed, solely or jointly, by
ENTREMED, or an AFFILIATE, successor or assign thereof at
any time subsequent to the EFFECTIVE DATE, including any
United States or foreign patent applications filed pursuant
to the CMCC AGREEMENT or NCI AGREEMENT, and the patents
issuing therefrom, which patent applications and patents
shall be added to Appendix A and shall be included in this
Agreement as PATENT RIGHTS and licensed to CELGENE in
accordance with Section 2 of this Agreement.
1.11 The term "ENTREMED DEVELOPED TECHNOLOGY RIGHTS" shall mean any
TECHNOLOGY RIGHTS developed, obtained, or acquired, solely or
jointly, exclusively or non-exclusively, by ENTREMED, or an
AFFILIATE, successor or assign thereof at any time subsequent
to the EFFECTIVE DATE, including any TECHNOLOGY RIGHTS
developed or obtained pursuant to the CMCC AGREEMENT or NCI
AGREEMENT, which TECHNOLOGY RIGHTS shall be included in this
Agreement and licensed to CELGENE in accordance with Section 2
of this Agreement.
1.12 The term "ENTREMED EXISTING PATENT RIGHTS" shall mean the
PATENT RIGHTS in which ENTREMED has an interest, jointly or
solely, as owner, assignee, or licensee, whether exclusive or
nonexclusive, as of the EFFECTIVE DATE.
1.13 The term "ENTREMED EXISTING TECHNOLOGY RIGHTS" shall mean any
TECHNOLOGY RIGHTS developed, obtained, or acquired, solely or
jointly, exclusively or non-exclusively, by ENTREMED, or an
AFFILIATE, successor or assign thereof as of the EFFECTIVE
DATE, including without limitation any TECHNOLOGY RIGHTS
developed or obtained pursuant to the CMCC AGREEMENT or NCI
AGREEMENT. ENTREMED EXISTING TECHNOLOGY RIGHTS expressly
includes any regulatory data and filings,
<PAGE>
including without limitation all FDA Investigational New
Drug and Orphan Drug Status applications, as set forth in
Appendix C.
1.14 The term "ENTREMED INTELLECTUAL PROPERTY" shall mean and
include ENTREMED DEVELOPED PATENT RIGHTS, ENTREMED DEVELOPED
TECHNOLOGY RIGHTS, ENTREMED EXISTING PATENT RIGHTS, and
ENTREMED EXISTING TECHNOLOGY RIGHTS.
1.15 The term "FIELD" shall mean the use of THALIDOMIDE in humans
and animals, including without limitation any and all
diagnostic, prophylactic, therapeutic, and research and
development uses.
1.16 The term "FIRST COMMERCIAL SALE" shall mean, in each country
of the TERRITORY, the first sale after the EFFECTIVE DATE in
such country to a THIRD PARTY in connection with the
nationwide introduction of any PRODUCT by CELGENE, its
AFFILIATES or SUBLICENSEES following marketing and/or pricing
approval by the appropriate governmental agency for the
country in which the sale is to be made and, when governmental
approval is not required, the first sale in that country in
connection with the nationwide introduction of a PRODUCT in
that country.
1.17 The term "NCI AGREEMENT" shall mean that certain Agreement by
and between the Division of Cancer Treatment at the National
Cancer Institute ("NCI") and ENTREMED, dated November 16,
1994, and executed on behalf of ENTREMED on November 23, 1994,
and on behalf of NCI on November 18, 1994, attached hereto as
Exhibit B.
1.18 The term "NDA" shall mean a New Drug Application filed with
the United States Food and Drug Administration.
<PAGE>
1.19 The term "NET SALES" means the gross amount received by
CELGENE or its AFFILIATES or SUBLICENSEES for sale of PRODUCT
to THIRD PARTIES, less: (i) cost of freight, postage, and
freight insurance, (if paid by seller); (ii) sales taxes,
value added taxes, excise taxes, and customs duties; (iii)
cost of export licenses and any taxes, fees or other charges
associated with the exportation or importation of PRODUCTS;
(iv) rebates accrued, incurred or paid to Federal Medicaid and
State Medicare and any other price reductions required by a
governmental agency; (v) rejected shipments, returns, and
retroactive deductions; (vi) the amount received for sales
which become the subject of a subsequent temporary or partial
recall by a regulatory agency for safety or efficacy reasons
outside the control of CELGENE; and (vii) customary cash,
quantity, and trade discounts; provided, however, that a sale
or transfer to an AFFILIATE or SUBLICENSEE for re-sale by such
AFFILIATE or SUBLICENSEE shall not be considered a sale for
the purpose of this provision but the resale by such AFFILIATE
or SUBLICENSEE shall be a sale for such purposes. A "sale"
shall also include a transfer or other disposition for
consideration, but not such transfers or dispositions, without
consideration, for pre-clinical, clinical, regulatory or
governmental purposes prior to receiving marketing approval
for the specific indication for which such transfer is made.
In the event that consideration in addition to or in lieu of
money is received for PRODUCT, such consideration shall be
added to the NET SALES as valued on the day of receipt thereof
by CELGENE. To the extent that a PRODUCT is sold in other than
an arms length transaction, NET SALES shall be the fair market
value of such PRODUCT if sold in an arms length transaction,
less the costs identified in subsections (i)-(vi) of this
Section 1.19. PRODUCT shall be considered "sold" at the
earlier of (a) the transfer of title in such PRODUCT to a
person other than an AFFILIATE or SUBLICENSEE of CELGENE or
(b) the shipment of such PRODUCT from the manufacturing or
warehouse facilities of CELGENE or its AFFILIATE or
SUBLICENSEE to a THIRD PARTY.
<PAGE>
1.20 The term "PATENT RIGHT(s)" shall mean:
(a) the United States patent applications and patents
listed in Appendix A;
(b) the United States and foreign patents issued
from applications listed in Appendix A and from
divisionals and continuations of such
applications;
(c) claims of United States continuation-in-part
applications and of equivalent foreign
applications, and of the resulting
patent(s), that are directed to subject
matter described in the United States and
foreign applications listed in Appendix A;
(d) claims of all later-filed foreign patent
applications, and of the resulting patents,
that are directed to subject matter
described in the United States patents
and/or patent applications described in the
foregoing subsections of this Section 1.20;
(e) any reissues, re-examinations or extension
of United States patents described in the
foregoing subsections of this Section 1.20; and
(f) ENTREMED DEVELOPED PATENT RIGHTS, when
assigned to, licensed to or filed, solely or
jointly, by ENTREMED, or an AFFILIATE,
successor or assign thereof, pursuant to
Section 1.10 of this Agreement.
1.21 The term "PRODUCT" shall mean any article of manufacture,
substance, material, chemical, formulation or composition for
use in the FIELD which is or includes THALIDOMIDE as an active
ingredient, including, without limitation, a composition that
comprises THALIDOMIDE and a non-steroidal anti-inflammatory
compound(s). PRODUCT expressly excludes THALIDOMIDE analogs.
1.22 The term "SUBLICENSEE" shall mean any THIRD PARTY licensed by
<PAGE>
CELGENE to make, have made, use, offer to sell, sell
or import any PRODUCT.
1.23 The term "TECHNOLOGY RIGHTS" shall mean any information
relating to PRODUCTS that is not covered by a patent or patent
application, including without limitation technical and
non-technical information, know-how, methods, processes,
procedures, compositions, devices, formulae, protocols,
techniques, software, designs, drawings, plans, diagrams,
specifications, data, the results of tests or assays, and all
other information relating to PRODUCTS.
1.24 The term "TERRITORY" shall mean all countries of the world.
1.25 The term "THALIDOMIDE" shall mean a compound with the chemical
structure described as
2-(2,6-Dioxo-3-piperidinyl)-1H-isoindole-1,3(2H)-dione, or as
otherwise defined in the Merck Index, entry 9390, 12th ed.,
and pharmaceutically acceptable salts thereof.
1.26 The term "THIRD PARTY(IES)" shall mean a person or entity
who or which is neither a party hereto nor an AFFILIATE of
a party hereto.
1.27 The term "VALID CLAIM" shall mean an issued claim of an
unexpired patent ("ISSUED VALID CLAIM") or a claim of a
pending patent application, which shall not have been
withdrawn, canceled or disclaimed, or held invalid or
unenforceable by a court of competent jurisdiction in an
unappealed or unappealable decision. Notwithstanding the
foregoing to the contrary, a claim of a pending patent
application, divisional application or continuation-in-part
shall cease to be a VALID CLAIM if no patent has issued on
such claim on or prior to the fifth (5th) anniversary of the
EFFECTIVE DATE of this Agreement, provided that such claim
shall once again become a VALID CLAIM on the issue date of a
patent that subsequently issues and covers such claim.
<PAGE>
1.28 The use herein of the plural shall include the singular, and
the use of the masculine shall include the feminine.
SECTION 2 - GRANT
2.1 Grant of ENTREMED EXISTING PATENT RIGHTS and ENTREMED EXISTING
TECHNOLOGY RIGHTS. ENTREMED hereby grants to CELGENE and
CELGENE hereby accepts from ENTREMED an exclusive, royalty
bearing right and license or sublicense, as the case may be,
under the ENTREMED EXISTING PATENT RIGHTS and the ENTREMED
EXISTING TECHNOLOGY RIGHTS to make, have made, use, offer to
sell, sell, and import PRODUCTS in the TERRITORY.
2.2 Grant of ENTREMED DEVELOPED PATENT RIGHTS and ENTREMED
DEVELOPED TECHNOLOGY RIGHTS. ENTREMED hereby grants to
CELGENE, to the extent not prohibited by the United States
Government or by prior contractual obligations to any THIRD
PARTY, and CELGENE hereby accepts from ENTREMED:
(a) an exclusive, royalty bearing right and license
under the ENTREMED DEVELOPED PATENT RIGHTS and the
ENTREMED DEVELOPED TECHNOLOGY RIGHTS to make, have
made, use, offer to sell, sell, and import PRODUCTS
in the TERRITORY; and
(b) to the extent an exclusive license is not available
to CELGENE in a country under a particular ENTREMED
DEVELOPED PATENT RIGHT or ENTREMED DEVELOPED
TECHNOLOGY RIGHT, but a non-exclusive license would
be available, ENTREMED hereby grants CELGENE a
nonexclusive, royalty bearing right and license under
such ENTREMED DEVELOPED PATENT RIGHT(s) and ENTREMED
DEVELOPED TECHNOLOGY RIGHT(s) to make, have made,
use, offer to sell, sell, and
<PAGE>
import PRODUCTS in the TERRITORY.
2.3 CELGENE'S Right To Sublicense.
(a) In the United States. ENTREMED hereby grants to
CELGENE the right to sublicense ENTREMED INTELLECTUAL
PROPERTY in the United States with the consent of
ENTREMED, to be exercised in ENTREMED's sole
discretion.
(b) Outside the United States. ENTREMED hereby grants to
CELGENE the right to sublicense ENTREMED INTELLECTUAL
PROPERTY outside the United States with the written
consent of ENTREMED, which consent shall not be
unreasonably withheld. Outside the United States,
CELGENE shall use reasonable efforts to negotiate
sublicensing agreements that are commercially
reasonable according to contemporaneous prevailing
standards within the pharmaceutical industry.
2.4 Assignment Of Investigational New Drug and Orphan Drug Status
Applications. Within ten (10) days of the EFFECTIVE DATE,
ENTREMED and CELGENE shall notify the Food and Drug
Administration ("FDA") of the transfer of ENTREMED's rights in
PRODUCTS to CELGENE by submitting to the FDA letters
substantially in the form attached hereto as Exhibit C, and
ENTREMED shall notify CELGENE of its compliance with this
Section 0 by copies of such letters. ENTREMED shall take all
further steps necessary or helpful to assign to CELGENE all
Orphan Drug Status and Investigational New Drug applications
filed by ENTREMED as of the EFFECTIVE DATE, as set forth in
Appendix C. If the FDA declines to allow the assignment of any
of ENTREMED's Investigational New Drug and/or Orphan Drug
Status application(s) to CELGENE, for whatever reason, then
ENTREMED's rights under such application(s) will be included
in this Agreement as ENTREMED EXISTING TECHNOLOGY RIGHTS and
will be licensed to CELGENE in accordance with Section 2 of
this Agreement.
<PAGE>
2.5 Assignment Of Agreements. Within ten (10) days of the
EFFECTIVE DATE, ENTREMED shall notify CMCC and NCI of the
sublicense and transfer, respectively, of its rights in
PRODUCTS to CELGENE, and shall take all steps necessary or
helpful to assign to CELGENE the NCI AGREEMENT, including
without limitation requesting consent to assign ENTREMED's
obligations and entire right, title, and interest, under such
agreement to CELGENE, and upon receipt of the consent of NCI
to assign the NCI AGREEMENT, CELGENE will expressly assume all
of ENTREMED's duties and obligations thereunder. In the event
that ENTREMED is not permitted to assign its rights under the
NCI AGREEMENT to CELGENE, ENTREMED's rights in any PATENT
RIGHTS or TECHNOLOGY RIGHTS resulting from the NCI AGREEMENT
will be included in this Agreement as ENTREMED DEVELOPED
PATENT RIGHTS and ENTREMED DEVELOPED TECHNOLOGY RIGHTS,
respectively, and will be licensed to CELGENE in accordance
with Section 0 of this Agreement.
2.6 Technology Transfer. As soon as reasonably possible following
the EFFECTIVE DATE, but in no event later than one (1) month
after such date, ENTREMED shall transfer to CELGENE all
ENTREMED EXISTING TECHNOLOGY RIGHTS and ENTREMED DEVELOPED
TECHNOLOGY RIGHTS not already in CELGENE's possession.
ENTREMED agrees to disclose and transfer all ENTREMED
DEVELOPED TECHNOLOGY RIGHTS to CELGENE promptly, as they are
obtained or developed. ENTREMED also agrees to provide, upon
reasonable notice from CELGENE, any technical, scientific,
statistical, and/or regulatory support necessary or useful to
CELGENE's understanding and/or use of ENTREMED EXISTING
TECHNOLOGY RIGHTS and ENTREMED DEVELOPED TECHNOLOGY RIGHTS.
2.7 Understanding Regarding CMCC AGREEMENT. To the extent
TECHNOLOGY RIGHTS and/or PATENT RIGHTS licensed to CELGENE
under this Agreement
<PAGE>
are rights which ENTREMED has licensed from CMCC under the
CMCC AGREEMENT, CELGENE and ENTREMED understand and agree as
follows:
(a) The rights licensed to CELGENE by ENTREMED are
subject to the terms, limitations, restrictions and
obligations of the CMCC AGREEMENT.
(b) CELGENE will comply with the terms, obligations,
limitations and restrictions of sublicensees under
Articles II, V, VII, VIII, IX, X, XII, XIII, and XV
of the CMCC AGREEMENT.
(c) ENTREMED will, at its own expense, timely pay the
milestone payment of *******************************
due to CMCC upon completion of a Phase II clinical
trial for any indication, pursuant to Section 4.1.3
of the CMCC AGREEMENT. ENTREMED shall promptly
provide written notice to CELGENE of such payment.
(d) CELGENE will, at its own expense, timely pay the
milestone payment of *******************************
due to CMCC upon completion of a Product License
Application for any indication, pursuant to
Section 4.1.4 of the CMCC AGREEMENT, which payment
shall be made to ENTREMED and timely forwarded by
ENTREMED to CMCC; provided, however, that if (i)
such payment becomes due prior to January 1, 2000,
and (ii) CELGENE's annual sales in the year such
payment becomes due are less than
********************, CELGENE may notify ENTREMED,
in writing, that it wishes ENTREMED to pay such
amount to CMCC directly, which ENTREMED hereby
agrees to do, and, by June 30, 2000 CELGENE shall
reimburse ENTREMED the amount paid to CMCC, plus
interest calculated at the annual rate of the sum
of ************ plus the prime interest rate quoted
by Citibank, N.A. on the date said payment is due.
ENTREMED shall promptly provide written notice to
CELGENE of all
<PAGE>
payments under this Section 2.7(d).
(e) ENTREMED will comply with the terms, obligations,
limitations and restrictions of the CMCC AGREEMENT,
including, without limitation, any provisions
relating to due diligence, notification with respect
to sublicenses, and milestone payments, subject to
Sections 2.7(c) and (d) of this Agreement.
(f) The CMCC AGREEMENT and ENTREMED's rights thereunder
shall remain in full force and effect for the life of
the last to expire patent issued under the Patent
Rights, as defined therein, unless earlier terminated
pursuant to Article XIII of the CMCC AGREEMENT.
SECTION 3 - DUE DILIGENCE
3.1 In the United States.
(a) CELGENE shall initiate and diligently use reasonable
efforts to develop, or to file for regulatory
approval of or register, and to market and sell
PRODUCTS in the United States. Reasonable efforts
with respect to the development and/or pursuit of
regulatory approval or registration for PRODUCTS
in the United States shall be demonstrated by
CELGENE (i) developing and pursuing regulatory
approval for PRODUCTS for those uses CELGENE, in
good faith, determines to be commercially and
scientifically reasonable, including but not
limited to (a) one (1)**************, (b) one (1)
****************, and (c) one (1)
****************; and (ii) funding and conducting
clinical trials for PRODUCTS for other uses in
order to enhance scientific knowledge with regard
to such PRODUCTS, including for the publication of
data and results in scientific journals, whether
or not such clinical trials result in or
facilitate the pursuit of regulatory approval.
<PAGE>
(b) ENTREMED agrees that, subject to Section 3.6 of this
Agreement, (i) the decision regarding which uses to
pursue regulatory approval of PRODUCTS for, and/or to
fund and conduct clinical trials of PRODUCTS for,
pursuant to Section 3.1(a) of this Agreement, shall
be made by and in the sole discretion of CELGENE; and
(ii) with respect to the manner in which regulatory
approval is sought and/or clinical trials are funded
and conducted, CELGENE shall have sole discretion,
including, without limitation, complete control over
all regulatory submissions of PRODUCTS to the
appropriate regulatory agencies worldwide, including
whether, when, and how to file, maintain, withdraw,
or abandon an application for regulatory approval of
PRODUCTS.
(c) Within 90 days after the EFFECTIVE DATE, CELGENE
shall draft a Development Plan outlining CELGENE'S
development objectives for PRODUCTS, in accordance
with Sections 3.1(a)(i) and (b) of this Agreement.
CELGENE shall consult with ENTREMED concerning the
Development Plan. The Development Plan shall include
suitable clinical milestones which are reasonably
intended to lead to regulatory approval of PRODUCTS,
in accordance with Sections 3.1(a)(i) and (b) of this
Agreement.
(d) CELGENE shall provide a written summary report to
ENTREMED within thirty (30) days after June 30th and
December 31st of each calendar year concerning the
efforts being made in accordance with this Section
3.1 with respect to PRODUCTS. CELGENE shall provide
ENTREMED with any additional information reasonably
requested by ENTREMED in this respect.
(e) At ENTREMED'S reasonable request, CELGENE shall
provide ENTREMED access to all clinical trial data
for PRODUCTS conducted by
<PAGE>
CELGENE in accordance with the Development Plan
set forth in this Section 3.1. In the event that
rights are returned to ENTREMED under Section
3.1(f) of this Agreement, ENTREMED shall have the
right to review and use the clinical trial data in
its own clinical program.
(f) In the event that CELGENE fails to meet any of its
obligations under this Section 3.1 with respect to
PRODUCTS in the United States, and such failure is
not cured within sixty (60) days after written notice
thereof is received by CELGENE from ENTREMED, then
ENTREMED shall have the right and option to terminate
the license granted in this Agreement and this
Agreement by giving CELGENE sixty (60) days prior
written notice thereof.
3.2 Outside the United States.
(a) Diligence. CELGENE shall initiate and diligently use
reasonable efforts to develop, or to file for
regulatory approval of or register, and to market
and sell PRODUCTS in Europe, in Canada, and in the
Pacific Rim, Japan, and Australia (collectively,
the "PACIFIC RIM"). Reasonable efforts with
respect to the development and/or pursuit of
regulatory approval or registration for PRODUCTS
in Europe, Canada, and the PACIFIC RIM shall be
demonstrated by CELGENE, or a sublicensee thereof,
pursuing regulatory approval for PRODUCTS (i) in
Italy, France, the United Kingdom, and Germany (in
the case of Europe), and in Japan and one other
country of the PACIFIC RIM (in the case of the
PACIFIC RIM), within ************ from the date of
the first FDA approval of a PRODUCT for an
oncology indication or Crohn's disease, whichever
occurs earlier; and (ii) in Canada, within one (1)
year from the date of the first FDA approval of a
PRODUCT for an oncology indication or Crohn's
disease, whichever occurs earlier.
<PAGE>
(b) CELGENE's Discretion. ENTREMED agrees that, subject
to Section 3.6 of this Agreement, (i) the decision
regarding which uses to pursue regulatory approval
of PRODUCTS for, and/or to fund and conduct
clinical trials of PRODUCTS for, pursuant to
Section 3.2(a) of this Agreement, shall be made by
and in the sole discretion of CELGENE; and (ii)
with respect to the manner in which regulatory
approval is sought and/or clinical trials are
funded and conducted, CELGENE shall have sole
discretion, including, without limitation,
complete control over all regulatory submissions
of PRODUCTS to the appropriate regulatory agencies
worldwide, including whether, when, and how to
file, maintain, withdraw, or abandon an
application for regulatory approval of PRODUCTS.
(c) Cooperation. If CELGENE fails to use reasonable
efforts in Europe, Canada, or the PACIFIC RIM, as set
forth in Section 3.2(a) of this Agreement, or to
sublicense its rights to a THIRD PARTY, then ENTREMED
shall have the right and option to either (i)
terminate the licenses granted in the region where
such failure has occurred, i.e., Europe, Canada, or
the PACIFIC RIM, respectively, by giving CELGENE
sixty (60) days prior written notice thereof, or (ii)
cooperate with CELGENE to find an appropriate
SUBLICENSEE for such rights.
3.3 For PRODUCTS For Use In Animals.
(a) Diligence. CELGENE shall initiate and diligently use
reasonable efforts to develop, or to file for
regulatory approval of or register, and to market and
sell PRODUCTS for use in animals. Such reasonable
efforts shall be demonstrated by CELGENE obtaining
regulatory approval for the sale of a PRODUCT for use
in animals within four (4) years of the EFFECTIVE
DATE in the United States and, outside the United
States, in one of the following countries: Italy,
France, the United Kingdom, or Germany.
(b) Cooperation. If CELGENE fails to use reasonable
efforts either in the
<PAGE>
United States or outside the United States, as set
forth in Section 3.3(a) of this Agreement, or to
sublicense its rights in such regions to a THIRD
PARTY, then ENTREMED shall have the right and
option to either (i) terminate CELGENE's rights in
the region where such failure has occurred, i.e.,
in the United States or outside the United States,
respectively, in and to such PRODUCTS for use in
animals by giving CELGENE sixty (60) days prior
written notice thereof, or (ii) cooperate with
CELGENE to find an appropriate SUBLICENSEE for
such rights.
3.4 No Other ENTREMED Rights. Except as otherwise expressly
provided in this Agreement, ENTREMED agrees that it has not
retained any rights under ENTREMED INTELLECTUAL PROPERTY to
PRODUCTS, and that is shall not (i) make, use, offer to sell,
sell, or import PRODUCTS in the TERRITORY, or (ii)
collaborate, negotiate, or deal with THIRD PARTIES with
respect to PRODUCTS.
3.5 Co-Promotion By CELGENE And ENTREMED.
(a) With Regard To PRODUCTS. If CELGENE, in its sole
discretion, decides to co-promote any PRODUCT or to
seek sales assistance in promoting any PRODUCT,
including, but not limited to, sales assistance for
indications not then promoted by CELGENE sales
personnel, CELGENE shall, in good faith, consider
ENTREMED for the opportunity to co-promote such
PRODUCT(S) for such indications in the United States.
(i) CELGENE will give ENTREMED due consideration
for the opportunity to co-promote such
PRODUCT(S) as set forth herein, provided
that ENTREMED has a sales force capable of
providing the required details to the
targeted physician audience, or is capable
of assembling such a sales force within six
(6) months, and agrees to do so. If and only
if ENTREMED either has a sales force capable
of providing the required details to the
targeted physician audience, or commits to
assembling such a sales force within six (6)
months, the
<PAGE>
decision to offer ENTREMED the opportunity
to co-promote such PRODUCT(s) for such
indications in the United States shall be
made, in good faith, by CELGENE, and CELGENE
shall notify ENTREMED of its decision in
writing.
(ii) If CELGENE offers ENTREMED the opportunity
to co-promote, pursuant to Section 3.5(a)(i)
of this Agreement, ENTREMED shall have
thirty (30) days to accept such offer by
written notice to CELGENE. If ENTREMED
accepts such offer to co-promote PRODUCTS,
then the parties will negotiate, in good
faith, a co-promotion agreement setting
forth the substance of this Section 3.5 and
other normal and customary conditions within
six (6) months of CELGENE's receipt of
ENTREMED's acceptance pursuant to this
Section 3.5(a)(ii).
(iii) ENTREMED's co-promotion efforts will focus
on detailing (product presentations) the
PRODUCT to the targeted physician audience.
In such case, ENTREMED's sales
representatives will also have the
opportunity, from time to time, to
participate in seminars, in-service
training, group presentations, and other
educational and promotional activities
initiated by CELGENE in consultations with
ENTREMED. In addition, ENTREMED will assign
a product manager to participate with the
CELGENE marketing team to provide input as
appropriate and to be the operational
liaison between CELGENE and ENTREMED's sales
force.
(b) With Regard To Anti-angiogenic Compounds. If
ENTREMED, in its sole discretion, decides to
co-promote an anti-angiogenic compound or a
composition containing, as an active ingredient,
such a compound, or to seek sales assistance in
promoting any such anti-angiogenic compound or
composition, including, but not limited to, sales
assistance for indications not then promoted by
ENTREMED sales personnel, ENTREMED shall, in good
faith, consider CELGENE for the opportunity to
co-promote such anti-
<PAGE>
angiogenic compounds and/or compositions. The
decision to offer CELGENE the opportunity to
co-promote such anti-angiogenic compounds and/or
compositions shall be made in the sole discretion of
ENTREMED, and be subject, mutatis mutandis, to the
terms and conditions set forth in Sections
3.5(a)(ii) and (iii) of this Agreement.
3.6 Establishment Of A Scientific Committee. CELGENE agrees to
conduct and fund a development program designed to obtain
approval to market PRODUCTS, in accordance with its
obligations under Section 3.1(a)(i) and 3.1(b) of this
Agreement (the "PROGRAM"). To ensure the continued
participation of ENTREMED in these development activities, the
PROGRAM will be monitored by a Scientific Committee as
described herein (the "COMMITTEE").
(a) Members. Within ten (10) days of the date hereof,
ENTREMED and CELGENE shall each appoint two (2)
persons to serve on the COMMITTEE. Each party will
have the right to change its representation on the
COMMITTEE upon written notice to the other.
(b) Chairperson. The COMMITTEE will be chaired by one
representative of CELGENE, who shall be chosen in the
sole discretion of CELGENE.
(c) Responsibilities. The COMMITTEE will have authority
to:
(i) act in an advisory role and provide
information, including without limitation
technical and regulatory information and
marketing and sales information, helpful in
connection with the PROGRAM;
(ii) make recommendations regarding the
performance of the PROGRAM and the conduct
of the work pursuant thereto, and monitor
performance thereunder;
(iii) propose modifications to the PROGRAM;
(iv) review any and all proposed publication(s)
relating to the PROGRAM and the results
therefrom; and
(v) review all information and data resulting
from the PROGRAM.
(d) Meetings. The COMMITTEE will meet not less than four
(4) times a year
<PAGE>
during the term of the PROGRAM, at such dates and
times as agreed to by the parties. The COMMITTEE
will prepare written minutes of each meeting and a
written record of all decisions whether made at a
formal meeting or not. All decisions made and
actions taken by the COMMITTEE will be made or taken
in the sole discretion of CELGENE after good faith
consideration of the position or opinion of the
ENTREMED members.
(e) Term and Termination. The PROGRAM will continue until
there are no longer any ongoing activities in
pursuit of regulatory approval, or any pending
applications for regulatory approval, for PRODUCTS,
pursuant to Sections 3.1(a)(i) and (b) of this
Agreement. Once all such activities have been
completed and all such regulatory approvals have
been obtained, CELGENE may, in its sole discretion,
extend the term of the PROGRAM to include PRODUCTS
in clinical trials for other uses, as set forth in
Sections 3.1(a)(ii) and (b) of this Agreement, in
which case the PROGRAM will continue until such
clinical trials have been completed or otherwise
terminated or, if applicable, until regulatory
approval has been obtained, unless the PROGRAM is
sooner terminated by CELGENE.
SECTION 4 - ROYALTIES
4.1 Royalty Payments.
(a) First Twelve Years. CELGENE shall pay to ENTREMED the
following royalties on the NET SALES of PRODUCTS sold by
CELGENE or its AFFILIATES in each country of the TERRITORY (i)
for the first consecutive twelve (12) years from the date of
the FIRST COMMERCIAL SALE of a PRODUCT in each country of the
TERRITORY, and, separately and independently, (ii) for the
first consecutive twelve (12) years from the date of the FIRST
COMMERCIAL SALE of each PRODUCT that contains, as a second
active ingredient, a compound other than THALIDOMIDE, in each
country of the TERRITORY:
<PAGE>
(i) **************of NET SALES up to ************* of such
sales;
(ii) ************** of NET SALES between **********
and ************ of such sales;
(iii) *************of NET SALES between **************and
**************dollars of such sales; and
(iv) ***************of NET SALES over **************** of
such sales.
(b) After Twelve Years. For each PRODUCT in each country in the
TERRITORY in which the twelve (12) year period provided for in
Section 4.1(a) of this Agreement shall have terminated,
CELGENE shall pay to ENTREMED the following royalties on the
NET SALES of such PRODUCT covered by an ISSUED VALID CLAIM of
the PATENT RIGHTS that are sold by CELGENE or its AFFILIATES
in such country:
(i) ************of NET SALES up to **************of such
sales;
(ii) ************of NET SALES between *************and
********************of such sales;
(iii) *************of NET SALES between **************and
******************dollars of such sales; and
(iv) **************of NET SALES over ************* of such
sales;
<PAGE>
and such royalties under this Section 4.1(b) shall be payable
until the last to expire PATENT RIGHT containing an ISSUED
VALID CLAIM covering such PRODUCT sold by CELGENE or its
AFFILIATES in such country.
4.2 Sublicensing Payments and Royalties.
(a) Under CELGENE's Rights. If CELGENE grants a
sublicense of its exclusive rights under this
Agreement, pursuant to Section 2.3 of this Agreement,
in any country(ies) of the TERRITORY, CELGENE shall
pay to ENTREMED (i) ***************of any non-royalty
consideration, including but not limited to any
sublicensing and/or milestone payments received by
CELGENE pursuant to such sublicense and (ii)
*************of the royalty income paid by
SUBLICENSEES to CELGENE on NET SALES of PRODUCTS.
(b) CELGENE-ENTREMED Cooperation. If CELGENE grants
a sublicense of any of its rights under this
Agreement in any area of the FIELD or any country of
the TERRITORY with respect to which ENTREMED and
CELGENE are cooperating pursuant to Sections 3.2 or
3.3 of this Agreement, CELGENE shall pay to ENTREMED
************** of any non-royalty consideration,
including but not limited to any sublicensing and/or
milestone payments received by CELGENE pursuant to
such sublicense. CELGENE shall also pay to ENTREMED,
as applicable, the following: (i) if CELGENE and
ENTREMED are cooperating in any country(ies)
pursuant to Section 3.2 of this Agreement,
*************of the royalty income paid by
SUBLICENSEES to CELGENE on NET SALES, in such
country(ies), of PRODUCTS; and (ii) if CELGENE and
ENTREMED are cooperating in any country(ies) with
regard to PRODUCTS for use in animals pursuant to
Section 3.3 of this Agreement, **************of the
royalty income paid by SUBLICENSEES to CELGENE on
NET SALES in such country(ies) of such PRODUCTS.
<PAGE>
4.3 Later-Issued VALID CLAIM. In the event that there is no ISSUED
VALID CLAIM of a PATENT RIGHT in a country within the
TERRITORY on the date the twelve (12) year period provided for
in Section 4.1(a) of this Agreement expires, no royalties
shall be owed by CELGENE to ENTREMED under Sections 4.1(b) and
4.2 of this Agreement on PRODUCTS sold by CELGENE or its
AFFILIATES in such country, provided, however, that if a VALID
CLAIM of a PATENT RIGHT thereafter issues in such country,
CELGENE shall pay ENTREMED royalties on the NET SALES in such
country of PRODUCTS covered by an ISSUED VALID CLAIM of the
PATENT RIGHTS that are sold by CELGENE or its AFFILIATES,
according to the royalty rates set forth in Sections 4.1(b)
and 4.2 of this Agreement, and such royalties under this
Section 4.3 shall be payable until the last to expire PATENT
RIGHT containing an ISSUED VALID CLAIM covering the PRODUCTS
sold by CELGENE, its AFFILIATES or SUBLICENSEE in such
country.
4.4 No Multiple Royalties. No multiple royalties shall be payable
because any PRODUCT, its manufacture, use, importation, lease,
or sale is or shall be covered by more than one PATENT RIGHT.
4.5 THIRD PARTY Sales. In any country where sales by a THIRD PARTY
of a PRODUCT(s) for a similar dosage form and/or route of
administration:
(a) are equal to or greater than ************of the
dollar market share for such PRODUCT in such country
("MARKET SHARE"), but less than ************of the
MARKET SHARE, then the royalty payable to ENTREMED
pursuant to Sections 4.1 and 4.3 of this Agreement
shall be reduced by ***********;
(b) are equal to or greater than **************of the
MARKET SHARE, but less than ************of the MARKET
SHARE, then the royalty payable to ENTREMED pursuant
to Sections 4.1 and 4.3 of this Agreement shall be
reduced by**************;
<PAGE>
(c) are equal to or greater than ************of the
MARKET SHARE, but less than ***************of the
MARKET SHARE, then the royalty payable to ENTREMED
pursuant to set Sections 4.1 and 4.3 of this
Agreement shall be reduced by***********; and
(d) are equal to or greater than *************of the
MARKET SHARE, then the royalty payable to ENTREMED
pursuant to Sections 4.1 and 4.3 of this Agreement
shall be reduced by************;
provided that royalties payable to ENTREMED shall never be
reduced below ************of NET SALES in each royalty
bracket. For purposes of this Section 4.5, oral dosage forms
shall include, without limitation, all capsule, caplet,
tablet, and liquid formulations for oral administration.
4.6 Recordkeeping. CELGENE shall keep, and shall cause each of its
AFFILIATES and SUBLICENSEES to keep, full and accurate books
of account containing all particulars relevant to its sales of
PRODUCTS that may be necessary for the purpose of calculating
all royalties payable to ENTREMED. Such books of account shall
be kept at their principal place of business and, with all
necessary supporting data shall, for the three (3) years next
following the end of the calendar year to which each shall
pertain, be open for inspection by an independent certified
public accountant reasonably acceptable to CELGENE, upon
reasonable notice during normal business hours at ENTREMED'S
expense for the sole purpose of verifying royalty statements
or compliance with this Agreement. In the event the inspection
determines that royalties due ENTREMED for any period have
been underpaid by ***********or more, then CELGENE shall pay
for all costs of the inspection. In all cases, CELGENE shall
pay to ENTREMED any underpaid royalties promptly and with
interest at the prime rate available to ENTREMED from its bank
plus**********. All information and data reviewed in the
inspection shall be used only for the purpose of verifying
royalties and shall be treated as CELGENE CONFIDENTIAL
INFORMATION subject to the obligations of this Agreement. No
audit by an agent of ENTREMED shall occur more frequently than
once during
<PAGE>
any twelve (12) month period.
4.7 Quarterly Payments and Reports. In each year the amount of
royalty due shall be calculated quarterly as of the end of
each CALENDAR QUARTER and shall be paid quarterly within the
forty-five (45) days next following such date. Every such
payment shall be supported by the accounting described in
Section 4.8 of this Agreement. All royalties due ENTREMED are
payable in United States dollars. When PRODUCTS are sold for
currency other than United States dollars, the earned
royalties will first be determined in the foreign currency of
the country in which such PRODUCTS were sold and then
converted into equivalent United States funds. The exchange
rate will be that rate quoted in the Wall Street Journal on
the last business day of the CALENDAR QUARTER in which such
sales were made.
4.8 Accounting Reports. With each quarterly payment, CELGENE shall
deliver to ENTREMED a full and accurate accounting to include
at least the following information:
(a) Quantity of PRODUCT subject to royalty sold, by
country, by CELGENE, its AFFILIATES or SUBLICENSEES;
(b) Total receipts for each PRODUCT subject to royalty,
by country and, to the extent used in any royalty
calculations during such quarter, the exchange rate
set forth in Section 4.7 of this Agreement;
(c) Compensation on PRODUCTS received from SUBLICENSEES
pursuant to a sublicense of CELGENE's rights under
this Agreement; and
(c) Total royalties and/or compensation payable to
ENTREMED.
SECTION 5 - CONFIDENTIALITY
<PAGE>
5.1 Confidential Information. During the term of this Agreement,
it is contemplated that each party may disclose to the other,
proprietary and confidential technology, inventions, technical
information, material, reagents, biological materials and the
like which are owned or controlled by the party providing such
information or which that party is obligated to maintain in
confidence and which is designated by the party providing such
information as confidential ("CONFIDENTIAL INFORMATION"). Each
party agrees not to disclose the CONFIDENTIAL INFORMATION and
to maintain the CONFIDENTIAL INFORMATION in strict confidence,
to cause all of its agents, representatives and employees to
maintain the disclosing party's CONFIDENTIAL INFORMATION in
confidence and not to disclose any such CONFIDENTIAL
INFORMATION to a THIRD PARTY without the prior written consent
of the disclosing party, and not to use such CONFIDENTIAL
INFORMATION for any purpose other than as provided under this
Agreement. The secrecy obligations of the parties with respect
to CONFIDENTIAL INFORMATION shall continue for a period ending
ten (10) years from the termination of this Agreement.
5.2 Non-Confidential Information. The obligations of
confidentiality will not apply to information that:
(a) was known to the receiving party or generally known
to the public prior to its disclosure hereunder
through no fault of the disclosing party or any
agent, representative or employee thereof; or
(b) subsequently becomes known to the public by some
means other than a breach of this Agreement,
including publication and/or laying open to
inspection of any patent applications or patents;
(c) is subsequently disclosed to the receiving party by a
THIRD PARTY having
<PAGE>
a lawful right to make such disclosure and who is
not under an obligation of confidentiality to the
disclosing party;
(d) is required by law, rule, regulation or bona fide
legal process to be disclosed, provided that the
disclosing party takes all reasonable stem to
restrict and maintain confidentiality of such
disclosure and provides reasonable notice to the
non-disclosing party; or
(e) is approved for release by the parties.
5.3 Disclosure To THIRD PARTIES. The obligations of Section 5.1
notwithstanding, CELGENE or ENTREMED, as the case may be, may
disclose the CONFIDENTIAL INFORMATION licensed hereunder to
THIRD PARTIES
(a) who need to know the same in order to obtain
regulatory approval for a PRODUCT under this
Agreement, provided that the actions of such THIRD
PARTY are not in conflict with CELGENE's rights under
this Agreement,
(b) who need to know the same in order to work towards
the commercial development of PRODUCT on behalf of
CELGENE, or
(c) for whom the non-disclosing party, ENTREMED or
CELGENE, as the case may be, has given prior written
approval
provided that such THIRD PARTIES are bound by obligations of
confidentiality and non-use at least as stringent as those set
forth herein.
5.4 Disclosure To Sublicensees. CELGENE may disclose ENTREMED's
CONFIDENTIAL INFORMATION to a SUBLICENSEE without ENTREMED's
approval, provided that such SUBLICENSEES are bound by
obligations of confidentiality and non-use at least as
stringent as those set forth herein.
<PAGE>
5.5 Public Statements. Neither CELGENE nor ENTREMED may issue a
public statement, including without limitation a press
release, with regard to this Agreement without the prior
written consent of the other party, which consent shall not be
unreasonably withheld. In accordance with the rules and
regulations promulgated by the Securities and Exchange
Commission, the parties will request that this Agreement be
treated as confidential.
SECTION 6 - ADVERSE MEDICAL EXPERIENCES
6.1 Adverse Medical Experience Reporting. CELGENE shall comply
fully with all applicable medical/adverse experience reporting
requirements in all countries where CELGENE intends to carry
out clinical trials and/or market PRODUCT.
SECTION 7 - PATENTS
7.1 Patent Prosecution.
(a) ENTREMED shall use reasonable efforts to prepare,
file, prosecute and maintain patent applications and
patents directed to PATENT RIGHTS and PRODUCTS
through patent counsel selected by ENTREMED and
reasonably acceptable to CELGENE, who shall consult
with and keep CELGENE advised with respect thereto.
(b) CELGENE shall reimburse ENTREMED for all reasonable
costs and expenses incurred after the EFFECTIVE DATE
for the filing, prosecution and maintenance of PATENT
RIGHTS.
7.2 Cooperation In Prosecution.
(a) With respect to any PATENT RIGHTS, each patent
application, office
<PAGE>
action, response to office action, request for
terminal disclaimer, petition, and request for
reissue or reexamination of any patent issuing from
such application shall be provided to CELGENE
sufficiently prior to the filing of such
application, response, petition, or request to allow
for review and comment by CELGENE. ENTREMED shall
have the right to take any action that, in its
judgement, is necessary to preserve such PATENT
RIGHTS.
(b) Within a reasonable time from the EFFECTIVE DATE,
CELGENE and ENTREMED will discuss each party's patent
portfolio with regard to PRODUCTS, in accordance with
prior obligations of confidentiality owed by each
party to any THIRD PARTY, and will use reasonable
efforts to coordinate their respective patent
portfolio, to the extent possible, so as to maximize
the patent protection for PRODUCTS.
7.3 Infringement and Declaratory Judgment Actions.
(a) Notification. In the event that either party learns
of the infringement of any PATENT RIGHT, or the
filing of a Declaratory Judgement action alleging the
invalidity, unenforceability, or noninfringement of
any PATENT RIGHT ("DJ ACTION"), that party must
promptly notify the other party of the infringement
or DJ ACTION, as the case may be, in writing, and
must provide reasonable evidence of the infringement.
Neither party will notify a THIRD PARTY of the
infringement of any PATENT RIGHT or of the filing of
a DJ ACTION directed to any PATENT RIGHT without
first obtaining consent of the other party, which
consent shall not be unreasonably withheld.
(b) CELGENE's Right To File Infringement Actions. To the
extent ENTREMED has the right to bring a suit or
action to compel the termination
<PAGE>
of infringement of the PATENT RIGHTS, including to
the extent provided in Article 7 of the CMCC
AGREEMENT, ENTREMED hereby grants CELGENE the right
and option, but not the obligation, to bring an
action for infringement or to defend against a DJ
action, at its sole expense, in the name of ENTREMED
and/or in the name of CELGENE, and to join ENTREMED
as a party plaintiff if required. No settlement,
consent judgment or other voluntary final
disposition of a suit that adversely affects PATENT
RIGHTS may be entered into without the consent of
ENTREMED, which consent shall not be unreasonably
withheld.
(c) CELGENE's Right To Defend DJ ACTIONS. In the event
that a DJ ACTION is brought naming CELGENE as a
defendant, CELGENE shall have the right to proceed
with the litigation or settle such action provided,
however, that no settlement, consent judgment or
other voluntary final disposition of a suit that
adversely affects PATENT RIGHTS may be entered into
without the consent of ENTREMED, which consent shall
not be unreasonably withheld.
(d) CELGENE's Recovery. In the event that CELGENE shall
undertake the enforcement and/or defense of the
PATENT RIGHTS by litigation, any recovery of damages
by CELGENE for any such litigation shall be applied
first in satisfaction of any unreimbursed expenses
and legal fees of CELGENE relating to the suit. The
balance remaining from any such recovery shall, after
ENTREMED receives its royalties from lost sales,
belong to CELGENE.
(e) ENTREMED's Right To Litigate. In the event that
CELGENE elects not to pursue an action for
infringement or to defend against a DJ action, as the
case may be, CELGENE shall notify ENTREMED in writing
of such election and ENTREMED shall have the right
and option, but not the
<PAGE>
obligation, at its cost and expense, to initiate
infringement litigation and to retain any recovered
damages.
(f) Cooperation. In any infringement suit either party
may institute to enforce or defend the PATENT RIGHTS
pursuant to this Agreement, the other party hereto
shall, at the request of the party initiating such
suit, cooperate in all respects and, to the extent
possible, have its employees testify when requested
and make available relevant records, papers,
information, samples, specimens, and the like. All
reasonable out-of-pocket costs incurred in connection
with rendering cooperation requested hereunder shall
be paid by the party requesting cooperation.
(g) THIRD PARTY Royalty Reduction. In the event that an
infringement action is brought by a THIRD PARTY
against CELGENE alleging that CELGENE's making,
using, offering to sell, selling, or importing of
PRODUCTS under the PATENT RIGHTS infringes a THIRD
PARTY patent, and results in a judgment or
settlement requiring royalties to be paid by CELGENE
to such THIRD PARTY, the royalties owed by CELGENE
to ENTREMED under Section 4 of this Agreement shall
be reduced by an amount equal to ****************of
the royalties owed to such THIRD PARTY, provided
that the royalties owed to ENTREMED shall not be
reduced under this Section 7.3(f) to less than
************of NET SALES, nor shall any specific
royalty payment be reduced under this Section 7.3(g)
by more than**********.
SECTION 8 - REPRESENTATIONS AND WARRANTIES.
8.1 By Both Parties. Each party hereby represents and warrants
that each has the full right and authority to enter into this
Agreement and that the entry into this Agreement does not
require the consent of a THIRD PARTY whose consent has not
<PAGE>
been obtained.
8.2 By ENTREMED. ENTREMED represents and warrants as follows:
(a) that ENTREMED has not received any notice of
infringement of THIRD PARTY patents or notice of
interfering subject matter; that, without having made
any special investigation, ENTREMED is not aware of
any THIRD PARTY patents or patent applications that
contain any interfering subject matter, or any issued
THIRD PARTY patents that would be infringed by the
making, using, selling, offering for sale, or
importing by CELGENE of PRODUCTS covered by the
ENTREMED EXISTING PATENT RIGHTS or the ENTREMED
EXISTING TECHNOLOGY RIGHTS in any country in the
TERRITORY, or by the exercise by CELGENE of any right
granted to it under this Agreement, aside from those
set forth in Appendix D;
(b) that the PATENT RIGHTS set forth in Appendix A and
the TECHNOLOGY RIGHTS transferred to CELGENE under
this Agreement, constitute the entirety of ENTREMED
EXISTING PATENT RIGHTS and ENTREMED EXISTING
TECHNOLOGY RIGHTS;
(c) that ENTREMED presently has no rights in PRODUCTS,
nor any option in or expectation of any rights in
PRODUCTS, apart from those identified in this
Agreement and set forth in the agreements listed in
Appendix B, and that ENTREMED is not in material
breach or default of any of the agreements set forth
in Appendix B, and that if ENTREMED acquires any such
rights after the EFFECTIVE DATE, the agreements
setting forth those rights, including all licenses
and assignments for ENTREMED DEVELOPED PATENT RIGHTS
and ENTREMED DEVELOPED TECHNOLOGY RIGHTS, shall be
redacted to the extent they do not relate to
CELGENE's rights under this Agreement, and attached
hereto as independent Exhibits and incorporated
herein;
(d) that, with regard to PRODUCTS, ENTREMED has no
applications filed or pending with the FDA as of the
EFFECTIVE DATE, including without
<PAGE>
limitation any Investigational New Drug or Orphan
Drug Status applications, apart from those set forth
in Appendix C;
(e) that ENTREMED will comply with all obligations and
duties with regard to PRODUCTS under the CMCC
AGREEMENT and, unless and until it is assigned to
CELGENE pursuant to Section 2.5 of this Agreement,
the NCI AGREEMENT, including, without limitation, any
notification provisions necessary to maintain in
effect this Agreement or preserve CELGENE's exclusive
or non-exclusive rights under this Agreement,
including without limitation the preservation of
CELGENE's rights hereunder in the event that ENTREMED
shall breach or default on its obligations under the
CMCC AGREEMENT or the NCI AGREEMENT;
(f) that ENTREMED understands and agrees that it has not
retained any rights under the ENTREMED INTELLECTUAL
PROPERTY to PRODUCTS in the TERRITORY, and that the
licenses and assignments granted in Sections 0, 0, 0,
and 0 of this Agreement are exclusive of any
continuing right of ENTREMED, except as otherwise
provided herein; and
(g) that ENTREMED will not collaborate, negotiate, or
deal with THIRD PARTIES with respect to PRODUCTS,
except as expressly provided herein.
8.3 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH HEREIN, ENTREMED MAKES
NO REPRESENTATIONS OR EXTENDS ANY WARRANTIES OF ANY KIND
EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO,
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, NON-INFRINGEMENT OR VALIDITY OF ANY ENTREMED PATENT
OR OTHER INTELLECTUAL PROPERTY RIGHTS.
SECTION 9 - INDEMNIFICATION AND INSURANCE
9.1 By CELGENE. CELGENE will defend, indemnify and hold harmless
ENTREMED, its successors, AFFILIATES and licensors and their
employees,
<PAGE>
agents, officers, trustees, shareholders and directors and
each of them (the "ENTREMED Indemnified Parties") from and
against any and all THIRD PARTY claims, causes of action and
costs (including reasonable attorney's fees) of any nature
made or lawsuits or other proceedings filed or otherwise
instituted against the ENTREMED Indemnified Parties in
connection with any claims, suits or judgments arising out of
any theory of product liability concerning the development,
testing, manufacture, sale or use of any PRODUCT by CELGENE,
its AFFILIATES or its SUBLICENSEES.
9.1.1 CELGENE's indemnification under this Section
9.1 shall not apply to any liability,
damage, loss or expense to the extent that
it is directly attributable to the negligent
activity, reckless misconduct or intentional
misconduct of ENTREMED.
9.1.2 Commencing not later than the date of FIRST
COMMERCIAL SALE of a PRODUCT, CELGENE shall
obtain and carry in full force and effect
product liability insurance against any
claims, judgments, liabilities and expenses
for which it is obligated to indemnify
ENTREMED and others under Section 9.1 of
this Agreement, in such amounts and with
such deductibles as are customary at the
time for companies engaged in a similar
business, and shall provide ENTREMED with
written evidence of such insurance upon
request.
9.2 By ENTREMED. ENTREMED will defend, indemnify and hold harmless
CELGENE, its successors, AFFILIATES and licensors and their
employees, agents, officers, trustees, shareholders and
directors and each of them (the "CELGENE Indemnified Parties")
from and against any and all THIRD PARTY claims, causes of
action and costs (including reasonable attorney's fees) of any
nature made or lawsuits or other proceedings filed or
otherwise instituted against the CELGENE
<PAGE>
Indemnified Parties in connection with any claims, suits or
judgments arising out of any theory of product liability
concerning the development, testing, manufacture, sale or use
of any PRODUCT by ENTREMED, its AFFILIATES or its SUBLICENSEES
prior to the EFFECTIVE DATE.
9.2.1 ENTREMED's represents and warrants that it
presently carries, in full force and effect,
and will continue to carry, product
liability insurance against any claims,
judgments, liabilities and expenses incurred
in connection with the use of THALIDOMIDE in
clinical trials by or on behalf of ENTREMED,
and shall provide CELGENE with written
evidence of such insurance upon request.
9.3 Conditions to Indemnification. A person or entity that intends
to claim indemnification under this Section 9 (the
"Indemnitee") shall promptly notify the party from whom
indemnification is sought (the "Indemnitor"), of any loss,
claim, damage, liability or action in respect of which the
Indemnitee intends to claim such indemnification, and the
Indemnitor shall assume the defense thereof with counsel
mutually satisfactory to the Indemnitee whether or not such
claim is rightfully brought; provided, however, that an
Indemnitee shall have the right to retain its own counsel,
with the fees and expenses to be paid by the Indemnitor if
Indemnitor does not assume the defense, or if representation
of such Indemnitee by the counsel retained by the Indemnitor
would be inappropriate due to actual or potential differing
interests between such Indemnitee and any other person
represented by such counsel in such proceedings. The failure
to deliver notice to the Indemnitor within a reasonable time
after the commencement of any such action, only if prejudicial
to its ability to defend such action, shall relieve such
Indemnitor of any liability to the Indemnitee under this
Section 9, but the omission so to deliver notice to the
Indemnitor will not relieve it of any liability that it may
have to any Indemnitee otherwise than under this Section 9.
The Indemnitee under this Section 9, its employees and agents,
shall cooperate fully with the Indemnitor and its legal
representatives in the investigations of any action, claim or
liability covered by this
<PAGE>
indemnification.
SECTION 10 - ASSIGNMENT AND SUCCESSORS
10.1 By Either Party. This Agreement shall not be assignable by
either party without the written consent of the other party,
except that either party may assign this Agreement to an
AFFILIATE, successor in interest or transferee of all or
substantially all of the portion of the business to which this
Agreement relates without the consent of the other party.
10.2 By CELGENE. If CELGENE assigns or licenses its rights under
this Agreement to a SUBLICENSEE or an AFFILIATE, such
SUBLICENSEE or AFFILIATE shall be bound by the terms and
conditions of this Agreement. CELGENE shall advise ENTREMED of
any such assignment or license and provide ENTREMED with a
copy of any sublicense within thirty (30) days of execution of
such sublicense.
10.3 CELGENE As Guarantor. CELGENE shall guarantee and be
responsible for the payment of all royalties due and the
making of reports under this Agreement by reason of the
development and sales of any PRODUCTS by CELGENE, its
AFFILIATES and SUBLICENSEES and their compliance with all
applicable terms of this Agreement. Performance or
satisfaction of any obligations of CELGENE under this
Agreement by any of its AFFILIATES or SUBLICENSEES shall be
deemed performance or satisfaction of such obligation by
CELGENE.
10.4 Binding Effect. This agreement shall be binding upon and inure
to the benefit of said successors in interest and assignees to
the parties. Any such successor or assignee of a party's
interest shall expressly assume in writing the performance of
all the terms and conditions of this Agreement to be performed
by said party and such Assignment shall not relieve the
Assignor of any of its obligations under this Agreement.
<PAGE>
SECTION 11 - FORCE MAJEURE
11.1 Neither party shall be liable to the other party for damages
or loss occasioned by failure of performance by the defaulting
party if the failure is occasioned by war, fire, explosion,
flood, strike or lockout, embargo, or any similar cause beyond
the control of the defaulting party, provided that the party
claiming this exception has exerted all reasonable efforts to
avoid or remedy such event and provided such event does not
extend for more than six (6) months.
SECTION 12 - TERMINATION
12.1 Term. Unless earlier terminated as hereinafter provided, this
Agreement shall remain in full force and effect until
CELGENE's obligations to pay royalties or other compensation
under Section 4 of this Agreement, either directly or pursuant
to a sublicense, terminate.
12.2 By Reason Of FDA Action. If the FDA withdraws or recalls
THALIDOMIDE from the market permanently, or in any other way
revokes or terminates CELGENE's regulatory approval to market
and sell THALIDOMIDE and/or PRODUCTS, CELGENE shall promptly
notify ENTREMED in writing, and this Agreement and all of
CELGENE's and ENTREMED's rights and obligations hereunder
shall terminate upon receipt by ENTREMED of such notice.
12.3 Termination Of Royalty Obligations. Upon termination of
CELGENE's obligation to pay royalties and other compensation
hereunder with respect to a specific country and specific
PRODUCT as to which CELGENE's license is then in effect, the
license granted to CELGENE with respect to such country and
such PRODUCT pursuant to Section 2 shall be deemed to be fully
paid and CELGENE shall thereafter have a royalty free,
exclusive right to use the PATENT RIGHTS to make,
<PAGE>
have made, use, offer to sell, sell and import such PRODUCT
in such country.
12.4 Breach.
(a) By Either Party. This Agreement shall be terminable
upon the material breach or default of either party.
In the event of a material breach or default by a
party ("Defaulting Party"), the other party
("Non-Defaulting Party") shall give the Defaulting
Party written notice of the default. The Defaulting
Party will then have sixty (60) days to cure the
breach. If cure has not been affected within said
sixty (60) days, the Non-Defaulting Party shall have
the right to terminate this Agreement.
(b)
By CELGENE.
(i) Payments. If and only if CELGENE materially
breaches this Agreement by failure to pay
royalties and/or sublicensing or milestone
payments due under Section 4 of this
Agreement, and fails to cure such material
breach within sixty (60) days of receiving
written notice thereof pursuant to Section
12.4(a) of this Agreement then:
a) CELGENE's rights under this
Agreement to ENTREMED INTELLECTUAL
PROPERTY shall terminate; and
b) CELGENE shall grant to ENTREMED, to
the extent not prohibited by the
United States Government or by prior
contractual obligations to any THIRD
PARTY, an exclusive, worldwide,
royalty-free license, with the right
to sublicense, under CELGENE
DEVELOPED INTELLECTUAL PROPERTY to
make, use, offer to sell, sell, and
import PRODUCTS in the TERRITORY.
(ii) Diligence. If and only if ENTREMED exercises
its right and option to terminate the
license granted to CELGENE in the entire
TERRITORY, pursuant to Section 3.1(f) of
this Agreement, or
<PAGE>
ENTREMED exercises its right and option to
terminate the license granted to CELGENE in
Europe, Canada, or the PACIFIC RIM, pursuant
to Section 3.2(c)(i) of this Agreement,
then, either in the entire TERRITORY or in
the region in which such termination has
occurred, i.e., Europe, Canada, or the
PACIFIC RIM, as applicable:
a) CELGENE's rights under this
Agreement to ENTREMED INTELLECTUAL
PROPERTY shall terminate; and
b) CELGENE shall grant to ENTREMED, to
the extent not prohibited by the
United States Government or by prior
contractual obligations to any THIRD
PARTY, an exclusive, worldwide,
royalty-free license, with the right
to sublicense, under CELGENE
DEVELOPED INTELLECTUAL PROPERTY to
make, use, offer to sell, sell, and
import PRODUCTS.
The grant of rights by CELGENE to ENTREMED under this
Section 12.4 expressly excludes rights in any CELGENE
EXISTING INTELLECTUAL PROPERTY.
(c) Termination under this Section 12.4 will be effective
upon the date specified in the written notice. All
termination rights shall be in addition to and not in
substitution for any other remedies that may be
available to the Non-Defaulting Party. Termination
pursuant to this Section 12.4 shall not relieve the
Defaulting Party from liability and damages to the
Non-Defaulting Party for default. Waiver by either
party of a single default or a succession of defaults
shall not deprive such party of any right to
terminate or convert this Agreement arising by reason
of any subsequent default.
12.5 Insolvency. Either party to this Agreement may terminate this
Agreement upon receipt of notice that the other party has
become insolvent or has suspended business in all material
respects hereof, or has consented to an involuntary petition
purporting
<PAGE>
to be pursuant to any reorganization or insolvency law of any
jurisdiction, or has made an assignment for the benefit of
creditors or has applied for or consented to the appointment
of a receiver or trustee for a substantial part of its
property, by giving written notice to the other party, and
termination of this Agreement will be effective upon receipt
of such notice.
12.6 Work-In-Progress. Upon termination of this Agreement, CELGENE
shall be entitled to, but shall not be obligated to finish any
work-in-progress at the time of termination and sell the same
as well as all completed inventory of PRODUCTS which remains
on hand as of the date of the termination, so long as CELGENE
pays to ENTREMED the royalties applicable to said subsequent
sales in accordance with the same terms and conditions as set
forth in this Agreement.
12.7 Survival. The obligations of Sections 5 and 9, as well as
Sections 12.6, 12.7, 12.8, and 13.3, shall survive any
termination of this Agreement.
12.8 Reversion of Rights. Upon termination of this Agreement or of
the rights and licenses granted to CELGENE in any country of
the TERRITORY, CELGENE agrees not to use the TECHNOLOGY RIGHTS
or PATENT RIGHTS or information or technology derived
therefrom for the manufacture, use or sale of PRODUCTS in any
country other than those countries in which CELGENE retains a
license under this Agreement. In addition, all rights to the
TECHNOLOGY RIGHTS and PATENT RIGHTS in such country shall
revert to ENTREMED and may be used by ENTREMED without
restriction in any country other than those countries in which
CELGENE retains a license under this Agreement.
<PAGE>
SECTION 13 - GENERAL PROVISIONS
13.1 Relationship of Parties. The relationship between ENTREMED and
CELGENE is that of independent contractors. ENTREMED and
CELGENE are not joint venturers, partners, principal and
agent, master and servant, employer or employee, and have no
relationship other than as independent contracting parties.
ENTREMED shall have no power to bind or obligate CELGENE in
any manner. Likewise, CELGENE shall have no power to bind or
obligate ENTREMED in any manner.
13.2 Entire Understanding. This Agreement sets forth the entire
agreement and understanding between the parties as to the
subject matter thereof and supersedes all prior agreements in
this respect. There shall be no amendments or modifications to
these Agreements, except by a written document which is signed
by both parties.
13.3 Governing Law. This Agreement shall be construed and enforced
in accordance with the laws of the State of Delaware,
U.S.A. without reference to its choice of law principles.
13.4 Headings. The headings in this Agreement have been inserted
for the convenience of reference only and are not intended to
limit or expand on the meaning of the language contained in
the particular or section or paragraph.
13.5 No Waiver. Any delay in enforcing a party's rights under this
Agreement or any waiver as to a particular default or other
matter shall not constitute a waiver of a party's right to the
future enforcement of its rights under this Agreement,
excepting only as to an expressed written and signed waiver as
to a particular matter for a particular period of time.
13.6 Export Controls. In conducting any activities under this
Agreement or in connection with the manufacture use or sale of
PRODUCT, CELGENE shall comply with all
<PAGE>
applicable laws and regulations including, but not limited to,
all Export Administration Regulations of the United States
Department of Commerce.
13.7 Notices. Any notices given pursuant to this Agreement shall be
in writing and shall be deemed delivered upon the earlier of
(i) when received at the address set forth below, or (ii)
three (3) business days after mailed by certified or
registered mail postage prepaid and properly addressed, with
return receipt requested, or (iii) when sent, if sent by
facsimile, as confirmed by certified or registered mail.
Notices shall be delivered to the respective parties as
indicated below:
If To ENTREMED EntreMed, Inc.
9610 Medical Center Drive
Rockville, MD 20850
Attn: CEO
Fax: (301) 217-9594
If To CELGENE: Celgene Corporation
6 Powder Horn Drive
Warren, NJ 07059
Attn: President
Fax: (732) 805-3931
13.8 Original Counterparts. This Agreement may be executed in any
number of separate counterpart, each of which shall be deemed
to be an original, but which together shall constitute one and
the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date set forth above.
ENTREMED, INC. CELGENE CORPORATION
By:____________________________ By:____________________________
Name:__________________________ Name:__________________________
Title:_________________________ Title:_________________________
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.
ENTREMED, INC. CELGENE CORPORATION
By: /s/ Edward R. Gubish By: /s/ John W. Jackson
------------------------------- -------------------------------
Name: Edward R. Gubish Name: John W. Jackson
---------------------------- ----------------------------
Title: Sr. V.P. R & D Title: Chairman & CEO
--------------------------- ----------------------------
<PAGE>
APPENDIX A
United States Patent No. 5,629,327
United States Patent No. 5,593,990
United States Patent Application Serial No. 08/025,046
United States Patent Application Serial No. 08/168,817
United States Patent Application Serial No. 08/371,987
United States Patent Application Serial No. 08/468,792
United States Patent Application Serial No. 08/918,610
United States Patent Application Serial No. 08/955,638
United States Patent Provisional Application Serial No. 60/028,708
United States Patent Application Serial No. 08/963,058
United States Patent Application Serial No. 09/107,578
United States Patent Application Serial No. 09/126,542
<PAGE>
APPENDIX B
1. That certain License Agreement entered into by and between ENTREMED and
Children's Medical Center Corporation ("CMCC"), dated May 26, 1994, as
amended to the date hereof, attached as Exhibit A to this Agreement.
2. That certain Agreement by and between the Division of Cancer Treatment
at the National Cancer Institute ("NCI") and ENTREMED, dated November
16, 1994, and executed on behalf of ENTREMED on November 23, 1994, and
on behalf of NCI on November 18, 1994, attached as Exhibit C to this
Agreement.
<PAGE>
APPENDIX C
Orphan Drug Designation Application (ODA) 97-1011 Primary Brain Malignancies
Orphan Drug Designation Application (ODA) 98-1149 Kaposis Sarcoma
Orphan Drug Designation Application (ODA) 98-1143 Prostate Cancer
Investigational New Drug Application 46,591 Ophthalmology
Investigational New Drug Application 55,966 Oncology
<PAGE>
APPENDIX D
United States Patent No. 5,605,684 to Piacquadio
United States Patent No. 5,443,824 to Piacquadio
United States Patent No. 5,731,325 to Andrulis, Jr. et al.
United States Patent No. 5,654,312 to Andrulis, Jr. et al.
United States Patent No. 5,643,915 to Andrulis, Jr. et al.
United States Patent No. 5,434,170 to Andrulis, Jr.
<PAGE>
EXHIBIT A
CMCC AGREEMENT
<PAGE>
EXHIBIT B
NCI AGREEMENT
<PAGE>
EXHIBIT C
LETTER TO FDA INDICATING TRANSFER OF
RIGHTS IN INVESTIGATIONAL NEW DRUG
AND ORPHAN DRUG APPLICATIONS TO CELGENE
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Celgene Corporation:
We consent to incorporation by reference in the Registration Statements (no.
333-70083, no. 33-21462, no. 33-38296, and no. 33-62510) on Form S-8 and no.
333-52963 on Form S-3 of Celgene Corporation of our report dated February 11,
1999, relating to the consolidated balance sheets of Celgene Corporation and
subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 1998, which report
appears in the December 31, 1998 Annual report on Form 10-K of Celgene
Corporation.
/s/ KPMG LLP
Short Hills, New Jersey
March 31, 1999
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