FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-94915
PROSPECTUS
3,000,000 Shares
[GRAPHIC OMITTED]
CELGENE CORPORATION
Common Stock
Celgene Corporation is selling 2,484,000 shares of common stock in this
offering and the selling stockholders are selling 516,000 shares.
Our common stock is traded on the Nasdaq National Market under the symbol
"CELG." On February 10, 2000, the reported last sale price of our common stock
was $103 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
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- ---------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO THE
PUBLIC DISCOUNTS CELGENE SELLING STOCKHOLDERS
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Per Share $ 101.00 $ 6.06 $ 94.94 $ 94.94
- ---------------------------------------------------------------------------------------------------------
Total $303,000,000 $18,180,000 $235,830,960 $48,989,040
- ---------------------------------------------------------------------------------------------------------
</TABLE>
We have granted the underwriters the right to purchase up to an additional
450,000 shares of our common stock to cover over-allotments.
Joint Lead Managers
J.P. MORGAN & CO. PRUDENTIAL VECTOR HEALTHCARE
A UNIT OF PRUDENTIAL SECURITIES
U.S. BANCORP PIPER JAFFRAY
February 10, 2000
<PAGE>
[BAR GRAPH INDICATING THE PRECLINICAL AND CLINICAL STATUS OF CELGENE
CORPORATION'S CANCER, IMMUNOLOGY AND CHIRAL CHEMISTRY PROGRAMS.]
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
TABLE OF CONTENTS
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Prospectus Summary ................................. 2
Risk Factors ....................................... 8
Forward-Looking Statements ......................... 13
Use of Proceeds .................................... 14
Price Range of Common Stock ........................ 14
Dividend Policy .................................... 14
Capitalization ..................................... 15
Selected Consolidated Financial Data ............... 16
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ...................................... 17
</TABLE>
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Business ........................................... 21
Management ......................................... 34
Selling Stockholders ............................... 37
Description of Capital Stock ....................... 38
Shares Eligible for Future Sale .................... 40
Underwriting ....................................... 41
Legal Matters ...................................... 43
Experts ............................................ 43
Where You Can Find More Information ................ 43
Index to Consolidated Financial Statements ......... F-1
</TABLE>
---------------
We own or have the right to various trademarks, service marks and trade names
used in our business. These include THALOMID(Reg. TM) (thalidomide),
S.T.E.P.S.(TM), IMiDs(TM), SelCIDs(TM), ATTENADE(TM) and Celgro(TM). This
prospectus also includes trademarks, service marks and trade names owned by
other companies.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before deciding to invest in our common stock. We urge you to read this entire
prospectus carefully, including the information under "Risk Factors," the
consolidated financial statements and the related notes to those statements.
CELGENE CORPORATION
We are an independent biopharmaceutical company engaged in the discovery,
development and commercialization of novel human pharmaceuticals for the
treatment of cancer and immunological diseases. Our primary therapeutic focus is
on the development of orally administered, small molecule pharmaceuticals that
regulate tumor necrosis factor alpha, or TNF(alpha), and are anti-angiogenic.
TNF(alpha) has been linked to the cause and symptoms of many chronic
inflammatory and immunological diseases. Anti-angiogenic drugs inhibit the
growth of undesirable blood vessels, including those that promote tumor growth.
Our lead product, THALOMID (thalidomide), was approved for sale in the United
States by the U.S. Food and Drug Administration, or FDA, on July 16, 1998.
THALOMID is approved for the treatment of erythema nodosum leprosum, or ENL, an
inflammatory complication of leprosy. During the first nine months of 1999, net
sales of THALOMID were $15.1 million, primarily for cancer, or oncology,
indications. Our 60 person sales and commercialization group sells this product
in the United States. Our regulatory and clinical strategy is to obtain
approvals for THALOMID for additional cancer and immunological disease
indications. THALOMID is currently being evaluated in over 100 clinical trials
for the treatment of certain blood and solid tumor cancers as well as
immunological disorders such as Crohn's disease. Several of these trials are
supported by the National Cancer Institute, or the NCI. Working with the FDA,
we have developed a novel comprehensive education and distribution program, the
"System for Thalidomide Education and Prescribing Safety," or S.T.E.P.S., that
is designed to support the safe and appropriate use of THALOMID.
Our cancer and immunology pharmaceutical pipeline is highlighted by two classes
of novel and proprietary oral therapeutic agents, IMiDs, or ImmunoModulatory
Drugs, and SelCIDs, or Selective Cytokine Inhibitory Drugs. Both classes are
being developed for the treatment of cancer, chronic inflammatory diseases, such
as inflammatory bowel disease and rheumatoid arthritis, and other diseases of
the immune system. Our IMiDs are thalidomide analogues that are designed to
modulate TNF(alpha) and inhibit angiogenesis without causing birth defects or
sedation. We have completed a Phase I safety trial for each of our two lead
IMiDs. Our SelCIDs have been found in research to be Phosphodiesterase type 4
inhibitors, or PDE 4 inhibitors. Our SelCIDs have not, to date, shown any of the
undesirable side effects, such as nausea or vomiting, often associated with PDE
4 inhibitors. Our lead SelCID was found to be well tolerated and did not cause
nausea or vomiting in two Phase I clinical trials and is currently in a Phase II
pilot trial to assess its potential for the treatment of Crohn's disease. We own
patents that cover these compounds and their therapeutic applications.
We also have a chiral chemistry program in which we develop chemically pure
versions of existing compounds. We recently announced the results of two Phase
III pivotal efficacy trials of ATTENADE for the treatment of Attention Deficit
Disorder, or ADD, and Attention Deficit Hyperactivity Disorder, or ADHD.
ATTENADE is a chirally pure version of dl-methylphenidate. dl-methylphenidate
is a generic drug that is currently sold under the trade name Ritalin. In these
trials, ATTENADE showed a statistically significant benefit in controlling
symptoms of ADD and ADHD and demonstrated a statistically significant longer
duration of behavior control versus dl-methylphenidate. We expect to file a New
Drug Application, or NDA, for ATTENADE with the FDA in the second half of 2000.
We hold six U.S. patents covering use and formulations of and manufacturing
processes for ATTENADE. Total U.S. sales in 1998 of drugs used to treat the
symptoms of ADD and ADHD were approximately $500 million.
We own or control exclusive worldwide development and marketing rights for all
of our current products and products under development, except for rights in
Canada with respect to ATTENADE. Our strategy is to sell and market products
that we develop for cancer and immunological disease indications with
accessible patient populations. In the United States, we plan to implement this
strategy through our sales and commercialization group, which we expect to
2
<PAGE>
continue to expand. We anticipate selectively partnering with larger
pharmaceutical companies with respect to products we may develop for
indications with large patient populations and for overseas markets. We may
also partner to further develop and commercialize ATTENADE. These partnering
arrangements are likely to include milestone payments, reimbursement of
research and development expenses and royalty arrangements.
RECENT DEVELOPMENTS
In the fourth quarter of 1999, clinical trial results for THALOMID were
featured at major medical meetings and in prestigious peer review journals.
These results validated the potential use of THALOMID in the treatment of
multiple myeloma and its potential use in the treatment of a broad range of
cancer and immunological diseases. Multiple myeloma is a malignant cancer of
plasma cells of the bone marrow. In addition, we achieved a significant
milestone in our clinical development program during this period. The
developments reported below provide no assurance of success in later phases of
the clinical development or regulatory processes necessary for approval of our
drugs.
o At the November 1999 Chemotherapy Foundation Symposium in New York, oncology
teams from the University College London, NCI, New York University Medical
Center, the University of Arkansas Cancer Research Center and Saint Vincents
Medical Center in New York presented positive data from five studies on the
use of THALOMID. These studies used THALOMID, both in combination with
various chemotherapeutic agents and as stand-alone therapy, in a number of
solid tumor and blood cancers, including prostate cancer, brain cancer,
kidney cancer and multiple myeloma.
o Clinical research published during November 1999 in The New England Journal
of Medicine reported the results of a study on the use of THALOMID in
multiple myeloma patients who had relapsed after high-dose chemotherapy. The
Phase II trial, conducted at the University of Arkansas Cancer Research
Center, found that 32% of patients had a partial response and 10% of
patients had complete or nearly complete remission. An editorial authored by
Noopur Raje, M.D. and Kenneth Anderson, M.D., both of the Dana-Farber Cancer
Institute, accompanied the article.
o At the November 1999 American College of Rheumatology meeting, data were
presented from small, open label studies of thalidomide in the treatment of
three immunological diseases: sclerodoma, sarcoidosis and spondylarthopathy.
Each of the three studies presented positive clinical results.
o A total of 26 studies were presented or published at the 41st meeting of the
American Society of Hematology, or ASH, in December 1999. These studies
provided new data and expanded upon previously published results on the use
of THALOMID in treating advanced and refractory multiple myeloma. The
studies included the use of thalidomide as a single chemotherapeutic agent
and in combination with other chemotherapeutic agents. Studies were also
presented on the use of THALOMID to treat the bone marrow disorder
myelodysplastic syndrome, or MDS. In a preliminary report, researchers at
Rush Cancer Institute in Chicago observed improvements in 50% of 20
evaluable patients, with three long-standing, transfusion dependent patients
able to discontinue transfusions.
o We have completed a Phase I safety trial for two of our IMiDs. These were
placebo controlled, double blind, escalating single dose trials carried out
in healthy human volunteers. Results of these trials will be announced
during the first quarter of 2000.
3
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RECENT OPERATING RESULTS
On January 27, 2000, we announced our operating results for the three months
and year ended December 31, 1999. Total revenues for the three months ended
December 31, 1999 were $9.4 million, consisting of product sales of THALOMID of
$9.0 million and $425,000 of revenues from research contracts. The $9.0 million
of THALOMID sales for the three months ended December 31, 1999 represents a 43%
increase over the $6.3 million of THALOMID sales for the three months ended
September 30, 1999. Research and development expenses for the three months
ended December 31, 1999 increased to $5.2 million, primarily due to increased
clinical trial costs for ATTENADE. Selling, general and administrative expenses
increased to $8.4 million for the three months ended December 31, 1999,
primarily due to the expansion of our sales and commercialization organization
and increased warehousing and distribution expenses. The net loss applicable to
common stockholders for the three months ended December 31, 1999 was $2.8
million, or $0.16 per share. The net loss applicable to common stockholders for
the three months and year ended December 31, 1999 includes a tax benefit of
$3.0 million from the sale of a portion of our New Jersey tax loss
carryforwards.
4
<PAGE>
CELGENE CORPORATION
CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
---------------------------------
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1998 1999 1998 1999
------------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
In thousands, except per share data
STATEMENTS OF OPERATIONS DATA:
Revenues:
Product sales ....................................................... $ 2,235 $ 8,988 $ 3,266 $ 24,052
Research contracts .................................................. 430 425 535 2,158
------- -------- --------- ---------
Total Revenues .................................................... 2,665 9,413 3,801 26,210
Expenses:
Cost of goods sold .................................................. 223 906 282 2,983
Research and development ............................................ 5,804 5,280 19,772 19,646
Selling, general and administrative ................................. 5,011 8,389 16,219 26,236
------- -------- --------- ---------
Total expenses .................................................... 11,038 14,575 36,273 48,865
------- -------- --------- ---------
Operating loss ....................................................... (8,373) (5,162) (32,472) (22,655)
Other--income (expense), net ......................................... (2) (701) 449 (2,144)
------- -------- --------- ---------
Loss before tax benefit .............................................. (8,375) (5,863) (32,023) (24,799)
Tax benefit .......................................................... -- 3,018 -- 3,018
--------- -------- --------- ---------
Loss from continuing operations ...................................... (8,375) (2,845) (32,023) (21,781)
Gain from discontinued operations, net ............................... -- -- 6,955 --
Accretion of premium payable on preferred stock and warrants ......... -- -- 25 --
--------- -------- --------- ---------
Net loss applicable to common stockholders ........................... $(8,375) $ (2,845) $ (25,093) $ (21,781)
========= ======== ========= =========
Per share--basic and diluted:
Loss from continuing operations, net ................................ $ (0.51) $ (0.16) $ (1.98) $ (1.28)
Net loss applicable to common stockholders .......................... $ (0.51) $ (0.16) $ (1.55) $ (1.28)
========= ======== ========= =========
Weighted average number of shares of common stock
outstanding ......................................................... 16,449 17,334 16,160 17,012
</TABLE>
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DECEMBER 31,
---------------------------
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
In thousands
BALANCE SHEET DATA:
Cash and cash equivalents and marketable securities available for sale $ 5,124 $ 19,527
Total assets .......................................................... 11,928 32,334
Long term convertible notes ........................................... 8,349 38,495
Accumulated deficit ................................................... (144,613) (166,394)
Total stockholders' deficit ........................................... (3,733) (15,709)
</TABLE>
Celgene Corporation was incorporated in Delaware in 1986. Our principal
executive offices are located at 7 Powder Horn Drive, Warren, New Jersey 07059;
our telephone number is (732) 271-1001.
5
<PAGE>
THE OFFERING
The following information is based on 17,703,646 shares of common stock
outstanding as of December 31, 1999. This number excludes 4,780,624 shares of
common stock issuable upon the exercise of our outstanding stock options and
warrants and conversion of our convertible notes, other than the conversion by
the selling stockholders immediately prior to this offering of a portion of our
9.0% convertible notes issued in January 1999. This number also assumes no
exercise of the underwriters' over-allotment option.
<TABLE>
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COMMON STOCK OFFERED BY CELGENE .................. 2,484,000 shares
COMMON STOCK OFFERED BY THE SELLING
STOCKHOLDERS .................................... 516,000 shares
COMMON STOCK OUTSTANDING AFTER THIS OFFERING ..... 20,703,646 shares
OVER-ALLOTMENT OPTION ............................ 450,000 shares
USE OF PROCEEDS .................................. We intend to use the net proceeds we receive from this
offering for:
o the further commercialization and clinical development
of THALOMID, including the expansion of our sales and
commercialization organization;
o the further development of our oncology and immunology
programs, including our IMiD and SelCID therapeutic agents;
o the further development of our chiral products, including
ATTENADE; and
o general corporate purposes.
We will not receive any of the proceeds from the sale of
shares of our common stock by the selling stockholders.
DIVIDEND POLICY .................................. We have never declared or paid any cash dividends on our
common stock. We currently intend to retain any future
earnings for funding growth, and, therefore, do not anticipate
that we will pay any cash dividends on our common stock in
the foreseeable future.
NASDAQ NATIONAL MARKET SYMBOL .................... CELG
</TABLE>
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SUMMARY CONSOLIDATED FINANCIAL DATA
The as adjusted balance sheet data below is adjusted to reflect the sale of
2,484,000 shares of our common stock offered by us and the receipt by us of the
net proceeds therefrom at a public offering price of $101 per share and after
deduction of the underwriting discounts and offering expenses payable by us and
the conversion of a portion of our $15.0 million 9.0% convertible notes issued
in January 1999 held by the selling stockholders into 516,000 shares of our
common stock.
<TABLE>
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YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
In thousands, except share data
STATEMENTS OF OPERATIONS DATA:
Total revenues .............................. $ 98 $ 472 $ 882 $ 1,122 $ 3,801
Total expenses .............................. 6,396 8,982 18,924 26,526 36,273
---------- ---------- ---------- ---------- ----------
Operating loss .............................. (6,298) (8,510) (18,042) (25,404) (32,472)
Other income (expense), net ................. 587 143 984 384 449
---------- ---------- ---------- ---------- ----------
Loss from continuing operations ............. (5,711) (8,367) (17,058) (25,020) (32,023)
Gain (loss) from discontinued operations..... (4,502) (2,150) (761) (427) 6,955
---------- ---------- ---------- ---------- ----------
Net loss .................................... (10,213) (10,517) (17,819) (25,447) (25,068)
Accretion of premium payable on
preferred stock and warrants ............... -- -- 1,013 521 25
Deemed dividend for preferred stock
conversion discount ........................ -- -- 2,778 953 --
---------- ---------- ---------- ---------- ----------
Net loss applicable to common
stockholders ............................... $ (10,213) $ (10,517) $ (21,610) $ (26,921) $ (25,093)
========== ========== ========== ========== ==========
Per share -- basic and diluted:
Net loss applicable to common
stockholders .............................. $ (1.30) $ (1.30) $ (2.29) $ (2.20) $ (1.55)
========== ========== ========== ========== ==========
Weighted average number of shares of
common stock outstanding ................... 7,853 8,073 9,450 12,215 16,160
<CAPTION>
----------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1999
-------------- --------------
(UNAUDITED)
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In thousands, except share data
STATEMENTS OF OPERATIONS DATA:
Total revenues .............................. $ 1,136 $ 16,796
Total expenses .............................. 25,235 34,289
---------- ----------
Operating loss .............................. (24,099) (17,493)
Other income (expense), net ................. 452 (1,443)
---------- ----------
Loss from continuing operations ............. (23,647) (18,936)
Gain (loss) from discontinued operations..... 6,955 --
---------- ----------
Net loss .................................... (16,692) (18,936)
Accretion of premium payable on
preferred stock and warrants ............... 25 --
Deemed dividend for preferred stock
conversion discount ........................ -- --
---------- ----------
Net loss applicable to common
stockholders ............................... $ (16,717) $ (18,936)
========== ==========
Per share -- basic and diluted:
Net loss applicable to common
stockholders .............................. $ (1.04) $ (1.12)
========== ==========
Weighted average number of shares of
common stock outstanding ................... 16,062 16,903
</TABLE>
<TABLE>
<CAPTION>
----------------
SEPTEMBER 30, 1999
----------------------------
ACTUAL AS ADJUSTED
------------- ------------
(UNAUDITED)
<S> <C> <C>
In thousands
BALANCE SHEET DATA:
Cash and cash equivalents and marketable securities available for sale $ 18,624 $ 253,963
Total assets .......................................................... 27,089 262,079
Long term convertible notes ........................................... 38,458 29,171
Accumulated deficit ................................................... (163,549) (163,549)
Total stockholders' equity (deficit) .................................. (18,496) 225,851
</TABLE>
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RISK FACTORS
You should carefully consider the following risk factors, as well as the other
information contained in this prospectus or incorporated by reference in this
prospectus, before purchasing any of our common stock.
RISKS TO CELGENE
IF WE ARE UNSUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR PRODUCTS, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED.
Many of our products and processes are in the early or mid-stages of
development and will require the commitment of substantial resources, extensive
research, development, preclinical testing, clinical trials, manufacturing
scale-up and regulatory approval prior to being ready for sale. We have not yet
sold any of our products other than THALOMID. All of our other products will
require further development, clinical testing and regulatory approvals, and
there can be no assurance that commercially viable products will result from
these efforts. If any of our products, even if developed and approved, cannot
be successfully commercialized, our business, financial condition and results
of operations could be materially adversely affected.
DURING THE NEXT SEVERAL YEARS, WE WILL BE VERY DEPENDENT ON THE COMMERCIAL
SUCCESS OF THALOMID.
At our present level of operations, we may not be able to attain profitability
if physicians prescribe THALOMID only for those who are diagnosed with ENL.
Under current FDA regulations, we are limited in our ability to promote
THALOMID outside this approved use. The market for the use of THALOMID in
patients suffering from ENL is relatively small. We have initiated clinical
studies to examine whether or not THALOMID is effective and safe when used to
treat disorders other than ENL, but we do not know whether these studies will
in fact demonstrate safety and efficacy, or if they do, whether we will succeed
in receiving regulatory approval to market THALOMID for additional indications.
If the results of these studies are negative, or if adverse experiences are
reported in these clinical studies or otherwise in connection with the use of
THALOMID by patients, this could undermine physician and patient comfort with
the product, could limit the commercial success of the product and could even
impact the acceptance of THALOMID in the ENL market. FDA regulations restrict
our ability to communicate the results of additional clinical studies to
patients and physicians without first obtaining approval from the FDA to expand
the authorized uses for this product.
IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED.
There can be no assurance that those of our products that receive regulatory
approval, including THALOMID, or those products for which no regulatory
approval is required, will achieve market acceptance. A number of factors
render the degree of market acceptance of our products uncertain, including the
extent to which we can demonstrate the products' efficacy, safety and
advantages, if any, over competing products, as well as the reimbursement
policies of third party payors, such as government and private insurance plans.
Failure of our products to achieve market acceptance would have a material
adverse effect on our business, financial condition and results of operations.
WE FACE A RISK OF PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
INSURANCE.
We may be subject to product liability or other claims based on allegations
that the use of our technology or products has resulted in adverse effects,
whether by participants in our clinical trials or by patients using our
products. Thalidomide, when used by pregnant women, has resulted in serious
birth defects. Therefore, necessary and strict precautions must be taken by
physicians prescribing the drug to women with childbearing potential, 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 we have product liability insurance that we believe is appropriate,
there can be no assurance that we will be able to obtain additional coverage if
required, or that such coverage will be adequate to protect us in the event
claims are asserted against us. Our obligation to defend against or pay any
product liability or other claim may have a material adverse effect on our
business, financial condition and results of operations.
8
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WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT AND MAY NEED
TO SEEK ADDITIONAL FUNDING.
We have sustained losses in each year since our incorporation in 1986. We
sustained net losses of $25.1 million and $25.4 million for the years ended
December 31, 1998 and 1997, and $18.9 million for the nine months ended
September 30, 1999. We had an accumulated deficit of $144.6 million and $119.5
million at December 31, 1998 and 1997, and $163.5 million at September 30,
1999. We expect to make substantial expenditures to further develop and
commercialize our products, and, based on these expenditures, it is probable
that losses will continue for at least the next six months. We expect that our
rate of spending will accelerate as the result of increased clinical trial
costs and expenses associated with regulatory approval and commercialization of
products now in development. In order to fund our future operations, we will
likely seek additional capital. We may not be able to raise additional capital
on reasonable terms, if at all. There can be no assurance, assuming we
successfully raise additional funds, that we will achieve profitability or
positive cash flow.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.
We have historically experienced, and expect to continue for the foreseeable
future to experience, significant fluctuations in our quarterly operating
results. These fluctuations are due to a number of factors, many of which are
outside our control, and may result in volatility of our stock price. Future
operating results will depend on many factors, including:
o demand for our products;
o regulatory approvals for our products;
o the timing of the introduction and market acceptance of new products by us
or competing companies;
o the timing of certain research and development milestones; and
o our ability to control our costs.
WE HAVE NO MANUFACTURING CAPABILITIES AND WE ARE DEPENDENT ON ONE SUPPLIER FOR
THE RAW MATERIAL AND ONE MANUFACTURER FOR THE FORMULATION AND ENCAPSULATION OF
THALOMID.
We currently have no experience in, or our own facilities for, manufacturing
any products on a commercial scale. Currently, we obtain all of our bulk drug
material for THALOMID from a single supplier and rely on a single manufacturer
to formulate and encapsulate THALOMID. The FDA requires that all suppliers of
pharmaceutical bulk material and all manufacturers of pharmaceuticals for sale
in or from the United States achieve and maintain compliance with the FDA's
current Good Manufacturing Practice, or cGMP, regulations and guidelines. If
the operations of the sole supplier or the sole manufacturer were to become
unavailable for any reason, the required FDA review and approval of the
operations of a new supplier or new manufacturer could cause a delay in the
manufacture of THALOMID which could have a material adverse effect on our
business, financial condition and results of operations. We intend to continue
to utilize outside manufacturers if and when needed to produce our other
products on a commercial scale. If our outside manufacturers do not meet our
requirements for quality, quantity or timeliness, or do not achieve and
maintain compliance with all applicable regulations, our business, financial
condition and results of operations could be materially adversely affected.
WE HAVE LIMITED MARKETING AND DISTRIBUTION CAPABILITIES.
Although we have a 60 person sales and commercialization group to sell
THALOMID, we may be required to seek a corporate partner to provide marketing
services with respect to our other products. Any delay in developing these
resources could have a material adverse impact on our results of operations. We
have contracted with a specialty distributor to distribute THALOMID. Failure of
this specialty distributor to perform its obligations could have a material
adverse effect on our business, financial condition and results of operations.
WE ARE DEPENDENT ON COLLABORATIONS AND LICENSES WITH THIRD PARTIES.
Our ability to fully commercialize our products, if developed, may depend to
some extent upon our entering into joint ventures or other arrangements with
established pharmaceutical companies with the requisite experience and
financial and other resources to obtain regulatory approvals and to manufacture
and market such products. Accordingly, our success may depend, in part, upon
the subsequent success of such third parties in performing preclinical and
clinical trials, obtaining
9
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the requisite regulatory approvals, scaling up manufacturing, successfully
commercializing the licensed product candidates and otherwise performing their
obligations to us. We cannot assure you that:
o we will be able to enter into joint ventures or other arrangements on
acceptable terms, if at all;
o our joint ventures or other arrangements will be successful;
o our joint ventures or other arrangements will lead to the successful
development and commercialization of any products;
o we will be able to obtain or maintain proprietary rights or licenses to any
technology or products developed in connection with our joint ventures or
other arrangements; or
o we will be able to preserve the confidentiality of any proprietary rights
or information developed in connection with our joint ventures or other
arrangements.
THE HAZARDOUS MATERIALS WE USE IN OUR RESEARCH AND DEVELOPMENT COULD RESULT IN
SIGNIFICANT LIABILITIES WHICH COULD EXCEED OUR INSURANCE COVERAGE AND FINANCIAL
RESOURCES.
We use some hazardous materials in our research and development activities.
While we believe we are currently in substantial compliance with the federal,
state and local laws and regulations governing the use of these materials, we
cannot assure you that accidental injury or contamination will not occur. Any
such accident or contamination could result in substantial liabilities, which
could exceed our insurance coverage and financial resources. Additionally, we
cannot assure you that the cost of compliance with environmental and safety
laws and regulations will not increase in the future.
RESIDUAL YEAR 2000 PROBLEMS COULD CAUSE A MATERIAL DISRUPTION IN OUR BUSINESS.
Although all of our computer hardware and software has been upgraded for Year
2000 compliance, all of our key vendors have provided assurance that they are
Year 2000 compliant and there were no related problems at the transition into
the Year 2000, any residual effect of the Year 2000 problem could cause a
material disruption in our business.
INDUSTRY RISKS
THE PHARMACEUTICAL AND AGROCHEMICAL INDUSTRIES ARE SUBJECT TO EXTENSIVE
GOVERNMENT REGULATION AND THERE IS 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 we will be able to obtain the necessary
approvals required to market our products in any of these markets. The testing,
marketing and manufacturing of our products will require regulatory approval,
including approval from the FDA and, in some cases, from the U.S. Environmental
Protection Agency, or the EPA, and the U.S. Department of Agriculture, or the
USDA, or governmental authorities outside of the United States that perform
roles similar to those of the FDA and EPA. Certain of our pharmaceutical
products in development also fall under the Controlled Substances Act of 1970,
or the CSA, which requires authorization by the U.S. Drug Enforcement Agency,
or the DEA, of the U.S. Department of Justice in order to handle and distribute
these products. It is not possible to predict how long the approval processes
of the FDA, EPA, DEA or any other applicable federal, state or foreign
regulatory authority or agency for any of our products will take or whether any
such approvals 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. Risks associated with the regulatory
approval process include:
o in general, preclinical tests and clinical trials can take many years, and
require the expenditure of substantial resources, and the data obtained
from these tests and trials can be susceptible to varying interpretation
that could delay, limit or prevent regulatory approval;
o 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, a
regulatory agency's requirements for safety, efficacy and quality or, in
the case of a product seeking an orphan drug indication, because another
designee received approval first;
o requirements for approval may become more stringent due to changes in
regulatory agency policy, or the adoption of new regulations or
legislation;
10
<PAGE>
o the scope of any regulatory approval, when obtained, may significantly
limit the indicated uses for which a product may be marketed;
o approved drugs and agrochemicals, as well as their manufacturers, are
subject to continuing and on-going review, and discovery of previously
unknown problems with these products may result in restrictions on their
manufacture, sale or use or in their withdrawal from the market; and
o regulatory authorities and agencies may promulgate additional regulations
restricting the sale of our existing and proposed products.
Once approved, we cannot guarantee that the FDA will permit us to market those
products for broader or different applications, or that it will grant us
approval with respect to separate product applications which represent
extensions of our basic technology, or that existing approvals will not be
withdrawn or modified in a significant manner. In addition, it is possible that
the FDA will promulgate additional regulations restricting the sale of our
present or proposed products.
Labeling and promotional activities are subject to scrutiny by the FDA and
state regulatory agencies and, in some circumstances, by the Federal Trade
Commission. FDA enforcement policy prohibits the marketing of approved products
for unapproved, or off-label, uses. These regulations, and the FDA's
interpretation of them, may impair our ability to effectively market THALOMID
or other products which gain approval. The FDA actively enforces regulations
prohibiting promotion of off-label uses and the promotion of products for which
approval has not been obtained. Failure to comply with these requirements can
result in regulatory enforcement action by the FDA. The FDA is aware that
physicians prescribe THALOMID for off-label uses and has not, as of this date,
initiated any regulatory actions against us. FDA approval of THALOMID requires
that we distribute it under the rigid standards of our S.T.E.P.S. program in
order to maintain approval.
Delays in obtaining, or the failure to obtain and maintain, necessary approvals
from the FDA, EPA, DEA or other applicable regulatory authorities or agencies
for our proprietary products or regulatory enforcement actions by FDA
concerning our marketing practices would have a material adverse effect on our
business, financial condition and results of operations.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY.
Our success will depend, in part, on our ability to obtain and enforce patents,
protect trade secrets, obtain licenses to technology owned by third parties,
when necessary, and conduct our business without infringing upon the
proprietary rights of others. The patent positions of pharmaceutical firms,
including ours, can be uncertain and involve complex legal and factual
questions. In addition, the coverage sought in a patent application may not be
obtained or may be significantly reduced before the patent is issued.
Consequently, we do not know whether any of our pending applications will
result in the issuance of patents or, if any patents are issued, whether they
will provide significant proprietary protection or commercial advantage. If any
of our issued or licensed patents are infringed, we cannot guarantee that we
will be successful in enforcing our intellectual property rights. Moreover, we
cannot assure you that we can successfully defend against any patent
infringement suit that may be brought against us by a third party. Patent
infringement lawsuits in the pharmaceutical and biotechnology industries can be
complex, lengthy and costly to both parties. Further, we rely upon unpatented
proprietary and trade secret technology that we try to protect, in part, by
confidentiality agreements with our collaborative partners, employees,
consultants, outside scientific collaborators, sponsored researchers and other
advisors. There can be no assurance that these agreements will not be breached
or that we would have adequate remedies for any such breach. We cannot assure
you that, despite precautions taken by us, others have not and will not obtain
access to our proprietary technology or that such technology will not be found
to be non-proprietary or not a trade secret. Our right to practice the
inventions claimed in some patents which relate to products under development
and THALOMID arises under licenses granted to us by others, including EntreMed,
Inc. and The Rockefeller University. While we believe these agreements to be
valid and enforceable, we cannot assure you that our rights under these
agreements will continue or that disputes concerning these agreement will not
arise. In addition, certain of the grants contained in the licenses granted to
us depend upon the validity and enforceability of other agreements to which we
are not a party.
THE PHARMACEUTICAL AND AGROCHEMICAL INDUSTRIES ARE HIGHLY COMPETITIVE AND
SUBJECT TO RAPID AND SIGNIFICANT TECHNOLOGICAL CHANGE.
The pharmaceutical and agrochemical industries in which we operate are highly
competitive and subject to rapid and significant technological change. Our
present and potential competitors include major chemical and pharmaceutical
companies, as well as specialized pharmaceutical firms. Most of these companies
have considerably greater financial,
11
<PAGE>
technical and marketing resources than us. We also experience competition from
universities and other research institutions and, in some instances, we compete
with others in acquiring technology from these sources. The pharmaceutical and
agrochemical industries have undergone, and are expected to continue to
undergo, rapid and significant technological change, and we expect competition
to intensify as technical advances in each field are made and become more
widely known. The development of products or processes with significant
advantages over those that we are seeking to develop could have a material
adverse effect on our business, financial condition and results of operations.
SALES OF OUR PRODUCTS ARE DEPENDENT ON THIRD-PARTY REIMBURSEMENT.
Sales of our products will depend, in part, on the extent to which the costs of
our products will be paid by health maintenance, managed care, pharmacy benefit
and similar health care management organizations, or reimbursed by government
health administration authorities, private health coverage insurers and other
third-party payors. These health care management organizations and third-party
payors are increasingly challenging the prices charged for medical products and
services. Additionally, the containment of health care costs has become a
priority of federal and state governments, and the prices of drugs have been
targeted in this effort. We cannot assure you that our 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 us to
sell our products on a profitable basis.
OFFERING RISKS
THE PRICE OF OUR COMMON STOCK HAS EXPERIENCED SUBSTANTIAL VOLATILITY AND MAY
CONTINUE TO DO SO IN THE FUTURE.
There has been significant volatility in the market prices for publicly traded
shares of pharmaceutical companies, including ours. In 1999, the price of our
common stock fluctuated from a low of $11 5/16 to a high of $72 5/8. On
February 10, 2000, our common stock closed at a price of $103. The price of our
common stock may not remain at or exceed current levels. The following factors
may have an adverse impact on the market price of our common stock:
o announcements of technical or product developments by us or our
competitors;
o market conditions for pharmaceutical and biotechnology stocks;
o market conditions generally;
o governmental regulation;
o healthcare legislation;
o public announcements regarding medical advances in the treatment of the
disease states that we are targeting;
o patent or proprietary rights developments;
o changes in third-party reimbursement policies for our products; or
o fluctuations in our operating results.
THE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE COULD
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Future sales of substantial amounts of our common stock could adversely affect
the market price of our common stock. As of December 31, 1999, there were
outstanding stock options for 2,327,267 shares of common stock, of which
967,234 were currently exercisable, and warrants either outstanding or issuable
upon demand that are exercisable for 551,044 shares of common stock. In
addition, the 9.25% convertible note issued on September 16, 1998 can be
converted into 795,463 shares of common stock, the 9.0% convertible notes
issued on January 20, 1999 can be converted into 833,400 shares of common stock
and the 9.0% convertible notes issued on July 6, 1999 can be converted into
789,450 shares of common stock. Immediately prior to this offering, the selling
stockholders will convert a portion of our 9.0% convertible notes issued in
January 1999 held by them into 516,000 shares of our common stock. Upon
issuance or conversion, all of these shares of common stock will be freely
tradable.
12
<PAGE>
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
We expect that the public offering price of our common stock in this offering
will be substantially higher than the net tangible book value per share of our
outstanding common stock. As of September 30, 1999, our net negative book value
was $(19.1) million and on a pro forma basis our net tangible book value after
this offering will be $225.6 million. The amount of the increase in net
tangible book value attributable to the investors in this offering will be
$36.9 million, or $12.31 per share of common stock. Investors of our common
stock in this offering will experience immediate and substantial dilution of
approximately $269.4 million, or $89.80 per share of common stock.
OUR SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BY-LAW PROVISIONS MAY DETER
A THIRD PARTY FROM ACQUIRING US.
Our board of directors has adopted a shareholder rights plan, the purpose of
which is to protect stockholders against unsolicited attempts to acquire
control of us that do not offer a fair price to all of our stockholders. The
rights plan may have the effect of dissuading a potential acquirer from making
an offer for our common stock at a price that represents a premium to the then
current trading price.
Our board of directors has the authority to issue, at any time, without further
stockholder approval, up to 5,000,000 shares of preferred stock, and to
determine the price, rights, privileges and preferences of those shares. Any
issuance of preferred stock could discourage a third party from acquiring a
majority of our outstanding voting stock. Additionally, our board of directors
has adopted certain amendments to our by-laws intended to strengthen the
board's position in the event of a hostile takeover attempt.
Furthermore, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law, which may also dissuade a
potential acquiror of our common stock.
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this prospectus
are forward-looking statements concerning our business, financial condition,
results of operations, economic performance and financial condition.
Forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and within the meaning of Section 21E of the Securities Exchange
Act of 1934 are included, for example, in the discussions about:
o our strategy;
o new product development or product introduction;
o product sales, royalties and contract revenues;
o expenses and net income;
o our credit risk management;
o our liquidity;
o our asset/liability risk management; and
o our operational and legal risks.
These statements involve risks and uncertainties. Actual results may differ
materially from those expressed or implied in those statements. Factors that
could cause such differences include, but are not limited to, those discussed
under "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
13
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of 2,484,000 shares of our common stock offered
by us will be approximately $235.3 million, $278.1 million if the underwriters'
over-allotment option is exercised in full, at a public offering price of $101
per share and after deduction of the underwriting discounts and estimated
offering expenses payable by us. We will not receive any proceeds from the sale
of shares of common stock in this offering by the selling stockholders.
We intend to use the net proceeds we receive from this offering for:
o the further commercialization and clinical development of THALOMID,
including the expansion of our sales and commercialization organization;
o the further development of our oncology and immunology programs, including
our IMiD and SelCID therapeutic agents;
o the further development of our chiral products, including ATTENADE; and
o general corporate purposes.
Pending use of the net proceeds we receive from this offering for the above
purposes, we intend to invest funds in investment grade debt obligations.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"CELG." The following table sets forth, for the periods indicated, the
intra-day high and low sale prices per share of common stock on the Nasdaq
National Market:
<TABLE>
<CAPTION>
-------------------
HIGH LOW
---------- ----------
<S> <C> <C>
2000
First Quarter (through February 10, 2000) ......... $ 112 $ 55
1999
Fourth Quarter .................................... $ 72 5/8 $ 24 3/4
Third Quarter ..................................... 29 14
Second Quarter .................................... 20 1/16 13 9/16
First Quarter ..................................... 18 5/8 11 5/16
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
</TABLE>
The last reported sales price per share of common stock on the Nasdaq National
Market on February 10, 2000 was $103. As of December 31, 1999, there were
approximately 450 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate paying any cash dividends on our common stock in
the foreseeable future.
14
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1999:
o our actual cash and cash equivalents and marketable securities available
for sale and capitalization;
o our cash and cash equivalents and marketable securities available for sale
and capitalization as adjusted to reflect:
-- the sale of 2,484,000 shares of our common stock offered by us and the
receipt by us of the net proceeds therefrom at a public offering price
of $101 per share and after deduction of the underwriting discounts
and offering expenses payable by us; and
-- the conversion by the selling stockholders of a portion of our 9.0%
convertible notes issued in January 1999 into 516,000 shares of our
common stock.
This table should be read in conjunction with our consolidated financial
statements and the related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
-----------------
SEPTEMBER 30, 1999
----------------------------
ACTUAL AS ADJUSTED
In thousands ------------- ------------
<S> <C> <C>
Cash and cash equivalents and marketable securities available for sale ................ $ 18,624 $ 253,963
========== ==========
Capital lease obligation-net of current portion ....................................... $ 45 $ 45
Long term convertible notes ........................................................... 38,458 29,171
Stockholders' equity (deficit):
Common stock, $.01 par value per share; 30,000,000 shares authorized; 17,151,595
shares issued and outstanding; 20,151,595 shares issued and outstanding as adjusted 172 202
Additional paid-in capital ........................................................... 144,945 389,262
Accumulated deficit .................................................................. (163,549) (163,549)
Accumulated other comprehensive loss ................................................. (64) (64)
---------- ----------
Total stockholders' equity (deficit) ............................................... (18,496) 225,851
---------- ----------
Total capitalization ............................................................. $ 20,007 $ 255,067
========== ==========
</TABLE>
The above table excludes, as of September 30, 1999, 1,902,313 shares of common
stock reserved for issuance upon conversion of our convertible notes, 602,833
shares reserved for issuance upon exercise of our outstanding warrants and
2,768,756 shares reserved for issuance upon exercise of our outstanding stock
options.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the related notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial information included elsewhere in
this prospectus. The statements of operations data set forth below 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 our consolidated financial
statements which have been audited by KPMG LLP, independent certified public
accountants, and which are included elsewhere in this prospectus and are
qualified by reference to such consolidated financial statements and the
related notes thereto. Some other information has been derived from other
audited consolidated financial statements. The statements of operations data
set forth below for the nine months ended September 30, 1998 and 1999, and the
balance sheet data as of September 30, 1999 have been derived from our
unaudited condensed consolidated financial statements which are included
elsewhere in this prospectus and are qualified by reference to such unaudited
condensed consolidated financial statements and the related notes thereto. The
interim nine month data has been prepared on a basis consistent with that of
the audited consolidated financial statements and, in the opinion of our
management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation. Our historical results of
operations are not necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
---------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
In thousands, except share data ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Product sales ........................... $ -- $ 32 $ 65 $ -- $ 3,266
Research contracts ...................... 98 440 817 1,122 535
--------- --------- --------- --------- ---------
Total revenues ......................... 98 472 882 1,122 3,801
Expenses:
Cost of goods sold ...................... -- -- -- -- 282
Research and development ................ 3,678 6,393 15,153 17,380 19,772
Selling, general and administrative ..... 2,718 2,589 3,771 9,146 16,219
--------- --------- --------- --------- ---------
Total expenses ......................... 6,396 8,982 18,924 26,526 36,273
--------- --------- --------- --------- ---------
Operating loss ........................... (6,298) (8,510) (18,042) (25,404) (32,472)
Other income and expense:
Interest income ......................... 587 568 1,308 496 705
Interest expense ........................ -- 425 324 112 256
--------- --------- --------- --------- ---------
Loss from continuing operations .......... (5,711) (8,367) (17,058) (25,020) (32,023)
Discontinued operations:
Loss from operations .................... (4,502) (2,150) (761) (427) (60)
Gain on sale of chiral assets ........... -- -- -- -- 7,015
--------- --------- --------- --------- ---------
Net loss ................................. (10,213) (10,517) (17,819) (25,447) (25,068)
Accretion of premium payable on
preferred stock and warrants ............ -- -- 1,013 521 25
Deemed dividend for preferred stock
conversion discount ..................... -- -- 2,778 953 --
--------- --------- --------- --------- ---------
Net loss applicable to common
stockholders ............................ $ (10,213) $ (10,517) $ (21,610) $ (26,921) $ (25,093)
========= ========= ========= ========= =========
Per share--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) --
Gain on sale of chiral assets .......... -- -- -- -- 0.43
--------- --------- --------- --------- ---------
Net loss applicable to common
stockholders ........................... $ (1.30) $ (1.30) $ (2.29) $ (2.20) $ (1.55)
========= ========= ========= ========= =========
Weighted average number of shares of
common stock outstanding ................ 7,853 8,073 9,450 12,215 16,160
<CAPTION>
------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1999
In thousands, except share data ------------ ------------
(UNAUDITED)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Product sales ........................... $ 1,031 $ 15,064
Research contracts ...................... 105 1,732
--------- ---------
Total revenues ......................... 1,136 16,796
Expenses:
Cost of goods sold ...................... 59 2,076
Research and development ................ 13,969 14,366
Selling, general and administrative ..... 11,207 17,847
--------- ---------
Total expenses ......................... 25,235 34,289
--------- ---------
Operating loss ........................... (24,099) (17,493)
Other income and expense:
Interest income ......................... 497 512
Interest expense ........................ 45 1,955
--------- ---------
Loss from continuing operations .......... (23,647) (18,936)
Discontinued operations:
Loss from operations .................... (60) --
Gain on sale of chiral assets ........... 7,015 --
--------- ---------
Net loss ................................. (16,692) (18,936)
Accretion of premium payable on
preferred stock and warrants ............ 25 --
Deemed dividend for preferred stock
conversion discount ..................... -- --
--------- ---------
Net loss applicable to common
stockholders ............................ $ (16,717) $ (18,936)
========= =========
Per share--basic and diluted:
Loss from continuing operations ......... $ (1.47) $ (1.12)
Discontinued operations:
Loss from operations ................... -- --
Gain on sale of chiral assets .......... 0.44 --
--------- ---------
Net loss applicable to common
stockholders ........................... $ (1.04) $ (1.12)
========= =========
Weighted average number of shares of
common stock outstanding ................ 16,062 16,903
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------
DECEMBER 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
In thousands ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and marketable securities
available for sale .............................. $ 8,500 $ 11,713 $ 17,815 $ 13,583 $ 5,124
Total assets ..................................... 11,548 14,211 20,938 18,217 11,928
Long term convertible notes ...................... -- 4,592 2,026 -- 8,349
Accumulated deficit .............................. (60,473) (70,989) (92,599) (119,521) (144,613)
Total stockholders' equity (deficit) ............. 10,004 7,143 16,065 15,425 (3,733)
<CAPTION>
-------------
SEPTEMBER 30,
1999
In thousands --------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and marketable securities
available for sale ............................. $ 18,624
Total assets .................................... 27,089
Long term convertible notes ..................... 38,458
Accumulated deficit ............................. (163,549)
Total stockholders' equity (deficit) ............ (18,496)
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and
the related notes thereto included elsewhere in this prospectus.
OVERVIEW
We were organized in 1980 as a unit of Celanese Corporation, a chemical
company. Our initial mandate was to apply biotechnology to the production of
fine and specialty chemicals. Following the 1986 merger of Celanese Corporation
with American Hoechst Corporation, we were spun off as an independent company.
In July 1987, we completed an initial public offering of our common stock and
commenced the development of chemical and biotreatment processes for the
chemical and pharmaceutical industries. We discontinued the biotreatment
operations in 1994 to focus on our targeted small molecule cancer and
immunology compound development programs and our biocatalytic chiral chemistry
program.
Since 1990, our revenues have been generated primarily through 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 we
developed our cancer and immunology programs, sales of chirally pure
intermediates became a less integral part of our strategic focus. Accordingly,
on January 9, 1998, we completed the sale of our chiral intermediate business
to Cambrex Corporation for $15.0 million. The terms of the sale provided for a
payment of $7.5 million at closing and an additional amount of future royalties
not to exceed the net present value on the date of contract of $7.5 million,
with a guarantee of certain minimum payments beginning in the third year after
closing.
In late September 1998, we commenced sales of our first commercial product,
THALOMID.
We have sustained losses in each year since our inception in 1986. Through the
first nine months of 1999, we had a net loss of $18.9 million and, at September
30, 1999, had an accumulated deficit of $163.5 million. We expect to make
substantial expenditures to further commercialize and develop THALOMID, develop
our oncology and immunology programs and expand our chiral business. Based on
these expenditures, it is likely that losses will continue for at least the
next six months.
Subject to the risks described elsewhere in this prospectus, we believe that
there are significant market opportunities for the products and processes under
development by us. To address these opportunities in a timely and effective
manner, we intend to seek out collaborations and licensing arrangements with
third parties. We have entered into agreements covering the manufacture and
distribution for us of certain compounds, such as THALOMID, and the development
by us of processes for producing chirally pure crop protection agents for
license to agrochemical manufacturers. This development is performed through
Celgro Corporation, our wholly owned subsidiary.
We have established a commercial organization to sell THALOMID and we currently
employ 60 persons in this capacity. We intend to develop and market our own
pharmaceuticals for indications with accessible patient populations. For drugs
with indications for larger patient populations, we anticipate partnering with
other pharmaceutical companies. We also anticipate partnering with companies
for the development and commercialization of our chirally pure pharmaceutical
and agrochemical products. We expect that these arrangements typically will
include milestone payments, reimbursement of research and development expenses
and royalty arrangements.
Future operating results will depend on many factors, including demand for our
products, regulatory approvals of our products, the timing of the introduction
and market acceptance of new products by us or competing companies, the timing
of research and development milestones and our ability to control costs.
17
<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 and 1998
Total revenues. Our total revenues for the nine months ended September 30, 1999
increased to $16.8 million from $1.1 million in the same period of 1998. Our
revenues for the 1999 period consisted of product sales of THALOMID of $15.1
million and research contract revenues of $1.7 million. The increase in total
revenues in the 1999 period was primarily due to a full nine months of sales of
THALOMID compared with sales from the initial launch of THALOMID late in the
third quarter of 1998, a milestone payment from an existing d-methylphenidate
research agreement and research contract revenue generated by Celgro.
Cost of goods sold. Cost of goods sold for the nine months ended September 30,
1999 was $2.1 million compared with approximately $59,000 in the same period in
1998. The cost of goods sold does not reflect raw material or formulation and
encapsulation costs of THALOMID prior to receiving FDA approval, as these costs
were charged as research and development expenses.
Research and development expenses. Research and development expenses increased
3% to $14.4 million in the nine months ended September 30, 1999 from $14.0
million in the same period in 1998. The increase in spending was due to
clinical trial costs, primarily for ATTENADE, of $3.1 million, which was offset
by a decrease or reclassification of the following: regulatory consulting fees
of approximately $600,000; quality assurance expenses of approximately
$633,000, which were recorded in cost of goods sold in 1999; external
university research program expenses of approximately $362,000; formulation and
encapsulation expenses for THALOMID of $1.0 million incurred prior to FDA
approval of THALOMID; and other expenses of approximately $500,000.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 59% to $17.8 million in the nine months
ended September 30, 1999 from $11.2 million in the same period of 1998. This
increase was due primarily to the expansion of our sales and commercialization
organization and related expenses of $2.4 million and warehousing and
distribution expenses, including our S.T.E.P.S. program, of $2.9 million, both
to support the commercial sales of THALOMID. This increase was also due to
expenses for the medical affairs and drug safety department of approximately
$600,000, amortization of expenses related to our convertible notes of
approximately $500,000 and other miscellaneous expenses of approximately
$200,000.
Interest income and interest expense. Interest income for the nine months ended
September 30, 1999 increased 3% to approximately $512,000 from approximately
$497,000 in the same period of 1998. The increase in interest income was due to
higher average cash balances in 1999, primarily from investment of the net
proceeds from our 9.0% convertible notes issued in July 1999. Interest expense
for the nine months ended September 30, 1999 increased significantly to $2.0
million from approximately $45,000 in the same period in 1998. The increase in
interest expense was due to interest on our three convertible notes with coupon
rates of 9.25%, 9.0% and 9.0% placed in September 1998, January 1999 and July
1999.
Loss from continuing operations. Loss from continuing operations for the nine
months ended September 30, 1999 decreased by 20% to $18.9 million from $23.6
million in the same period of 1998. The decrease was due primarily to the gross
profit on the sales of THALOMID and increased research contract revenue offset
by increased research and development and selling, general and administrative
expenses as described above.
Discontinued operations. Discontinued operations in 1998 reflects the one-time
gain on the sale of our chiral intermediate business of $7.0 million. The
$60,000 loss in the nine months ended September 30, 1998 represents expenses
for the nine-day period preceding the sale. There were no discontinued
operations in 1999.
Fiscal Years Ended December 31, 1998, 1997 and 1996
Total revenues. In 1998, total revenues increased by 245% to $3.8 million from
$1.1 million in 1997. This was due to product sales of $3.3 million of
THALOMID, which was launched in late September 1998, offset by a decrease in
revenues from research contracts of approximately $600,000 due to completion of
a contract with a major agrochemical company at the end of 1997. Our 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, our first commercial product, which was launched in late
September 1998. The cost of goods sold does not reflect raw material or
formulation and encapsulation costs of THALOMID prior to receiving FDA
approval, as these were charged as research and development expenses. There
were no cost of goods sold in 1997 or 1996.
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Research and development expenses. Research and development expenses for 1998
increased by 14% to $19.8 million from $17.4 million in 1997. This increase was
due to an increase of $1.5 million primarily for clinical trials and
preclinical toxicology studies for our chiral pharmaceutical program, and
approximately $780,000 due to clinical trials for potential NDA filings for
THALOMID.
Research and development expenses for 1997 increased by 15% to $17.4 million
from $15.2 million in 1996. This increase was due to an increase in expenses of
approximately $823,000 associated with our chiral pharmaceutical program and
$1.3 million associated with facility and personnel charges related to
establishing a separate location for our chiral agrochemical business.
Selling, general and administrative expenses. Selling, general and
administrative expenses for 1998 increased by 78% to $16.2 million from $9.1
million in 1997. This was primarily due to sales and commercialization expenses
of $4.8 million in anticipation of the THALOMID product launch as well as
post-launch selling activities. The increase was also related to the
infrastructure costs required to support our commercial operations, including
medical affairs and drug safety costs of approximately $928,000, information
systems development costs and additional finance personnel of approximately
$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 $9.1
million from $3.8 million in 1996. This was primarily due to the formation of a
sales and commercialization organization in anticipation of the THALOMID
product launch as well as an increase in some support functions resulting from
the anticipated transition to a commercial operation. Major increases resulted
from: sales and commercialization expenses of $3.4 million for sales force
recruiting and training and other pre-launch expenses; medical affairs and drug
safety costs of approximately $425,000; additional finance personnel and
information systems development costs of approximately $366,000; executive and
administrative costs for Celgro of approximately $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 $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 approximately $112,000 in 1997 due primarily to the
interest expenses associated with our 9.25% convertible notes 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 our 8.0%
convertible debentures issued in 1995.
Loss from continuing operations. Loss from continuing operations increased 28%
to $32.0 million from $25.0 million in 1997. The increase was due primarily to
spending related to the launch of THALOMID and ongoing research programs in
oncology, immunology and chiral pharmaceuticals as described above. The loss
from continuing operations for 1997 increased by 46% from $17.1 million in 1996
reflecting increased spending in oncology and immunology, the start of a
THALOMID sales and commercialization organization and the start of our chiral
pharmaceutical development program.
Loss from discontinued operations. The loss from discontinued operations
decreased to approximately $60,000 in 1998 from approximately $427,000 in 1997
due to the sale of the chiral intermediate business in January 1998. We
recorded a gain on the sale of the chiral intermediate assets of $7.0 million.
The loss from discontinued operations decreased by 44% in 1997 from
approximately $761,000 in 1996. The decrease was primarily a result of an
increase in revenues to $2.1 million in 1997 from $1.4 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in 1986, we have financed our working capital requirements
primarily through private and public sales of our debt and equity securities,
income earned on the investment of the proceeds from the sale of such
securities, revenues from research contracts, product sales from businesses
which we have since sold and currently from revenues from sales of THALOMID. As
of December 31, 1999, we have raised approximately $100.0 million in net
proceeds from three public and three private offerings, including our initial
public offering in July 1987. We also issued convertible notes in September
1998, January 1999 and July 1999 with net proceeds aggregating $38.0 million.
Our net working capital as of September 30, 1999 was $17.2 million compared
with $2.5 million at December 31, 1998. The increase was attributable to an
increase in cash and cash equivalents and marketable securities available for
sale of $13.5 million, an increase in accounts receivable and inventory of
approximately $780,000, an increase in other current
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assets of approximately $450,000 and a decrease in accounts payable of
approximately $808,000 offset by an increase in accrued expenses of
approximately $784,000. Net working capital consisted principally of cash and
cash equivalents, marketable securities available for sale, accounts
receivable, inventory, accounts payable and accrued expenses.
Cash and cash equivalents increased by $11.3 million in the first nine months
of 1999 and marketable securities increased $2.2 million in the same period.
This increase reflects the receipt in January 1999 and July 1999 of funds from
the issuance of two convertible notes as well as increasing revenues from the
sales of THALOMID.
We expect that our rate of spending will increase as the result of increased
clinical trial costs, increased expenses associated with the regulatory
approval process and commercialization of products now in development,
increased costs related to the commercialization of THALOMID and increased
working capital requirements. This increased spending will be mitigated by the
collection of receivables resulting from sales of THALOMID. It is anticipated
that the increasing sales of THALOMID, as well as existing cash resources, will
be sufficient to fund operations through 2000.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
All of our computer hardware and software has been upgraded for Year 2000
compliance. All of our key vendors have provided assurance that they are Year
2000 compliant. While there were no Year 2000 related problems at the
transition in the Year 2000, we are maintaining our contingency plans in the
event any problems arise in the future.
The statement contained in the foregoing Year 2000 readiness disclosures is
subject to protection under Year 2000 Information and Readiness Disclosure Act.
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BUSINESS
OVERVIEW
We are an independent biopharmaceutical company engaged primarily in the
discovery, development and commercialization of orally administered, small
molecule drugs for the treatment of cancer and immunological diseases. The key
mechanisms of action for our drugs are modulation of the overproduction of
TNF(alpha) and inhibition of angiogenesis. Additionally, our chiral chemistry
program develops chirally pure versions of existing compounds for both
pharmaceutical and agrochemical markets.
The FDA approved our first commercialized product, THALOMID, for sale in the
United States in July 1998. The approved indication for THALOMID is for the
treatment of acute cutaneous manifestations of moderate to severe ENL and as
maintenance therapy for prevention and suppression of cutaneous manifestation
recurrences. ENL is an inflammatory complication of leprosy. We sell this
product in the United States through our 60 person sales and commercialization
organization.
Our pipeline of new drugs is highlighted by two classes of orally administered
therapeutic agents: IMiDS and SelCIDs. The IMiD class is based on the activity
of THALOMID in modulating the overproduction of TNF(alpha) and inhibiting
angiogenesis. In preclinical studies, our IMiDs have demonstrated a higher level
of activity than thalidomide. In animal models, these compounds did not cause
birth defects or sedation. We completed Phase I trials in the fourth quarter of
1999 for each of our lead IMiDs. We expect that the data on these trials will be
compiled and released in the first quarter of 2000.
The second class of compounds, SelCIDs, is designed to modulate TNF(alpha) by
selectively inhibiting PDE 4, a key cell-signaling enzyme. Our SelCIDs are
targeted to control inflammation without broad suppression of the immune system.
Phase I trials demonstrated our lead SelCID compound, CDC 801, was safe and well
tolerated. There were no signs of nausea or vomiting, common side effects of
known PDE 4 inhibitors. CDC 801 is being tested in a Phase II pilot, placebo
controlled trial for the treatment of Crohn's disease. This trial is expected to
be completed in the first quarter of 2000.
In the third quarter of 1999, we announced favorable clinical results of two
Phase III pivotal efficacy trials for ATTENADE, a chirally pure version of
dl-methylphenidate. dl-methylphenidate is commonly marketed as Ritalin.
ATTENADE is designed to treat the symptoms of ADD and ADHD. We expect that the
final 12-month safety trial will be completed in the first quarter of 2000 and
we plan to submit an NDA to the FDA in the second half of 2000.
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CELGENE PRODUCT OVERVIEW
The target disease states for, and clinical trial status of, THALOMID and our
products and compounds currently under development are outlined in the
following table:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
PRODUCT INDICATION/INTENDED USE STATUS
- ------------ --------------------------------- --------------------------------------------
<S> <C> <C>
THALOMID ENL Approved
Multiple Myeloma Phase II trial data published and
presented at the American Society of
Hematology
Phase III pivotal trial protocol in
preparation
Myelodysplastic Syndrome Phase II trial ongoing and initial data
presented at the American Society of
Hematology
Leukemia Multiple Phase II trials underway
Glioblastoma(1) Initial Phase II trials completed
Other Phase II trials underway
Liver Cancer Phase II trial underway
Kidney Cancer Phase II trial underway
Prostate Cancer(1) Initial Phase II trial completed
Other Phase II trials underway
Kaposi's Sarcoma(1) Phase II trial completed
Cancer Cachexia Initial Phase II trial completed
Sarcoidosis Initial Phase II trial completed
Other Phase II trials underway
Scleroderma Initial Phase II trial completed
Recurrent Aphthous Stomatitis Phase III pivotal trial completed
in AIDS patients
Crohn's disease Phase II trial completed and initial data
published
Ulcerative Colitis Phase II trial underway
Colon and Rectal Cancer(1) Phase II trial announced
SelCIDs
CDC 801 Crohn's disease Phase II trial underway
CC 7085 Crohn's disease Preclinical toxicology
IMiDs
CC 5013 Blood cancers Initial Phase I trial completed
CC 4047 Blood cancers Initial Phase I trial completed
ATTENADE Attention Deficit Disorder and Phase III pivotal efficacy trials completed
Attention Deficit Hyperactivity Phase III safety trials ongoing
Disorder
</TABLE>
- ---------------
(1) At least one study supported by the National Cancer Institute.
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OVERVIEW OF ONCOLOGY AND IMMUNOLOGY
Our clinical and commercial focus is to produce a portfolio of highly potent,
selective 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 that act as chemical messengers throughout the body
to regulate many aspects of the immune system. TNF(alpha) is essential to
mounting an inflammatory response, which is the normal immune system reaction to
infection or injury that rids the body of foreign agents and promotes tissue
repair. However, chronic or excessive production of TNF(alpha) has been
implicated in a number of acute and chronic inflammatory diseases. These disease
states, which are inadequately treated with existing therapies, include
non-insulin dependent diabetes, Alzheimer's disease, congestive heart failure,
inflammatory bowel disease, rheumatoid arthritis, cancer cachexia, Parkinson's
disease, multiple sclerosis and lupus.
Traditional therapies for these disease states include anti-inflammatory drugs
and immunosuppressive agents. These therapies often fail to achieve significant
clinical benefits and can cause serious side effects such as severe drops in
certain blood component counts, liver toxicity, osteoporosis, teratogenicity and
various endocrine abnormalities. We believe that selective control and reduction
of TNF(alpha) represents a promising new strategy for treating chronic
inflammatory diseases. In pursuit of this strategy, two broad classes of
compounds have been investigated: proteins and small synthetic molecules.
Anti-TNF(alpha) proteins, including anti-TNF(alpha) antibodies and TNF(alpha)
soluble receptors, have demonstrated efficacy in the treatment of such chronic
inflammatory diseases as rheumatoid arthritis and Crohn's disease. While initial
doses of these anti-TNF(alpha) proteins have been well tolerated and have
reduced disease activity in clinical studies, these proteins exhibit certain
shortcomings linked to their nature as proteins. First, they are large molecules
that must currently be injected or infused. Second, the period of efficacy of a
given dosage of a protein-based drug can decline with repeated administration,
rendering protein-based drugs more suitable for treatment of acute pathological
conditions rather than chronic disease states. This limitation is due in part to
increasing production by a patient's immune system of antibodies that neutralize
administered proteins.
There are a number of large molecule, protein-based therapeutic products under
development by other companies for TNF(alpha) modulation. One product has
received approval from the FDA for the treatment of Crohn's disease and
rheumatoid arthritis, and another has received approval for rheumatoid
arthritis. Synthetic small molecule drugs, however, if successfully developed,
may prove to be preferable in the treatment of chronic inflammatory diseases,
due to factors such as oral dosing, lower cost of therapy and avoidance of
undesirable immune response that results in adverse side effects and reduced
efficacy. We believe that our small molecule immunotherapeutic compounds have
the potential to selectively modulate TNF(alpha) while affording these benefits.
In addition, research has indicated that our small molecule drug, THALOMID, is
anti-angiogenic. Angiogenesis is the fundamental biological process by which
new blood vessels are formed. Cancer cells require oxygen and nutrients and
initiate a biochemical mechanism that stimulates angiogenesis which, in turn,
provides the cancerous cells with the blood supply that they need to grow.
Inhibition of angiogenesis could adversely affect the graft of a tumor and be a
potential anti-cancer therapy. This therapy could 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, we believe that THALOMID is the only product on the market that has a
direct anti-angiogenic effect. Moreover, preliminary research suggests that our
two new classes of small molecule immunotherapeutic compounds -- one of which
is based on thalidomide's activity -- may be anti-angiogenic.
THALOMID
In July 1998, we received FDA approval to market THALOMID for treatment of ENL
and the product was launched in late September 1998. THALOMID is the first drug
approved under a special "Restricted Distribution for Safety" regulation and is
distributed through our S.T.E.P.S. program. Our program is designed to support
the safe and appropriate use of THALOMID and has been made a part of the
approved labeling for THALOMID. We are currently developing THALOMID for the
treatment of a variety of serious disease states for which we believe there are
currently no adequate approved therapies. Our current intent is to seek FDA
approval for THALOMID for at least one cancer of the blood, such as multiple
myeloma, one solid tumor cancer and an AIDS-related indication.
The immunological and anti-angiogenic properties of THALOMID are being
investigated as the basis for treatment of a variety of oncological diseases,
and a number of trials are ongoing, some in cooperation with the NCI, to
evaluate the potential of the drug in cancer. Key investigations include
multiple myeloma, which was the subject of an article and
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editorial in the November 18, 1999 issue of The New England Journal of
Medicine, Volume 341, Number 21, and glioblastoma multiforme, for which initial
data were presented in November 1999 at the Chemotherapy Foundation Symposium
XVII in New York. Additional presentations have been made at the 41st ASH
symposium in December 1999.
Our work with thalidomide was originally based on a scientific collaboration
with The Rockefeller University's Laboratory of Cellular Physiology and
Immunology. In the early 1990s, researchers at The Rockefeller University
discovered that thalidomide is a selective modulator of TNF(alpha) and,
therefore, could be of potential benefit in many serious immune-related disease
states, including cachexia and other AIDS-related conditions. We believe that,
in serious and debilitating disease states, the risk of birth defects and other
potential side effects related to thalidomide is outweighed by the drug's
potential clinical benefits. The Rockefeller University has granted to us
certain exclusive rights and licenses to manufacture, use and sell thalidomide
for treating the toxicity associated with high concentrations of TNF(alpha) in
septic shock, cachexia and HIV-related disease states. Researchers at the
Children's Medical Center, which is affiliated with Harvard University,
discovered that thalidomide is anti-angiogenic and filed patents on this
utility. These patents, some of which have not issued in the United States, are
exclusively licensed to EntreMed, Inc. We were granted an exclusive sublicense
to all of EntreMed's thalidomide patents in December 1998.
As a result of our own applications and designations acquired from EntreMed, we
now have Orphan Drug designations from the FDA for THALOMID covering: primary
brain malignancies; HIV associated wasting syndrome; severe Recurrent Aphthous
Stomatitis, or RAS, in severely, terminally immunocompromised patients;
clinical manifestations of mycobacterial infections caused by Mycobacterium
tuberculosis and non-tuberculous mycobacteria; ENL; multiple myeloma; Crohn's
disease and Kaposi's sarcoma. If the FDA approves any of these indications for
THALOMID, we will be granted a seven-year period of exclusivity during which
time the FDA is prohibited, except under some conditions, from approving
another version of thalidomide for the approved indication.
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, 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 dispensed the drug for the
treatment of ENL for the past 25 years. We note that thalidomide's history may
limit market acceptance of THALOMID.
Oncology
Cancer tissue has many blood vessels. This observation has led to the
realization that growth of blood vessels is 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 causing the formation of new blood vessels from
existing ones. Almost three decades ago, it was proposed that this tumor
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
Medical Center in Boston.
We are currently working with the NCI and a number of clinical investigators to
assess the potential of THALOMID in the treatment of various cancers. In the
first 12 months after THALOMID was commercially launched in the United States,
approximately 70% of the product's prescriptions were in oncology, as reported
by prescribers on our S.T.E.P.S. program enrollment surveys.
Multiple Myeloma. Multiple myeloma is a malignant proliferation of plasma cells
and plasmacytoid cells. It is the second most common blood borne malignancy and
is invariably fatal. According to the Leukemia Society of America, multiple
myeloma accounts for about 13% of blood borne disease and affects approximately
40,000 people in the United States. The incidence of this disease is
approximately four per 100,000, and approximately 14,400 cases are reported
annually with approximately 11,000 deaths associated with the disease every
year.
Clinical research published in the November 18, 1999 edition of The New England
Journal of Medicine, Volume 341, Number 21, reported results of a study
conducted at the University of Arkansas on the use of THALOMID in 84 multiple
myeloma patients with advanced stage disease and histories of extensive prior
chemotherapeutic interventions, radiation treatments and multiple bone marrow
transplants. This Phase II study found that 32% of the patients had a partial
response
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and 10% of the patients had a complete or nearly complete remission based on
decreases in paraprotein, the myeloma protein in serum, or Bence Jones protein
in urine, important markers of the progression of the disease. Clinical data
from 180 patients in this study was presented at the December 1999 ASH meeting
by researchers at the University of Arkansas who reported that 36% of the
patients achieved a 25% reduction in tumor burden. Eighteen patients achieved
paraprotein response of at least 90%, 14 patients achieved at least a 75%
paraprotein response, 16 patients achieved at least a 50% paraprotein response
and four patients achieved a complete response. Side effects reported by the
investigators were constipation, weakness/fatigue and somnolence. A number of
additional presentations and posters presented confirmatory evidence at the ASH
meeting regarding the efficacy of THALOMID. In September 1999, similar findings
were reported at the International Myeloma Workshop in Stockholm, Sweden on
trials conducted at Cedars-Sinai Medical Center, Los Angeles. In this Phase II,
open label study of 20 relapsing or progressive multiple myeloma patients
utilizing low-dose THALOMID administered over an eight-week trial period, 30%
of patients experienced a greater than 50% reduction of tumor burden. Further
data confirming earlier trials was presented at the Chemotherapy Foundation
Symposium XVII in November 1999 in New York on 15 refractory patients treated
at Saint Vincents Medical Center, New York in which there was observed a 67%
overall response with THALOMID alone or in combination with chemotherapy.
In the 12 months following the launch of THALOMID, as reported by prescribers
on our S.T.E.P.S. program enrollment surveys, approximately 30% of total usage
was in multiple myeloma. Based on this information and on the growing volume of
clinical trial data, our plan is to develop a regulatory/clinical program based
on what has been learned from these studies and file a supplemental NDA for
THALOMID for the treatment of multiple myeloma.
Glioblastoma Multiforme. Glioblastomas are the most common brain tumors and
account for 50% of all gliomas, an aggressive form of brain cancer. The usual
treatment of high-grade gliomas is surgical removal followed by radiation
therapy.
Studies at the New York University School of Medicine and at the Dana Farber
Institute have demonstrated the potential for thalidomide as a treatment for
glioblastoma multiforme. Phase I/II data from the New York University trial
were presented in November 1999 at the Chemotherapy Foundation Symposium XVII
in New York. THALOMID in combination with carboplatin was administered to 71
patients with recurrent glioblastoma multiforme. At the maximum tolerated dose
of THALOMID, 53 of the patients were evaluated for efficacy, with 70%
experiencing responses, two with partial responses, 35 with disease
stabilization. The trial's most commonly reported side effects were
constipation and drowsiness. A Phase III trial will assess whether patients
benefited because of the higher carboplatin doses or if there was any synergy
between thalidomide and carboplatin. Additionally, a Phase II trial has been
initiated in collaboration with the NCI's Radiation Therapy Oncology Group to
investigate the effect of THALOMID and radiation as co-therapy for the
treatment of glioblastoma.
Other Oncology Indications. In addition to glioblastoma multiforme, the NCI is
currently investigating THALOMID in clinical trials on prostate, colorectal,
head and neck and non-small cell lung cancer. Other trials such as those in
liver cancer, kidney cancer and leukemia are being run by key investigators.
Recently, researchers in London reported that continuous, low-dose thalidomide
is useful as an agent in patients with advanced cancers as a palliative. That
study showed that three of 18 patients with kidney cancer also showed a
response benefit and three patients had stabilization of their disease for
periods of up to six months. In addition, four of 17 melanoma patients
experienced stable disease for up to six months. According to a report in the
medical journal Lancet, follow-up studies using higher doses have also shown
"encouraging results" in patients with kidney cancer. These researchers are now
testing thalidomide in combination with interferon or interleukin 2 in this
group. Similarly, the NCI reported trial results in which 63 patients were
treated with either a low dose or a high dose of thalidomide. Approximately 53%
of the low dose and 68% of the high dose patients had declines in prostate
specific antigen, a recognized marker for prostate cancer. If successful, these
studies would establish proof of principle, leading to the design of additional
trials, including pivotal studies.
Immunology
THALOMID has been shown to impact the immune system both in vitro and in vivo.
Examples of such biological activities include the inhibition of TNF(alpha),
stimulation of the anti-inflammatory cytokine IL-10 and activation of T-cell
function. These types of activities could prove to have therapeutic benefit in a
variety of inflammatory, infectious and autoimmune diseases. The two key areas
of investigation at present involve inflammatory bowel disease and serious
complications associated with HIV/AIDS. In addition, other areas of
investigation include sarcoidosis, an inflammation of body tissue which often
attacks the lungs and lymph nodes, and scleroderma, a chronic tissue disorder.
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Erythema Nodosum Leprosum. ENL is a complication of leprosy, a chronic
bacterial disease. Although the disease is relatively rare in the United
States, leprosy afflicts millions worldwide. ENL occurs in about 30% of leprosy
patients and is characterized by cutaneous lesions, acute inflammation, fever
and anorexia. On July 16, 1998, we received approval from the FDA to market
THALOMID for the treatment of ENL.
Inflammatory Bowel Disease. According to the Crohn's and Colitis Foundation of
America, there are approximately one million Americans with active 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 with an estimated 70,000
to 125,000 U.S. patients diagnosed with active moderate to severe manifestation
of the disease.
A Phase II pilot study using THALOMID in patients with severe Crohn's disease
has been concluded at the Cedars-Sinai Medical Center, Los Angeles, and
reported in the journal Gastroenterology. About 70% of the patients suffering
from moderate to severe Crohn's disease who completed at least five weeks of
the 12-week trial demonstrated a response when treated with low dose THALOMID,
with 20% of these patients experiencing remission. All patients were able to
reduce their steroid regimen by at least 50%, with 44% of patients
discontinuing steroids. Data from this trial suggests that THALOMID may provide
clinical benefit and potentially reduce the need for steroid treatment. This
combination of effects could mean improvement over current therapeutic options.
A similar Phase II pilot study has been initiated at Cedars-Sinai Medical
Center using THALOMID for chronically active ulcerative colitis, which is
another form of inflammatory bowel disease. Estimates of the prevalence of
ulcerative colitis in the United States generally range between 250,000 and
500,000. Recent preliminary data has shown that eight of 11 patients with
intractable bowel disease benefited from THALOMID.
HIV/AIDS. Recurrent Aphthous Stomatitis, or RAS, is a complication of AIDS
characterized by lesions of the oral cavity, esophagus and gastrointestinal
tract and may interfere with normal eating. We believe RAS currently afflicts
an estimated 5,000 AIDS patients in the United States. 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, we began a pivotal clinical trial involving 84
patients for the evaluation of THALOMID in the treatment of RAS, using the same
principal investigator as the AIDS Clinical Trials Group study. We will be
analyzing this clinical trial data in 2000 with a view toward the possibility
of a supplemental NDA submission to the FDA.
S.T.E.P.S. Program
Working with the FDA and other governmental agencies as well as certain
advocacy groups, we designed and implemented our S.T.E.P.S. program, the
objective of which is the safe and appropriate use of THALOMID. This
proprietary program includes comprehensive physician, pharmacist and patient
education. Female patients are required to use contraception and are given
pregnancy tests regularly. All patients are also subject to other requirements,
including informed consent and participation in a confidential outcomes
registry managed on our behalf by an academic epidemiology research group.
Physicians are also required to comply with the educational, contraception
counseling, informed consent and pregnancy testing and other 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
each prescription may not exceed four weeks dosing. A new prescription is
required each month.
Sales and Commercialization
We have established an organization of approximately 60 persons to sell and
commercialize THALOMID. These individuals have considerable experience in the
pharmaceutical industry and many have experience with oncological and
immunological products. We expect to expand our THALOMID sales and
commercialization group to support products we develop to treat oncological and
immunological diseases. We intend to market and sell the products we develop
for indications with accessible patient populations. For drugs with indications
with larger patient populations, we anticipate partnering with other
pharmaceutical companies. In addition, we are positioned to accelerate the
expansion of these sales resources as appropriate to take advantage of product
in-licensing and product acquistion opportunities. We intend to establish
commercial relationships with selected companies in other countries to market
THALOMID.
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Manufacturing
THALOMID is formulated and encapsulated for us by Penn Pharmaceuticals Ltd. of
Great Britain in an FDA approved facility 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 cGMP
compliant. In certain instances, we may be required to make substantial capital
expenditures to access additional manufacturing capacity. In addition, we have
established a contract with another cGMP certified bulk drug substance supplier
for THALOMID that will begin in 2001 once the regulatory process is completed.
We are also actively seeking an alternate manufacturer to provide additional
capacity for the formulation and encapsulation of THALOMID and expect that this
will be concluded in 2000.
IMIDS
We have designed and synthesized a number of novel structural analogues of
thalidomide called IMiDs which have been demonstrated in in vitro tests to be
substantially more potent than thalidomide. There can be no assurance, however,
that the same effect can be duplicated in humans. Animal models have suggested
that our IMiDs do not cause the birth defects associated with thalidomide.
Research on these compounds has identified two clinical trial candidates and
each has advanced into a Phase I trial. Research continues on follow-on
compounds with enhanced immunological and anti-angiogenic activity. IMiDs may
have potential for treating conditions where there is a deficiency in T-cell
activity, such as viral diseases including HIV-related diseases, or for
enhancing potential IL-12 mediated anti-tumor activities. In preclinical
studies, our lead IMiD compound has been shown to inhibit interleukins 1-beta,
6 and 12 while stimulating the production of interleukins 10 and 2 as well as
interferon gamma. The activity of T-cells is enhanced by the compound up to
1,000 times more than with thalidomide. We expect to advance at least one of
the lead IMiDs, CC 5013 or CC 4047, into a Phase II pilot trial in a blood
cancer during 2000. The U.S. Patent and Trademark Office has issued composition
of matter and use patents to us relating to our IMiDs.
SELCIDS
We have designed, synthesized and tested a large number of SelCIDs. These
compounds have demonstrated the ability to be highly specific inhibitors of
TNF(alpha) overproduction in in vitro bioassays of human cells. SelCIDs appear
to have a specific inhibitory effect on 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.
Preclinical and animal tests have shown this class of compounds to be up to
10,000 times more active with a longer half-life than THALOMID. We believe that
control of TNF(alpha) at its source, versus simple removal of circulating levels
of the cytokine, may facilitate more effective therapy without immune
suppression. There can be no assurance, however, that the same effect can be
duplicated in humans.
Our lead SelCID, CDC 801, was found to be well tolerated in two Phase I trials
completed in 1999 in the United Kingdom. A Phase II pilot trial for this
compound in Crohn's disease commenced in 1999 at the Cedars-Sinai Medical
Center and results are expected in the first quarter of 2000. In addition, we
expect to initiate a Phase II pilot trial for CDC 801 in a blood cancer during
2000. Other SelCIDs have been identified and the most advanced of these is
undergoing toxicological evaluation in preparation for the initiation of Phase
I trials. Unlike many therapeutics which inhibit PDE 4, SelCIDs have not shown
any evidence of acute nausea and vomiting in patients. The U.S. Patent and
Trademark Office has issued to us composition of matter and use patents
relating to our SelCIDs.
CHIRAL CHEMISTRY
Many human pharmaceuticals and agrochemicals exist in two different
three-dimensional configurations that are identical in chemical structure but
are mirror images of each other. These conformations, known as enantiomers, or
isomers, generally interact differently with biological targets. In clinical
applications, one isomer may result in the desired therapeutic effect by
stimulating or inhibiting a targeted biological function, while the other
isomer may be inactive or cause undesirable side effects. In contrast to
racemic compositions which contain both isomers, the use of chirally pure
pharmaceuticals can result in significant clinical benefits such as reduced
toxicity and increased efficacy. In agrochemical applications, the use of
chirally pure chemicals can result in a substantially reduced volume of product
required to achieve the desired benefit, thereby potentially lowering
manufacturing costs and reducing the environmental burden as compared with
racemic chemicals.
Our 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 us 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.
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Our biocatalytic process for producing chirally pure compounds differs from the
more common approach of producing racemic mixtures followed by separation 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 substantial amounts of
raw materials and involve the disposition of waste product. Traditional
approaches also are generally less economical than our process. We believe that
our biocatalytic process can be applied to the manufacture of a wide variety of
organic chemicals.
We believe there is a significant incremental opportunity in developing
selected, 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:
o the cost and duration of preclinical evaluations and 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;
o the risk of not obtaining regulatory approval may be reduced; and
o marketing risks may also be reduced due to the established market for the
parent compound.
We have made significant progress over the past year in the development of
ATTENADE, the chirally pure version of Ritalin. We have also made significant
progress in the development and production of chirally pure agrochemicals. We
believe that the agrochemical market presents a substantial opportunity because
many agrochemicals produced in racemic form could be manufactured in chirally
pure form.
ATTENADE
We have completed two pivotal Phase III efficacy trials for ATTENADE. These
trials found that ATTENADE met all efficacy parameters for controlling symptoms
of ADD and ADHD in school-age children. Drugs containing dl-methylphenidate
such as Ritalin have been used for decades for the treatment of ADD and ADHD.
We believe that one million children in the United States were treated with
dl-methylphenidate and other psychostimulants in 1998. Total U.S. sales in 1998
of drugs used to treat the symptoms of ADD and ADHD were approximately $500
million.
More than 200 children participated in our pivotal trials. Both multi-center
trials compared ATTENADE to placebo; the second trial directly compared the
efficacy of both ATTENADE and dl-methylphenidate to placebo. As compared to
placebo, ATTENADE demonstrated a statistically significant longer duration of
action than dl-methylphenidate. ATTENADE controlled the symptoms of ADD and
ADHD at all times measured in the study while dl-methylphenidate did not
control the symptoms at the last measurement. In both trials, behavioral and
objective measures were examined. ATTENADE had favorable scores over
dl-methylphenidate in all parameters measured. The results of the primary
efficacy analysis indicated that ATTENADE was significantly more effective than
placebo as evaluated by a behavioral scale, signifying an improvement in the
clinical status of the children. The results of the second trial confirmed the
drug's efficacy and indicated a significantly longer duration of action for
ATTENADE compared to dl-methlyphenidate as measured by a behavioral scale. The
Phase III safety trial is scheduled for completion in the first quarter of 2000
and an NDA submission is anticipated later in the year. Clinical trials on a
pulsed release formulation are planned to commence in the first half of 2000.
We are in discussions regarding partnerships for ATTENADE in the United States
and Europe. In Canada, where it is awaiting registration, ATTENADE is licensed
to Biovail Corporation, which purchased $2.5 million dollars worth of our stock
and will pay to us licensing fees, milestone payments and royalties. We have
been issued patents for the use of ATTENADE for the treatment of ADD and ADHD,
and for the once-a-day administration of methylphenidate drugs in a controlled
or pulsed release formulation that includes both the chirally pure
d-methylphenidate and the racemic form. In addition, we have been issued
process patents covering our manufacturing process for the active substance.
Chirally Pure Agrochemicals
Celgro is applying our proprietary biocatalytic synthesis technology to
agrochemicals. Celgro's approach is to work with agrochemical companies to
adapt our biocatalytic technology to the manufacture of chirally pure versions
of their existing crop protection 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
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parties, who would manufacture and sell the agrochemicals. We expect that these
arrangements typically will include milestone payments, reimbursement of
research and development expenses and royalty arrangements. We have entered
into research and development agreements with two leading agrochemical
companies and initiatives are underway to secure additional collaborations.
We also believe that our chiral technology can be enabling in agrochemical
applications because it has the potential to significantly lower manufacturing
costs compared to conventional technologies and other chiral technologies.
Compared to our biocatalytic process, conventional technologies require more
raw materials and greater plant capacity to produce the same effective quantity
of product, while other chiral technologies require specialized equipment, more
expensive chiral agents, more raw material and greater capacity for handling
hazardous wastes produced in the separation process. In addition, 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 our business. It is our
policy to seek patent protection for our inventions, and also to rely upon
trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
Under an agreement with The Rockefeller University, we have obtained certain
exclusive rights and licenses to manufacture, have manufactured, use and sell
products that are based on compounds that were identified in research carried
out by The Rockefeller University and us, that have activity associated with
TNF(alpha). The Rockefeller University 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. In 1995, The Rockefeller
University was issued a U.S. patent which claims such methods. This U.S. patent
expires in 2012 and is included in the patent rights exclusively licensed to us
under the license from The Rockefeller University. However, The Rockefeller
University did not seek corresponding patents in any other country in respect of
this invention. The Rockefeller University has filed an additional U.S. patent
application and an international patent application relating to the activity of
thalidomide related to interleukin-12. Under the license from The Rockefeller
University, we were obligated to pay certain specified royalties to The
Rockefeller University on net sales of licensed products for covered
indications. In November 1999, we agreed with The Rockefeller University to
substitute a lump sum payment and issue stock options to The Rockefeller
University and the inventors in lieu of the royalties previously payable under
the license. The license from The Rockefeller University is coterminous with the
last to expire of the licensed patents and is terminable by The Rockefeller
University only in the event of a breach of the agreement's terms by us which
breach shall fail to be remedied for more than sixty days after notice thereof.
Any termination of the license from The Rockefeller University could have a
material adverse effect on our business, financial condition and results of
operations.
In 1998, we were granted an exclusive sublicense to all of the thalidomide
patents and patent applications worldwide, exclusively licensed to EntreMed by
the Children's Medical Center Corp., which is affiliated with Harvard
University, related to the anti-angiogenic action of thalidomide. Three U.S.
patents issued to Children's Medical Center Corp. will expire in 2014.
Corresponding foreign patent applications and additional U.S. patent
applications are still pending. Further, we have also exclusively sublicensed
pending U.S. and foreign patent applications related to the use of thalidomide
in combination with other therapeutic agents. There can be no assurance that
additional patents will issue, or that if patents issue, that such patents will
provide us with significant proprietary protection or commercial advantage. The
license from EntreMed is coterminous with the last to expire of the licensed
patents and we must pay royalties for at least 12 years from our first
commercial sale in the United States. The EntreMed license is terminable in the
event of a breach by us, which breach shall fail to be remedied for 60 days
after notice thereof. Any termination of the license from EntreMed could have a
material adverse affect on our business, financial condition and results of
operations.
We have been issued a total of 36 U.S. patents and have filed an additional 15
U.S. patent applications. Of the issued patents, 14 relate to our oncologic or
immunologic compounds and uses and six are directed to methylphenidate
therapeutic compositions and processes. Our U.S. patents expire between 2001
and 2019. We have filed patient applications and in some instances have
obtained patents in certain other countries which correspond to some, but not
all of our U.S. patents. We expect to continue to file patent applications
covering the use of our proprietary inventions.
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Prior to the enactment in the United States of new laws adopting certain
changes mandated by the General Agreement on Tariffs and Trade, the exclusive
rights afforded by a U.S. patent were for a period of 17 years measured from
the date of grant. Under these new laws, the term of any U.S. patent granted on
an application filed subsequent to June 8, 1995 will terminate 20 years from
the date on which the patent application was filed in the United States or the
first priority date, whichever occurs first. Future patents granted on an
application filed before June 8, 1995 will have a term that terminates 20 years
from such date, or 17 years from the date of grant, whichever date is later.
Under the Drug Price Competition and Patent Term Restoration Act of 1984, a
U.S. product patent or use patent may be extended for up to five years under
certain circumstances to compensate the patent holder for the time required for
FDA regulatory review of the product. The benefits of this act are available
only to the first approved use of the active ingredient in the drug product and
may be applied only to one patent per drug product. There can be no assurance
that we will be able to take advantage of this law.
Our success will depend, in part, on our ability to obtain and enforce patents,
protect trade secrets, obtain licenses to technology owned by third parties
when necessary and conduct its business without infringing the proprietary
rights of others. The patent positions of pharmaceutical and biotechnology
firms, including ours, can be uncertain and involve complex legal and factual
questions. In addition, the coverage sought in a patent application can be
significantly reduced before the patent is issued. Consequently, we do not know
whether any of our owned or licensed pending applications will result in the
issuance of patents or, if any patents are issued, whether they will provide
significant proprietary protection or commercial advantage, or whether they
will be circumvented or infringed upon by others. Since patent applications 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, we cannot be certain that we, or our licensors, were
the first to make the inventions covered by each of the pending patent
applications or that we, or our licensors, were the first to file patent
applications for such inventions. In the event a third party has also filed a
patent for any of its inventions, we, or our licensors, may have to participate
in interference proceedings declared by the U.S. patent and Trademark Office to
determine priority of invention, which could result in the loss of a U.S.
patent or loss of any opportunity to secure U.S. patent protection for the
invention. Even if the eventual outcome is favorable to us, such interference
proceedings could result in substantial cost to us. Prosecution of patent
applications and litigation to establish the validity and scope of patents, to
assert patent infringement claims against others and to defend against patent
infringement claims by others can be expensive and time-consuming. There can be
no assurance that, in the event that claims of any of our owned or licensed
patents are challenged by one or more third parties, any court or patent
authority ruling on such challenge will determine that such patent claims are
valid and enforceable. An adverse outcome in such litigation could cause us to
lose exclusivity relating to the subject matter delineated by such patent
claims and may have a material adverse effect on our business. If a third party
is found to have rights covering products or processes used by us, we could be
forced to cease using the products or processes covered by the disputed rights,
subject to significant liabilities to such third party and/or required to
license technologies from such third party. Also, different countries have
different procedures for obtaining patents and patents issued by different
countries provide different degrees of protection against the use of a patented
invention by others. There can be no assurance, therefore, that the issuance to
us in one country of a patent covering an invention will be followed by the
issuance in other countries of patents covering the same invention or that any
judicial interpretation of the validity, enforceability or scope of the claims
in a patent issued in one country will be similar to the judicial
interpretation given to a corresponding patent issued in another country.
Furthermore, even if our owned or licensed patents are determined to be valid
and enforceable, there can be no assurance that competitors will not be able to
design around such patents and compete with us using the resulting alternative
technology. We do not currently have, nor do we intend to seek, patent
protection relating to the use of THALOMID to treat ENL.
We also rely upon unpatented, proprietary and trade secret technology that we
seek to protect, in part, by confidentiality agreements with our collaborative
partners, employees, consultants, outside scientific collaborators, sponsored
researchers and other advisors. There can be no assurance that these agreements
provide meaningful protection or that they will not be breached, that we would
have adequate remedies for any such breach or that our trade secrets,
proprietary know-how and technological advances will not otherwise become known
to others. In addition, there can be no assurance that, despite precautions
taken by us, others have not and will not obtain access to our proprietary
technology or that such technology will not be found to be non-proprietary or
not a trade secret.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the manufacture and marketing of pharmaceuticals and
in our ongoing research and development activities. All of our therapeutic
products
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will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic products are subject to
rigorous preclinical testing and clinical trials and other pre-marketing
approval requirements by the FDA and regulatory authorities in other countries.
In the United States, various federal, and in some cases state statutes and
regulations also govern or impact upon the manufacturing, safety, labeling,
storage, record-keeping and marketing of such products. The lengthy process of
seeking required approvals and the continuing need for compliance with
applicable statutes and regulations, require the expenditure of substantial
resources. Regulatory approval, when and if obtained, may be limited in scope
which may significantly limit the indicated uses for which a product may be
marketed. Further, approved drugs, as well as their manufacturers, are subject
to ongoing review and discovery of previously unknown problems with such
products may result in restrictions on their manufacture, sale or use or in
their withdrawal from the market. Any failure by us, our collaborators or
licensees to obtain or maintain, or any delay in obtaining regulatory approvals
could adversely affect the marketing of our products, and our ability to
receive product revenue, royalty revenue or profit sharing payments.
The activities required before a pharmaceutical may be marketed in the United
States begin with preclinical testing not involving human subjects. Preclinical
tests include laboratory evaluation of product chemistry and animal studies to
assess the potential safety and efficacy of a product and its formulations. The
results of these studies must be submitted to the FDA as part of an
Investigational New Drug application, or IND, which must be reviewed by the FDA
primarily for safety considerations before proposed clinical trials in humans
can begin.
Typically, clinical trials involve a three-phase process. In Phase I, clinical
trials are generally conducted with a small number of individuals to determine
the early safety and tolerability profile and the pattern of drug distribution
and metabolism within the body. If the Phase I trials are satisfactory, Phase
II clinical trials are conducted with groups of patients in order to determine
preliminary efficacy, dosing regimes and expanded evidence of safety. In Phase
III, large-scale, multi-center, adequately powered and well-controlled,
comparative clinical trials are conducted with patients in effort to provide
enough data for the statistical proof of efficacy and safety required by the
FDA and others. However, in some limited circumstances Phase III trials may be
modified to allow evaluation of safety and efficacy in a less regimented
manner, which may allow us to rely on historical data relating to the natural
course of disease in untreated patients. In some cases, as a condition of NDA
approval, confirmatory trials are required to be conducted after the FDA's
approval of an NDA in order to resolve any open issues. The FDA requires
monitoring of all aspects of clinical trials and reports of all adverse events
must be made to the agency, both before and after drug approval.
The results of the preclinical testing and clinical trials are submitted to the
FDA as part of an NDA for evaluation to determine if the product is adequate
for approval to commence commercial sales. In responding to an NDA, the FDA may
grant marketing approval, request additional information or deny the
application if it determines that the application does not satisfy its
regulatory approval criteria. When an NDA is approved, the manufacturer must
employ a system for obtaining reports of experience and side effects that are
associated with the drug and make appropriate submissions to the FDA.
Pursuant to the Orphan Drug Act, a sponsor may request that the FDA designate a
drug intended to treat a "rare disease or condition" as an "orphan drug." A
"rare disease or condition" is defined as one which affects less than 200,000
people in the United States or which affects more than 200,000 people, 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 initially went into effect in January 1993 and were
amended in certain respects in 1998. Therefore, there is no assurance as to the
precise scope of protection that may be afforded by orphan drug status in the
future or that the current level of exclusivity and tax credits will remain in
effect. We have received from the FDA orphan drug approval for thalidomide for
the treatment of ENL. Celgene also has received orphan drug designations for
thalidomide: for the treatment of multiple myeloma; for the treatment of
HIV-associated wasting syndrome; for the treatment of the clinical
manifestations of mycobacterial infection caused by Mycobacterium tuberculosis
and non-tuberculosis mycobacteria; for the treatment of severe recurrent
apthous stomatitis in severely, terminally compromised patients; and for the
treatment of Crohn's disease. We also obtained orphan drug designation in
Kaposi's sarcoma and primary brain malignancies as part of our agreement with
EntreMed. However, there can be no assurance that another company also holding
orphan drug designation will not receive approval prior to us for the use of
thalidomide for the treatment of one or more of these indications, other than
ENL. If that were to happen, our applications for that indication could not be
approved until the competing company's seven-year period of exclusivity
expired.
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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 cGMP. In complying with cGMP, manufacturers must devote
extensive time, money and effort in the area of production and quality control
and quality assurance to maintain full technical compliance. Manufacturing
facilities and company records are subject to periodic inspections by the FDA
to ensure compliance. If a manufacturing facility is not in substantial
compliance with these requirements, regulatory enforcement action may be taken
by the FDA which may include seeking an injunction against shipment of products
from the facility and recall of products previously shipped from the facility.
Failure to comply with applicable FDA regulatory requirements can result in
informal administrative enforcement actions such as warning letters, recalls or
adverse publicity issued by the FDA or in legal actions such as seizures,
injunctions, fines based on the equitable remedy of disgorgement, restitution
and criminal prosecution.
Steps similar to those in the United States must be undertaken in virtually
every other country comprising the market for our products before any such
product can be commercialized in those countries. The approval procedure and
the time required for approval vary from country to country and may involve
additional testing. There can be no assurance that approvals will be granted on
a timely basis or at all. In addition, regulatory approval of prices is
required in most countries other than the United States. There can be no
assurance that the resulting prices would be sufficient to generate an
acceptable return to us.
COMPETITION
The pharmaceutical and agrochemical industries in which we compete are each
highly competitive. Our competitors include major pharmaceutical and
biotechnology companies, most of which have considerably greater financial,
technical and marketing resources than us. We also experience competition in
the development of our products and processes from universities and other
research institutions and, in some instances, compete with others in acquiring
technology from such sources.
Competition in the pharmaceutical industry, and specifically in the oncology and
immunology areas being addressed by us, is particularly intense. Numerous
companies are pursuing techniques to modulate TNF(alpha) production through
various combinations of monoclonal antibodies, TNF(alpha) receptors and small
molecule approaches. Two U.S. companies, Centocor Inc., a wholly owned
subsidiary of Johnson & Johnson, and Immunex Corporation, have registered drugs
that block the disease-causing effects of TNF(alpha) in inflammatory arthritis
and bowel disease. Both drug products are registered only in the United States
and have been marketed since 1998. In the United States the present cost of
TNF(alpha) modulating drugs, not including medical or other charges, is between
$7,000 and $11,500 per patient year. Both U.S. companies have applied for
European registration of their products. Amgen Inc. is currently also developing
a soluble TNF(alpha) receptor. BASF A.G. has a human antibody in development and
Celltech Group plc has a humanized antibody. In addition, a number of other
companies are attempting to address, with other technologies and products, the
disease states currently being targeted by us. EntreMed is researching the
effectiveness of its own thalidomide analogues as anti-angiogenic agents in the
treatment of retinal disease and cancer. 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-methylphenidate and is working with Medeva plc, a leading supplier of
dl-methylphenidate 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-methylphenidate. The agrochemical market is large and, within this market,
efforts are underway by the 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, we will be
required to continually upgrade our scientific expertise and technology,
identify and retain capable management, and pursue scientifically feasible and
commercially viable opportunities.
Our competition will be determined in part by the indications for which our
products are developed and ultimately approved by regulatory authorities. An
important factor in competition will be the timing of market introduction of
our or our competitors' products. Accordingly, the relative speed with which we
can develop products, complete clinical trials and approval processes and
supply commercial quantities of products to the market will be expected to be
important competitive factors. Competition among products approved for sale
will be based, among other things, on product efficacy, safety, convenience,
reliability, availability, price and patent position.
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EMPLOYEES
As of January 15, 2000, we had 146 full-time employees, 45 of whom were engaged
primarily in research and development activities, 60 of whom were engaged in
sales and commercialization activities and the remainder of whom were engaged
in executive and administrative activities. Of these employees, 53 have
advanced degrees, including 26 who have Ph.D. degrees. We also maintain
consulting arrangements with a number of scientists at various universities and
other research institutions in Europe and the United States.
PROPERTIES
We lease a 44,500-square foot laboratory and office facility in Warren, New
Jersey, under a lease with an unaffiliated party, which has a term ending in
May 2002 with one five-year renewal option, and a 29,000-square foot facility
which has a term ending in July 2010 with two five-year renewal options. We
also lease an 18,000-square foot laboratory and office facility in North
Brunswick, New Jersey, under a lease with an unaffiliated party which has a
term ending in December 2009 with two five-year renewal options. We believe
that our laboratory facilities are adequate for our research and development
activities for at least the next 12 months.
LEGAL PROCEEDINGS
We are not engaged in any material legal proceedings.
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MANAGEMENT
DIRECTORS, OFFICERS AND KEY EMPLOYEES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
NAME AGE POSITION
--------------------------------------------------------------------------------
<S> <C> <C>
John W. Jackson* ...................... 55 Chairman of the Board and Chief Executive
Officer
Sol J. Barer, Ph.D*. .................. 52 President, Chief Operating Officer, Director
Robert J. Hugin* ...................... 45 Chief Financial Officer and Senior Vice
President
David I. Stirling, Ph.D. .............. 46 Chief Scientific Officer and Executive Vice
President - Pharmaceutical Research and
Development
Jerome B. Zeldis, M.D., Ph.D. ......... 49 Chief Medical Officer and Vice President --
Medical Affairs
Joseph J. Day, Jr. .................... 58 Senior Vice President -- Planning and
Business Development
George W. J. Matcham, Ph.D. ........... 47 Senior Vice President -- Celgro
Steven D. Thomas, Ph.D. ............... 38 Vice President -- Regulatory Affairs and
Project Management
Bruce A. Williams ..................... 45 Vice President -- Marketing and Sales
Jack L. Bowman ........................ 67 Director
Frank T. Cary ......................... 79 Director
Arthur Hull Hayes, Jr., M.D. .......... 66 Director
Gilla Kaplan, Ph.D. ................... 52 Director
Richard C.E. Morgan ................... 55 Director
Walter L. Robb, Ph.D. ................. 71 Director
Lee J. Schroeder ...................... 71 Director
</TABLE>
* Executive Officer
JOHN W. JACKSON has been our Chairman of the Board and Chief Executive Officer
since January 1996. From February 1991 to January 1996, Mr. Jackson was
President of Gemini Medical, a consulting firm that he founded and which
specialized in services and investment advice to start-up medical device and
biotechnology companies. 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. Mr. Jackson received a B.A. degree
from Yale University and an M.B.A. from INSEAD, France.
SOL J. BARER, PH.D. has been our President since October 1993 and our Chief
Operating Officer and one of our directors since March 1994. Dr. Barer was our
Senior Vice President -- Science and Technology and Vice President/General
Manager -- Chiral Products from October 1990 to October 1993 and our Vice
President -- Technology from September 1987 to October 1990. Dr. Barer received
a Ph.D. in organic and physical chemistry from Rutgers University.
ROBERT J. HUGIN has been our Senior Vice President and Chief Financial Officer
since June 1999. Previously, Mr. Hugin had been a Managing Director at J.P.
Morgan & Co. Inc., which he joined in 1985. Mr. Hugin received an A.B. degree
from Princeton University and an M.B.A. from the University of Virginia.
DAVID I. STIRLING, PH.D. has been our Executive Vice President --
Pharmaceutical Research and Development since 1996 and our Chief Scientific
Officer since 1998. Dr. Stirling served as Senior Vice President--Biological
and Pharmaceutical Research and Development from 1993 to 1996, as Vice
President -- New Technology Chiral Products from 1991 to 1993, and in a variety
of other research positions from 1986 to 1991. Previously, Dr. Stirling was
employed by Celanese Research Company, a major chemical company, from 1980 to
1986. Dr. Stirling received a Ph.D. in biochemistry from the University of
Warwick.
34
<PAGE>
JEROME B. ZELDIS, M.D., PH.D. has been our Chief Medical Officer since 1999 and
our Vice President -- Medical Affairs since February 1997. Since 1996, Dr.
Zeldis has also been Associate Attending Physician at New York Hospital. Since
1995, Dr. Zeldis has also been a Clinical Associate Professor of Medicine,
Cornell University Medical School. From 1990 to 1994, Dr. Zeldis was Clinical
Research Physician, Sacramento Medical Foundation, Center for Blood Research,
and Associate Professor of Medicine at the University of California at Davis.
From 1988 to 1990, Dr. Zeldis was Assistant Professor of Medicine at the
University of California at Davis. From 1986 to 1988, Dr. Zeldis was Assistant
Professor of Medicine, Harvard Medical School. Dr. Zeldis was a director of
Sandoz Research Foundation and Janssen Research Foundation. Dr. Zeldis received
a Ph.D. in molecular biophysics and biochemistry from Yale University. Dr.
Zeldis also received an M.D. degree from Yale Medical School.
JOSEPH J. DAY, JR. has been our Senior Vice President, Planning and Business
Development since January 1998. Mr. Day is a 28-year veteran of the
pharmaceutical industry. During his career, Mr. Day has held various
international and domestic management positions with Cephalon, Inc., American
Home Products Corporation, Johnson & Johnson, Merck and Company and
Schering-Plough Corporation. Mr. Day received a B.S. in pharmacy from Fordham
University and an M.B.A. from Rutgers University.
GEORGE W. J. MATCHAM, PH.D. has been our Senior Vice President -- Celgro since
1996. Dr. Matcham joined in 1988, and became Vice President of Chiral Amine
Technology in 1991 and Vice President and General Manager of Chiral Products in
1993. Previously, Dr. Matcham was a Senior Scientist and Project Leader for
Shell Research Ltd., UK, the physical and biological research subsidiary of
Royal Dutch/Shell, from 1981 to 1988. Dr. Matcham received a Ph.D. in microbial
enzymology from the University of Wales, and was Director of Studies in
chemistry, and a fellow of Emmanuel College of the University of Cambridge from
1979 to 1980.
STEVEN D. THOMAS, PH.D. has been our Vice President -- Regulatory Affairs and
Project Management since August 1999 and was our Vice President --
Pharmaceutical Development from 1996 to 1999. Dr. Thomas held various research
and development positions with us from 1992 to 1996. Previously, Dr. Thomas was
a Business Unit Manager for Enzymatix Ltd., a pharmaceutical and fine chemicals
company, from 1987 to 1992. Dr. Thomas received a Ph.D. in molecular enzymology
from Southampton University.
BRUCE A. WILLIAMS has been our Vice President -- Marketing and Sales since
1996. Previously, Mr. Williams was employed by Ortho Biotech Inc., a subsidiary
of Johnson & Johnson, where he held various positions from 1989 to 1996,
including Executive Director -- Marketing. From 1984 to 1989, Mr. Williams held
several positions at American Cyanamid Company. Mr. Williams received a B.A. in
biology from Syracuse University and an M.B.A. from Columbia University.
JACK L. BOWMAN, one of our directors 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.
FRANK T. CARY has been Chairman of the Executive Committee of our board of
directors since July 1990 and has been one of our directors 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., Lexmark
International Inc., Vion Pharmaceuticals Inc. and Teltrend, Inc.
ARTHUR HULL HAYES, JR., M.D., one of our directors since 1995, has been
President and Chief Operating Officer of MediScience Associates, 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 United States Food and Drug Administration. Dr.
Hayes also is a director of Myriad Genetics, Inc., NaPro BioTherapeutics, Inc.
and Premier Research Worldwide.
GILLA KAPLAN, PH.D., one of our directors 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
35
<PAGE>
Immunization of the World Health Organization, has participated in several NIH
peer review panels, and 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.
RICHARD C.E. MORGAN, one of our directors since 1987, has been the Managing
Member of Amphion Partners LLC, formerly Wolfensohn Partners, L.P., since 1986.
From January 1996 to January 1998, Mr. Morgan was a partner of Jackson Hole
Management Company, Inc. Mr. Morgan also is Chairman of the board of directors
of AXCESS, Inc., Chairman of the board of directors of Quidel Corp., and a
director of Indigo, N.V. and Orbis International, Inc.
WALTER L. ROBB, PH.D., one of our directors 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 Capital District Sports and a director of
Cree Research Inc., Mechanical Technology, Inc. and Plug Power, Inc.
LEE J. SCHROEDER, one of our directors 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 Bryan LGH Hospital, MGI Pharmaceutical, Inc., Ascent
Pediatrics, Inc. and Interneuron Pharmaceuticals, Inc.
36
<PAGE>
SELLING STOCKHOLDERS
The table below sets forth the beneficial ownership of our common stock as of
December 31, 1999 by each of the selling stockholders. Beneficial ownership of
our common stock is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes voting or investment power with
respect to securities and options that are exercisable or convertible within 60
days. Each of the selling stockholders has sole voting and investment power
with respect to all shares of common stock shown as beneficially owned by it.
All of the shares owned by each selling stockholder are shares underlying our
convertible notes held by it.
<TABLE>
<CAPTION>
--------------------------------------------
SHARES OWNED NUMBER OF SHARES SHARES OWNED
PRIOR TO OFFERING BEING OFFERED AFTER OFFERING
-------------------- ------------------ -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ----------------------------------------------------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Hancock Mezzanine Partners, LP ..................... 416,700 2.3% 258,000 158,700 *
c/o John Hancock Life Insurance Company
200 Clarendon Street
Boston, MA 02117
Attention: Sandeep Alva
Bond & Corporate Finance Group, T-57
Signature 1A (Cayman), Ltd. ........................ 27,780 * 17,200 10,580 *
c/o John Hancock Life Insurance Company
200 Clarendon Street
Boston, MA 02117
Attention: Manager
Investment Accounting Division, B-3
John Hancock Variable Life Insurance Company ....... 11,112 * 6,880 4,232 *
c/o John Hancock Life Insurance Company
200 Clarendon Street
Boston, MA 02117
Attention: Manager
Investment Accounting Division, B-3
John Hancock Life Insurance Company ................ 377,808 2.0% 233,920 143,888 *
200 Clarendon Street
Boston, MA 02117
Attention: Manager
Investment Accounting Division, B-3
</TABLE>
- ---------
* Represents less than 1%.
37
<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of December 31, 1999, our authorized capital stock consists of 30,000,000
shares of common stock, par value $.01 per share, and 5,000,000 shares of
preferred stock, par value $.01 per share, of which 520 shares have been
designated Series A convertible preferred stock and 20,000 shares have been
designated as Series B convertible preferred stock. As of December 31, 1999,
there were 17,703,646 shares of common stock outstanding, no shares of Series A
convertible preferred stock outstanding and no shares of Series B convertible
preferred stock outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders, and do not have cumulative voting
rights. Holders of common stock are entitled to receive ratably such dividends,
if any, as may be declared by our board of directors out of funds legally
available therefor, and subject to any preferential dividend rights of any then
outstanding preferred stock. Upon liquidation, dissolution, or winding up of
us, the holders of common stock are entitled to receive ratably our net assets
available after the payment of all debts and other liabilities and subject to
any liquidation preference of any then outstanding preferred stock. Holders of
common stock have no preemptive, subscription or conversion rights. There are
no redemption or sinking fund provisions applicable to the common stock. The
outstanding shares of common stock are, and the shares offered by us in this
offering will be when issued and paid for, fully paid and non-assessable.
PREFERRED STOCK
Our board of directors has the authority, subject to certain restrictions,
without further stockholder approval, to issue, at any time and from time to
time, shares of preferred stock in one or more series. Each such series shall
have such number of shares, designations, preferences, voting powers,
qualifications, and special or relative rights or privileges as shall be
determined by our board of directors, which may include, among others, dividend
rights, voting rights, redemption and sinking fund provisions, liquidation
preferences, conversion rights and preemptive rights, to the full extent now or
hereafter permitted by the laws of the State of Delaware.
The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of holders of any preferred stock that may be
issued in the future. Such rights may include voting and conversion rights
which could adversely affect the holders of the common stock. Satisfaction of
any dividend preferences of outstanding preferred stock would reduce the amount
of funds available, if any, for the payment of dividends on common stock.
Holders of preferred stock would typically be entitled to receive a preference
payment.
SHAREHOLDER RIGHTS PLAN
Our board of directors has adopted a shareholder rights plan. The shareholder
rights plan was adopted to give the Board increased power to negotiate in our
best interests and to discourage appropriation of control of us at a price that
is unfair to our stockholders. It is not intended to prevent fair offers for
acquisition of control determined by our board of directors to be in the best
interests of us and our stockholders, nor is it intended to prevent a person or
group from obtaining representation on or control of our board of directors
through a proxy contest, or to relieve our board of directors of its fiduciary
duty to consider any proposal for our acquisition in good faith.
The shareholder rights plan involved the distribution of one "right" as a
dividend on each outstanding share of our common stock to all holders 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 become exercisable upon, the occurrence of certain
triggering events, and the exercise price is based on the estimated long-term
value of our common stock. The exercise of these rights becomes economically
attractive upon the triggering of certain "flip-in" or "flip-over" rights which
work in conjunction with the shareholder rights plan's basic provisions. The
flip-in rights will permit their holders to purchase shares of common stock at
a discounted rate, resulting in substantial dilution of an acquiror's voting
and economic interests in us. The flip-over element of the shareholder rights
plan involves some mergers or significant asset purchases, which trigger
certain rights to purchase shares of the acquiring or surviving company at a
discount. The shareholder rights plan contains a "permitted offer" exception
which allows offers determined by our board of directors to be in our best
interests and our stockholders to take place free of the diluting effects of
the shareholder rights plan's mechanisms.
38
<PAGE>
Our board of directors retains the right, at all times prior to acquisition of
15% of our voting common stock by an acquiror, to discontinue the shareholder
rights plan through the redemption of all rights, or to amend the shareholder
rights plan in any respect.
DELAWARE LAW AND SOME BY-LAW PROVISIONS
Our board of directors has adopted certain amendments to our by-laws intended
to strengthen our board of directors' position in the event of a hostile
takeover attempt. These by-law provisions have the following effects:
o they provide that only persons who are nominated in accordance with the
procedures set forth in the by-laws shall be eligible for election as our
directors, except as may be otherwise provided in the by-laws;
o they provide that only business brought before the annual meeting by our
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;
o they provide that only the Chairman of the Board, if any, the Chief
Executive Officer, the President, the Secretary or a majority of our board
of directors may call special meetings of our stockholders;
o they establish a procedure for our board of directors to fix the record
date whenever stockholder action by written consent is undertaken; and
o they require a vote of holders of two-thirds of the outstanding shares of
common stock to amend certain by-law provisions.
Furthermore, we are 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company. It is located at 40 Wall St., 46th Floor, New York,
NY, 10005, and its telephone number is (718) 921-8200.
39
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock could adversely affect
the prevailing market price of our common stock. In addition, as of December
31, 1999, there were outstanding stock options exercisable for 2,327,267 shares
of common stock, of which 967,234 were currently exercisable, and outstanding
warrants exercisable for 551,044 shares of common stock. If all of the
convertible notes outstanding on December 31, 1999 had been converted on that
date, 2,418,313 shares of common stock would have been issued. Immediately
prior to this offering, the selling stockholders will convert a portion of our
9.0% convertible notes issued in January 1999 held by them into 516,000 shares
of our common stock. All shares of common stock referred to in this paragraph
would be freely tradeable upon issuance. See "Description of Capital Stock."
Shares which may be acquired by a person deemed an affiliate of ours as that
term is defined in Rule 144 promulgated under the Securities Act of 1933 will
remain subject to the resale limitations of Rule 144. Generally, Rule 144
provides that a person who has beneficially owned "restricted" shares for at
least one year will be entitled to sell on the open market in brokers'
transactions within any three month period a number of shares that does not
exceed the greater of:
o 1% of the then outstanding shares of common stock; and
o the average weekly trading volume in the common stock on the open market
during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain post-sale notice requirements
and the availability of current public information about us.
In the event that any person who is deemed to be our affiliate purchases shares
of our common stock pursuant to this offering or acquires shares of our common
stock pursuant to one of our employee benefit plans, the shares held by such
person are required under Rule 144 to be sold in brokers' transactions, subject
to the volume limitations described above. Shares properly sold in reliance
upon Rule 144 to persons who are not our affiliates are thereafter freely
tradable without restriction.
We and our executive officers and directors and the selling stockholders have
agreed, with limited exceptions, that, during the period beginning from the
date of this prospectus and continuing to and including the date 90 days after
the date of this prospectus, none of us will, directly or indirectly, offer,
sell, offer to sell, contract to sell or otherwise dispose of any shares of
common stock or any of our securities which are substantially similar to the
common stock, including but not limited to any securities that are convertible
into or exchangeable for, or that represent the right to receive, common stock
or any such substantially similar securities or enter into any swap, option,
future, forward or other agreement that transfers, in whole or in part, the
economic consequence of ownership of common stock or any securities
substantially similar to the common stock, other than pursuant to the exercise
of stock options and warrants outstanding on the date of this prospectus, the
conversion of our convertible notes outstanding on the date of this prospectus
and employee and director stock option plans existing on the date of this
prospectus, without the prior written consent of J.P. Morgan Securities Inc.
40
<PAGE>
UNDERWRITING
J.P. Morgan Securities Inc. and Prudential Securities Incorporated are acting
as joint lead managers. J.P. Morgan Securities Inc. is acting as book running
lead manager for this offering.
The underwriters named below, for whom J.P. Morgan Securities Inc., Prudential
Securities Incorporated and U.S. Bancorp Piper Jaffray Inc. are acting as
representatives, have severally agreed, subject to the terms and conditions set
forth in the underwriting agreement between us, the selling stockholders and
the underwriters, to purchase from us and the selling stockholders, and we and
the selling stockholders have agreed to sell to the underwriters, the
respective numbers of shares of common stock set forth opposite their names
below:
<TABLE>
<CAPTION>
-------------
NUMBER OF SHARES
UNDERWRITERS -----------------
<S> <C>
J.P. Morgan Securities Inc. ................................ 1,012,500
Prudential Securities Incorporated ......................... 1,012,500
U.S. Bancorp Piper Jaffray Inc. ............................ 675,000
Adams, Harkness & Hill, Inc. ............................... 30,000
Banc of America Securities LLC ............................. 30,000
Bear, Stearns & Co. Inc. ................................... 30,000
Deutsche Bank Securities Inc. .............................. 30,000
FAC/Equities ............................................... 30,000
FleetBoston Robertson Stephens Inc. ........................ 30,000
Lehman Brothers Inc. ....................................... 30,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated ......... 30,000
Salomon Smith Barney Inc. .................................. 30,000
Vanguard Capital ........................................... 30,000
---------
Total .................................................. 3,000,000
=========
</TABLE>
The nature of the underwriters' obligations under the underwriting agreement is
such that all of the common stock being offered, excluding shares covered by
the over-allotment option granted to the underwriters, must be purchased if any
are purchased.
The representatives of the underwriters have advised us and the selling
stockholders that the several underwriters propose to offer the common stock to
the public initially at the public offering price set forth on the cover page
of this prospectus and may offer the common stock to selected dealers at such
price less a concession not to exceed $3.64 per share. The underwriters may
allow, and such dealers may reallow, a concession to other dealers not to
exceed $0.10 per share. After the initial public offering of the common stock,
the public offering price and other selling terms may be changed by the
representatives.
We have granted the underwriters an option, exercisable for 30 days from the
date of this prospectus, to purchase up to 450,000 additional shares of common
stock at the same price per share to be paid by the underwriters for the other
shares offered hereby. If the underwriters purchase any such additional shares
pursuant to the option, each of the underwriters will be committed to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The underwriters may exercise the option only to cover
over-allotments, if any, made in connection with the distribution of the common
stock offered hereby.
The following tables show the per share and total underwriting discounts to be
paid to the underwriters by us and the selling stockholders, assuming both no
exercise and full exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
----------------------
PAYABLE BY CELGENE
--------------------------------
NO EXERCISE FULL EXERCISE
--------------- --------------
<S> <C> <C>
Per share ......... $ 6.06 $ 6.06
Total ........... $15,053,040 $17,780,040
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
----------------------
PAYABLE BY THE
SELLING STOCKHOLDERS
------------------------------
NO EXERCISE FULL EXERCISE
------------- --------------
<S> <C> <C>
Per share ......... $ 6.06 $ 6.06
Total ........... $3,126,960 $3,126,960
</TABLE>
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to make in respect
thereof.
We estimate that the total expenses of this offering to us, excluding
underwriting discounts, will be $492,000. The selling stockholders will pay no
expenses of this offering.
In connection with this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of common stock.
Specifically, the underwriters may overallot this offering, creating a
syndicate short position. In addition, the underwriters may bid for, and
purchase, shares of common stock in the open market to cover syndicate shorts
or to stabilize the price of the common stock. Finally, the underwriting
syndicate may reclaim selling concessions allowed for distributing shares of
common stock in this offering, if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain
the market price of the shares of common stock above independent market levels.
The underwriters are not required to engage in these activities, and may end
any of these activities at any time.
Prior to the pricing of the common stock, and until such time when a
stabilizing bid may have been made, some or all of the underwriters who are
market makers in the common stock may make bids for or purchases of shares of
common stock subject to certain restrictions, known as passive market making
activities.
One or more of the underwriters may facilitate the marketing of this offering
online directly or through one of its affiliates. In those cases, prospective
investors may view offering terms and a prospectus online and, depending upon
the particular underwriter, place orders online or through their financial
advisors.
We and our executive officers and directors and the selling stockholders have
agreed, with limited exceptions, that, during the period beginning from the
date of this prospectus and continuing to and including the date 90 days after
the date of this prospectus, none of us will, directly or indirectly, offer,
sell, offer to sell, contract to sell or otherwise dispose of any shares of
common stock or any of our securities which are substantially similar to the
common stock, including but not limited to any securities that are convertible
into or exchangeable for, or that represent the right to receive, common stock
or any such substantially similar securities or enter into any swap, option,
future, forward or other agreement that transfers, in whole or in part, the
economic consequence of ownership of common stock or any securities
substantially similar to the common stock, other than pursuant to the exercise
of stock options and warrants outstanding on the date of this prospectus, the
conversion of our convertible notes outstanding on the date of this prospectus
and employee and director stock option plans existing on the date of this
prospectus, without the prior written consent of J.P. Morgan Securities Inc.
The common stock is traded on the Nasdaq National Market under the symbol
"CELG."
It is expected that delivery of the shares will be made to investors on or
about February 16, 2000.
From time to time in the ordinary course of their respective businesses,
certain of the underwriters and their affiliates have engaged in and may
continue to engage in commercial banking and/or investment banking transactions
with us and our affiliates.
42
<PAGE>
LEGAL MATTERS
Proskauer Rose LLP, New York, New York, has passed on the validity of the
shares. Certain legal matters in connection with this offering are being passed
upon for the underwriters by Cahill Gordon & Reindel, New York, New York.
EXPERTS
Our consolidated financial statements as of December 31, 1998 and 1997, and for
each of the years in the three-year period ended December 31, 1998, have been
included herein and in the Registration Statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The statements in this prospectus under the captions "Risk Factors--We may not
be able to protect our intellectual property" and "Business--Patents and
Proprietary Technology" have been reviewed and approved by Mathews, Collins,
Shepherd & Gould, P.A. and are included herein in reliance upon such review and
approval.
The statements in this prospectus that relate to U.S. patent rights licensed
from The Rockefeller University and EntreMed/Children's Medical Center Corp.
under the captions "Risk Factors--We may not be able to protect our
intellectual property" and "Business--Patents and Proprietary Technology" have
been reviewed and approved by Pennie & Edmonds LLP as special patent counsel to
Celgene Corporation for these matters, and are included herein in reliance upon
their review and approval as experts in U.S. patent law.
The statements in this prospectus under the captions "Risk Factors--The
pharmaceutical and agrochemical industries are subject to extensive government
regulation and there is no assurance of regulatory approval" and
"Business--Governmental Regulation" have been reviewed and approved by
Kleinfeld, Kaplan & Becker, as experts in such matters, and are included herein
in reliance upon such review and approval.
WHERE YOU CAN FIND MORE INFORMATION
We file reports with the Securities and Exchange Commission on a regular basis
that contain financial information about us and our results of operations. You
may read or copy any document that we file with the Securities and Exchange
Commission at the Securities and Exchange Commission's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549 and 7 World Trade Center, Suite
1300, New York, New York 10048. You may obtain information about the Public
Reference Room by calling the Securities and Exchange Commission for more
information at 1-800-SEC-0330. Our Securities and Exchange Commission filings
are also available at the Securities and Exchange Commission's web site at
http://www.sec.gov.
The Securities and Exchange Commission allows us to "incorporate by reference"
the information we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus, and
information that we file later with the Securities and Exchange Commission will
automatically update and supersede this information. We are incorporating by
reference the documents listed below and any future filings that we will make
with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934:
o Our Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
as amended by an Amendment on Form 10-K/A and an Amendment on Form
10-K/A-2;
o Our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1999;
o Our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1999;
o Our Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 1999;
o Our Current Report on Form 8-K dated February 11, 1999;
o Our Current Report on Form 8-K dated January 27, 2000;
o Our Current Report on Form 8-K dated February 9, 2000; and
o Our Current Report on Form 8-K dated February 9, 2000.
43
<PAGE>
You may request a copy of these filings, at no cost, by writing or telephoning
our Secretary at the following address:
Celgene Corporation
7 Powder Horn Drive
Warren, NJ 07059
(732) 271-1001
This prospectus is part of a registration statement we filed with the
Securities and Exchange Commission. You should rely only on the information or
representations provided in this prospectus. We have authorized no one to
provide you with different information. We are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this prospectus is accurate as of any date other than
the date on the front of the document.
44
<PAGE>
CELGENE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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-8
Notes to Consolidated Financial Statements .............................................. F-10
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of September 30, 1999 ........................... F-20
Condensed Consolidated Statements of Operations -- Nine Months Ended
September 30, 1999 and 1998 ............................................................ F-21
Condensed Consolidated Statements of Operations -- Three Months Ended
September 30, 1999 and 1998 ............................................................ F-22
Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 1999 and 1998 ............................................................ F-23
Notes to Unaudited Condensed Consolidated Financial Statements .......................... F-24
</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>
---------------------
DECEMBER 31,
-------------------------------------
1997 1998
----------------- -----------------
<S> <C> <C>
ASSETS
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
Current liabilities:
Accounts payable .................................................................. $ 842,262 $ 3,848,853
Accrued expenses .................................................................. 1,388,933 3,041,859
Capitalized lease obligation ...................................................... 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 consolidated 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 stockholders ............................... $ (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 consolidated financial statements.
F-4
<PAGE>
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
-------------------------------------------------------------------
COMMON STOCK PREFERRED STOCK TREASURY STOCK
------------------------- ------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ -------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1,
1996 ............................ 8,807,863 $ 88,079 -- $ -- (24,271) $ (243)
Exercised stock options .......... 42,069 420
Repurchase of shares ............. (5,714) (99,996)
Amortization of deferred
compensation ....................
Conversion of convertible
debentures ...................... 372,681 3,727
Issuance of preferred stock,
net ............................. 503 25,150,000
Conversion of preferred stock 1,388,809 13,888 (236) (12,141,309)
Preferred stock lock-up
warrants ........................
Accretion of premium on
preferred stock ................. 874,725
Deemed dividend for
preferred stock conversion
discount ........................
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)
<CAPTION>
-------------------------------------------------------------------
ACCUMULATED
ADDITIONAL UNAMORTIZED OTHER
PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE
CAPITAL COMPENSATION DEFICIT INCOME (LOSS) TOTAL
-------------- -------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1,
1996 ............................ $ 78,064,288 $ (7,085) $ (70,989,400) $ (13,138) $ 7,142,501
Exercised stock options .......... 337,521 337,941
Repurchase of shares ............. (99,996)
Amortization of deferred
compensation .................... 5,952 5,952
Conversion of convertible
debentures ...................... 2,645,388 2,649,115
Issuance of preferred stock,
net ............................. (1,320,375) 23,829,625
Conversion of preferred stock 12,127,421 --
Preferred stock lock-up
warrants ........................ 138,156 (138,156) --
Accretion of premium on
preferred stock ................. (874,725) --
Deemed dividend for
preferred stock conversion
discount ........................ 2,777,777 (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 ............................ $ 94,770,176 $ (1,133) $ (92,599,039) $ 5,714 $ 16,065,009
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (CONTINUED)
<TABLE>
<CAPTION>
------------------------------------------------------------------
COMMON STOCK PREFERRED STOCK TREASURY STOCK
------------------------ ---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ----------- ----------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31,
1996 ............................. 10,611,422 $ 106,114 267 $ 13,883,416 (29,985) $ (100,239)
Exercised stock options ........... 2,986 30
Shares issued in lieu of cash
bonus ............................ 5,000 50
Amortization of deferred
compensation .....................
Conversion of convertible
debenture ........................ 441,248 4,412
Issuance of Series B Preferred
Stock-net ........................ 5,000 4,046,923
Conversion of preferred stock ..... 2,166,193 21,662 (5,180) (14,654,071)
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
Issuance of common stock, net ..... 2,201,100 22,011
---------- --------- -- -------------- ------- -----------
BALANCES AT DECEMBER 31,
1997 ............................. 15,427,949 $ 154,279 74 $ 4,029,455 (22,888) $ (76,535)
<CAPTION>
------------------------------------------------------------------
ACCUMULATED
ADDITIONAL UNAMORTIZED OTHER
PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE
CAPITAL COMPENSATION DEFICIT INCOME (LOSS) TOTAL
--------------- -------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31,
1996 ............................. $ 94,770,176 $ (1,133) $ (92,599,039) $ 5,714 $ 16,065,009
Exercised stock options ........... 20,187 20,217
Shares issued in lieu of cash
bonus ............................ 55,575 55,625
Amortization of deferred
compensation ..................... 1,133 1,133
Conversion of convertible
debenture ........................ 2,326,892 2,331,304
Issuance of Series B Preferred
Stock-net ........................ 793,825 4,840,748
Conversion of preferred stock ..... 14,632,409 --
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 ............ 55,250 78,954
Issuance of common stock, net ..... 18,184,119 18,206,130
------------- --------- -------------- -------- -------------
BALANCES AT DECEMBER 31,
1997 ............................. $ 130,838,433 $ -- $ (119,520,540) $ -- $ 15,425,092
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (CONTINUED)
<TABLE>
<CAPTION>
-------------------------------------------------------------------
COMMON STOCK PREFERRED STOCK TREASURY STOCK
------------------------ ------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ----------- -------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT
DECEMBER 31, 1997 ........... 15,427,949 $154,279 74 $ 4,029,455 (22,888) $ (76,535)
Exercised stock options ...... 283,120 2,831
Exercise of warrants ......... 118,230 1,183
Costs related to secondary
offering ....................
Conversion of preferred
stock ....................... 575,669 5,757 (74) (4,054,103)
Accretion of premium on
preferred stock ............. 24,648
Shares issued for employee
benefit plans ............... 8,317 83 22,888 76,535
Stock purchase ............... 199,688 1,997
Net loss and comprehensive
loss ........................
---------- -------- --- ------------- ------- ---------
BALANCES AT
DECEMBER 31, 1998 ........... 16,612,973 $166,130 -- $ -- -- $ --
========== ======== === ============= ======= =========
<CAPTION>
-------------------------------------------------------------------
ACCUMULATED
ADDITIONAL UNAMORTIZED OTHER
PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE
CAPITAL COMPENSATION DEFICIT INCOME (LOSS) TOTAL
--------------- -------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCES AT
DECEMBER 31, 1997 ........... $130,838,433 $ -- $ (119,520,540) $ -- $ 15,425,092
Exercised stock options ...... 2,028,715 2,031,546
Exercise of warrants ......... 986,883 988,066
Costs related to secondary
offering .................... (73,136) (73,136)
Conversion of preferred
stock ....................... 4,048,346 --
Accretion of premium on
preferred stock ............. (24,648) --
Shares issued for employee
benefit plans ............... 387,070 463,688
Stock purchase ............... 2,498,003 2,500,000
Net loss and comprehensive
loss ........................ (25,067,880) (25,067,880)
------------ ---- -------------- ---- -------------
BALANCES AT
DECEMBER 31, 1998 ........... $140,714,314 $ -- $ (144,613,068) $ -- $ (3,732,624)
============ ==== ============== ==== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<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 consolidated financial statements.
F-8
<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:
Charge 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 consolidated financial statements.
F-9
<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(Reg. TM), its formulation of thalidomide, a
potent yet selective inhibitor of TNF(alpha). On July 16, 1998, the Company
received an approval from the United States 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.
F-10
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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.
(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:
<TABLE>
<S> <C>
Laboratory equipment and
machinery ...................... 5-10 years
Furniture and fixtures ......... 5-10 years
</TABLE>
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 8.
F-11
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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.
(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 consolidated 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 10), 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 goods .......... 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.
F-12
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 (CONTINUED )
(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>
(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 shares of common stock 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.
F-13
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 (CONTINUED)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
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.
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 per share. 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 of 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 had 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 fair market value of the Company's common stock at the
date of issuance.
Preferred Stock
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.
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.
(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
F-14
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 (CONTINUED)
(8) STOCK BASED COMPENSATION (CONTINUED)
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 Plans. The plans terminate in 2002 and
2008, respectively.
With respect to options granted under the incentive plans, the exercise price
may not be less than the fair market value of the common stock on the date of
grant. In general, each option granted under the Plans vests evenly over a
three or four year period and expires 10 years from the date of grant, subject
to earlier expiration in case of termination of employment. The vesting period
for options and restricted stock awards granted under the Plans is subject to
certain acceleration provisions if a change in control, as defined in the
Plans, occurs.
On 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:
<TABLE>
<CAPTION>
---------------------
1996 1997 1998
In thousands of dollars, except per share data ------------- -------------- --------------
<S> <C> <C> <C>
Net loss applicable to common stockholders:
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.
F-15
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 (CONTINUED)
(8) STOCK BASED COMPENSATION (CONTINUED)
The following table summarizes the stock option activity for both Plans:
<TABLE>
<CAPTION>
---------------------
OPTIONS OUTSTANDING
------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE PRICE PER
FOR GRANT SHARES 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>
The following table summarizes information concerning options outstanding under
the Plans at December 31, 1998:
<TABLE>
<CAPTION>
------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------- ---------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER AVERAGE REMAINING NUMBER AVERAGE
OUTSTANDING EXERCISE TERM EXERCISABLE EXERCISE
AT 12/31/98 PRICE (YRS.) AT 12/31/98 PRICE
RANGE OF EXERCISE 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 Chief Executive Officer, 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 notes, 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.
F-16
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 (CONTINUED)
(8) STOCK BASED COMPENSATION (CONTINUED)
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.
(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>
-------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Deferred Assets:
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.
F-17
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 (CONTINUED )
(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 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 The Rockefeller University and funded by the Company. The
Rockefeller University 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 The Rockefeller University $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.
F-18
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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>
CELGENE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
----------
SEPTEMBER 30,
1999
-----------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 14,324,499
Marketable securities available for sale ................................. 4,299,974
Accounts receivable, net of allowance of $117,512 at September 30, 1999... 2,941,555
Inventory ................................................................ 2,072,272
Other current assets ..................................................... 678,527
--------------
Total current assets ................................................... 24,316,827
Plant and equipment, net .................................................. 2,083,212
Other assets .............................................................. 688,732
--------------
Total assets ........................................................... $ 27,088,771
==============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable ......................................................... $ 3,041,185
Accrued expenses ......................................................... 3,826,091
Capitalized lease obligation ............................................. 214,544
--------------
Total current liabilities .............................................. 7,081,820
Capitalized lease obligation-net of current portion ....................... 44,607
Long term convertible notes ............................................... 38,458,336
--------------
Total liabilities ...................................................... 45,584,763
--------------
Stockholders' equity (deficit):
Common stock, $.01 par value per share
30,000,000 shares authorized at September 30, 1999
issued and outstanding 17,151,595 shares at September 30, 1999 ......... 171,516
Additional paid-in capital ............................................... 144,944,797
Accumulated deficit ...................................................... (163,548,803)
Accumulated other comprehensive loss ..................................... (63,502)
--------------
Total stockholders' deficit ............................................ (18,495,992)
--------------
Total liabilities and stockholders' deficit .............................. $ 27,088,771
==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-20
<PAGE>
CELGENE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
-------------------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1998 1999
---------------- -----------------
<S> <C> <C>
Revenues:
Product sales .......................................................... $ 1,030,838 $ 15,063,644
Research contracts ..................................................... 105,000 1,732,500
------------- -------------
Total revenues ....................................................... 1,135,838 16,796,144
Expenses:
Cost of goods sold ..................................................... 59,270 2,076,457
Research and development ............................................... 13,968,657 14,366,132
Selling, general and administrative .................................... 11,207,326 17,846,527
------------- -------------
Total expenses ....................................................... 25,235,253 34,289,116
Operating loss .......................................................... (24,099,415) (17,492,972)
Other income and expense:
Interest income ........................................................ 497,100 511,659
Interest expense ....................................................... 45,192 1,954,420
------------- -------------
Loss from continuing operations ......................................... (23,647,507) (18,935,733)
Discontinued operations: (Note 7)
Loss from operations ................................................... (59,837) --
Gain on sale of chiral assets .......................................... 7,014,830 --
------------- -------------
Net loss ................................................................ (16,692,514) (18,935,733)
Accretion of premium payable on preferred stock ......................... 24,648 --
------------- -------------
Net loss applicable to common stockholders .............................. $ (16,717,162) $ (18,935,733)
============= =============
Per share basic and diluted:
Loss from continuing operations ........................................ $ (1.47) $ (1.12)
Discontinued operations:
Loss from operations ................................................. -- --
Gain on sale of chiral assets ........................................ 0.44 --
------------- -------------
Net loss applicable to common stockholders per share of common stock ... $ (1.04) $ (1.12)
============= =============
Weighted average number of shares of common stock outstanding .......... 16,062,000 16,903,000
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-21
<PAGE>
CELGENE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
-------------------
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Revenues:
Product sales ........................................................ $ 1,030,838 $ 6,315,319
Research contracts ................................................... 25,000 425,000
------------ ------------
Total revenues ..................................................... 1,055,838 6,740,319
Expenses:
Cost of goods sold ................................................... 59,270 701,816
Research and development ............................................. 5,238,106 4,933,317
Selling, general and administrative .................................. 3,876,150 6,618,373
------------ ------------
Total expenses ..................................................... 9,173,526 12,253,506
Operating loss ........................................................ (8,117,688) (5,513,187)
Other income and expense:
Interest income ...................................................... 136,262 256,215
Interest expense ..................................................... 39,086 861,397
------------ ------------
Net loss .............................................................. $ (8,020,512) $ (6,118,369)
============ ============
Per share basic and diluted:
Net loss ............................................................. $ (0.49) $ (0.36)
============ ============
Weighted average number of shares of common stock outstanding ......... 16,399,000 17,028,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-22
<PAGE>
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
--------------------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations ..................................................... $ (23,647,507) $ (18,935,733)
Adjustments to reconcile loss from continuing operations to
net cash used in operating activities:
Depreciation ....................................................................... 575,575 585,497
Issuance of stock for employee benefits ............................................ 463,606 799,004
Provision for doubtful accounts .................................................... -- 74,126
Amortization of debt issuance costs ................................................ -- 187,500
Amortization of discount on convertible note ....................................... -- 109,377
Change in current assets & liabilities:
Increase in inventory .............................................................. (317,437) (500,864)
Increase (Decrease) in accounts payable and accrued expenses ....................... (1,984,036) (822,440)
(Increase) Decrease in accounts receivable ......................................... 388,063 (353,292)
(Increase) Decrease in other assets ................................................ 129,648 (496,534)
------------- -------------
Net cash used in continuing operations .............................................. (20,424,016) (19,353,359)
Net cash used in discontinued operations ............................................ (59,837) --
------------- -------------
Net cash used in operating activities ............................................... (20,483,853) (19,353,359)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................................ (645,104) (406,579)
Proceeds from sales and maturities of marketable
securities available for sale ...................................................... 7,086,154 2,495,992
Purchases of marketable securities available for sale ............................... (10,116,494) (4,802,578)
Proceeds from sale of chiral assets ................................................. 7,500,000 --
------------- -------------
Net cash provided by (used in) investing activities ................................. 3,824,556 (2,713,165)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs related to secondary public offering .......................................... (73,136) --
Proceeds from the sale of stock ..................................................... 2,500,000 --
Proceeds from exercise of common stock options and warrants ......................... 1,673,740 4,235,869
Capital lease buyout ................................................................ (329,614) (161,799)
Capital lease funding ............................................................... 260,195 --
Debt issuance costs ................................................................. (437,500) (750,000)
Proceeds from convertible notes ..................................................... 8,750,000 30,000,000
------------- -------------
Net cash provided by (used in) financing activities ................................. 12,343,685 33,324,070
------------- -------------
Net (decrease) increase in cash and cash equivalents ................................ (4,315,612) 11,257,546
Cash and cash equivalents at beginning of period .................................... 13,583,445 3,066,953
------------- -------------
Cash and cash equivalents at end of period .......................................... $ 9,267,833 $ 14,324,499
------------- -------------
NON-CASH INVESTING ACTIVITY:
Change in net unrealized loss on marketable securities available for sale ........... $ -- $ (63,502)
============= =============
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock upon the conversion of Series A convertible preferred stock
and accretion thereon, net ......................................................... $ 4,054,103 $ --
============= =============
Accretion of premium payable on preferred stock and warrants ........................ $ 24,648 $ --
============= =============
INTEREST PAID ....................................................................... $ 11,468 $ 1,080,693
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-23
<PAGE>
CELGENE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared
from the books and records of Celgene Corporation (the "Company") in accordance
with generally accepted accounting principles for interim financial information
pursuant to Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Interim results may not be indicative of the results that may be
expected for the year.
The interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-K.
2. Series A Convertible A Preferred Stock
The Series A Convertible Preferred Stock ("Preferred Stock"), plus accretion at
a rate of 4.9% per year, was convertible into common stock of the Company at
the option of the holders thereof 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 of February 23, 1998, all 503 shares of the Series A Preferred Stock, with
their respective accretion, had been converted or redeemed into 3,342,202
shares of common stock. Through February 23, 1998 the Company had accrued
$1,420,770 representing accretion of the premium on the Preferred Stock.
3. Warrants to Acquire Common Stock
Under the terms of a private placement of Series B Preferred Stock with
Chancellor LGT Asset Management, Inc. ("Chancellor") entered into on June 9,
1997, upon the request of the purchasers of the Series B Preferred, the Company
is obligated to issue warrants to Chancellor to acquire a number of shares of
Common Stock equal to (i) 1,500,000 divided by the Conversion Price ($6.50 at
September 30, 1999) in effect on the issuance date (230,769 warrants as of
September 30, 1999) plus (ii) 37.5% of the conversion shares issuable on such
issuance date upon conversion of all shares of Series B Preferred Stock issued
through the issuance date (288,461 warrants as of September 30, 1999). All such
warrants will have a term of four years from the issuance date and an exercise
price equal to 115% of the Conversion Price in effect on the issuance date. As
of September 30, 1999, no warrants have been issued.
4. Stock Based Compensation
On June 22, 1999, an amendment to the 1995 Non-Employee Directors' Incentive
Plan was approved by the Company's stockholders. The amendment increased the
number of shares that may be issued upon exercise of options granted from
350,000 shares to 600,000 shares. The amendment also provides for a
discretionary grant upon the date of each annual meeting of an additional
option to purchase up to 5,000 shares to a non-employee director who serves as
a member (but not a chairman) of a committee of the Board of Directors, and up
to 10,000 shares to a non-employee director who serves as the chairman of a
committee of the Board of Directors.
5. Convertible Debt
On September 16, 1998, the Company issued to an institutional investor an
$8,750,000 convertible note due September 16, 2003. The proceeds were net of a
5% fee or $437,500, the cost of which will be amortized over a three-year
period. The note bears interest at 9.25% which is payable semi-annually on
March 16 and September 16 each year. The Company may, at its election, pay all
or a portion of the interest on this security in shares of Common Stock. The
note is convertible into 795,463 shares of Common Stock at a price equal to $11
per share which was 125% of the fair market value of the Company's Common Stock
at the date of issuance. The Company can, at its election, redeem the Security
in three years (two years under certain conditions), at 103% of the principal
amount.
F-24
<PAGE>
CELGENE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (CONTINUED )
On January 20, 1999, the Company issued to an institutional investor a
convertible note in the amount of $15,000,000. The note has a five-year term
and a coupon rate of 9% with interest payable on a semi-annual basis. The note
contains a conversion feature that allows the note holder to convert the note
into shares of common stock after one year at $18 per share. The Company can
redeem the note after three years at 103% of the principal amount (two years
under certain conditions). This note was subject to an issuance cost of
$750,000 or 5%, which is being amortized over three years.
On July 6, 1999, the Company issued to an institutional investor a convertible
note in the amount of $15,000,000. The note has a five-year term and a coupon
rate of 9% with interest payable on a semi-annual basis. The note contains a
conversion feature that allows the note holder to convert the note into shares
of common stock after one year at $19 per share. The Company can redeem the
note after three years at 103% of the principal amount (two years under certain
conditions). There was no fee or discount associated with this note.
6. Marketable Securities Available for Sale
Marketable securities available for sale at September 30, 1999 include debt
securities with maturities ranging from January 2000 to August 2004. A summary
of marketable securities at September 30, 1999 is as follows:
<TABLE>
<CAPTION>
-----------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Government Bonds & Notes ......... $2,313,476 -- $(15,557) $2,297,919
Government Agencies .............. 2,050,000 -- (47,945) 2,002,055
---------- -- -------- ----------
Total ............................ $4,363,476 -- $(63,502) $4,299,974
========== == ======== ==========
</TABLE>
7. Discontinued Operations
On January 9, 1998, the Company sold its chiral intermediate business to
Cambrex Corporation for approximately $15.0 million. The terms of the agreement
provided for the sale of chiral assets of approximately $485,000 for proceeds
of $7.5 million on the contract date plus future royalties with a present value
not exceeding $7.5 million, with certain minimum royalty payments in the third
through sixth year following the closing of the transaction. Included in the
transaction are the rights to the Company's enzymatic technology for the
production of chirally pure intermediate for the pharmaceutical industry,
including the current pipeline of third party products and the equipment and
personnel associated with the business.
8. Comprehensive Income and Recently Issued Accounting Pronouncement
Comprehensive income includes net income and other comprehensive income which
refers to those revenues, expenses, gains and losses which are excluded from
net income. Other comprehensive income includes unrealized gains and losses on
marketable securities classified as available-for-sale, which prior to adoption
were reported separately in shareholders' equity.
<TABLE>
<CAPTION>
--------------------
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Net Loss ......................... $(16,692,514) $(18,935,733)
Other Comprehensive Loss ......... -- (63,502)
------------ ------------
Total Comprehensive Loss ......... $(16,692,514) $(18,999,235)
============ ============
</TABLE>
<TABLE>
<CAPTION>
--------------------
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Net Loss ......................... $(8,020,512) $(6,118,369)
----------- -----------
Other Comprehensive Loss ......... -- (12,072)
----------- -----------
Total Comprehensive Loss ......... $(8,020,512) $(6,130,441)
=========== ===========
</TABLE>
F-25
<PAGE>
CELGENE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (CONTINUED )
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued and is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. SFAS No. 133 requires derivative
instruments to be recognized as Assets and Liabilities and be recorded at Fair
Value. The Company is currently not party to any Derivative Instruments. Any
future transactions involving Derivative Instruments will be evaluated based on
SFAS No. 133.
9. Subsequent Events
In November, 1999, we signed an amendment to The Rockefeller University License
Agreement pursuant to which we agreed to substitute a lump sum payment and
issue stock options to The Rockefeller University and the inventors in lieu of
the royalties previously payable under the license.
In December, 1999, we entered into a lease with our current landlord to rent an
additional 29,000 square feet of office and laboratory space adjacent to our
current leased space. The lease has a ten-year term with two five-year renewal
options. The annual commitment is approximately $260,000.
F-26
<PAGE>
[GRAPHIC OMITTED]
