<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 1996
------------------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transaction Period from ______________ to _______________
Commission File Number 0-19119
--------------
CEPHALON, INC.
------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 23-2484489
----------------------- -----------------------
(State Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification Number)
Organization)
145 Brandywine Parkway, West Chester, PA 19380
- ------------------------------------------ -----------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610) 344-0200
---------------------
Not Applicable
-------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, If Changed
Since Last Report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of August 9, 1996
----------------- --------------------------------
Common Stock, par value $.01 24,423,542 Shares
This Report Includes a Total of 22 Pages
<PAGE>
CEPHALON, INC. and SUBSIDIARIES
-------------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - 1
June 30, 1996 and December 31, 1995
Consolidated Statements of Operations - 2
Three and six months ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows - 3
Six months ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements 4 - 7
Item 2. Management's Discussion and Analysis of 8 - 18
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
<PAGE>
PART 1 - Financial Information
- ------------------------------
Item 1. Financial Statements
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------------- ----------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ($5,000,000 and $6,250,000 in custodial account) (Note 2) $ 6,127,000 $ 6,565,000
Short-term investments (Note 2) 149,073,000 171,502,000
Related-party receivables (Note 5) 37,000 33,000
Other 7,923,000 10,382,000
---------------- ----------------
Total current assets 163,160,000 188,482,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $11,570,000 and $9,652,000 29,049,000 30,002,000
OTHER 2,921,000 2,846,000
---------------- ----------------
$ 195,130,000 $ 221,330,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,860,000 $ 4,379,000
Accrued expenses 11,839,000 10,116,000
Current portion of long-term debt 3,952,000 3,907,000
---------------- ----------------
Total current liabilities 17,651,000 18,402,000
LONG-TERM DEBT 20,077,000 21,668,000
OTHER 1,419,000 1,055,000
---------------- ----------------
Total liabilities 39,147,000 41,125,000
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY: (Note 4)
Preferred stock, $.01 par value,
5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 100,000,000 and 40,000,000 shares authorized,
24,415,582 and 23,837,204 shares issued and outstanding 244,000 238,000
Additional paid-in capital 292,259,000 284,649,000
Accumulated deficit (136,520,000) (104,682,000
---------------- ----------------
Total stockholders' equity 155,983,000 180,205,000
---------------- ----------------
$ 195,130,000 $ 221,330,000
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
REVENUES (Note 5):
Related party $ -- $ 2,726,000
Other 4,060,000 12,188,000
--------------- ---------------
4,060,000 14,914,000
OPERATING EXPENSES (Notes 5 and 6):
Research and development 16,247,000 16,864,000
Selling, general and administrative 6,268,000 3,214,000
--------------- ---------------
22,515,000 20,078,000
LOSS FROM OPERATIONS (18,455,000) (5,164,000)
INTEREST:
Income 2,123,000 2,096,000
Expense (568,000) (914,000)
--------------- ---------------
1,555,000 1,182,000
--------------- ---------------
LOSS $ (16,900,000) $ (3,982,000)
=============== ===============
LOSS PER SHARE $ (0.70) $ (0.22)
=============== ===============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 24,301,003 18,352,867
=============== ===============
Six Months Ended
June 30,
---------------------------------------
1996 1995
--------------- ----------------
REVENUES (Note 5):
Related party $ -- $ 3,557,000
Other 7,788,000 13,984,000
--------------- ----------------
7,788,000 17,541,000
OPERATING EXPENSES (Notes 5 and 6):
Research and development 30,540,000 30,393,000
Selling, general and administrative 11,763,000 6,288,000
--------------- ----------------
42,303,000 36,681,000
LOSS FROM OPERATIONS
(34,515,000) (19,140,000)
INTEREST:
Income 3,864,000 3,959,000
Expense (1,187,000) (1,382,000)
--------------- ----------------
2,677,000 2,577,000
--------------- ----------------
LOSS $ (31,838,000) $ (16,563,000)
=============== ================
LOSS PER SHARE $ (1.32) (0.90)
=============== ================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 24,164,919 18,324,112
=============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss $ (31,838,000) $ (16,563,000)
Adjustments to reconcile loss to net cash
used for operating activities:
Depreciation and amortization 1,918,000 277,000
(Increase) decrease in operating assets:
Related-party receivable (5,000) (3,159,000)
Other current assets 1,552,000 (1,169,000)
Other long-term assets (75,000) 172,000
Increase (decrease) in operating liabilities:
Accounts payable (2,519,000) (1,446,000)
Accrued expenses 2,953,000 323,000
Other long-term liabilities 364,000 725,000
-------------- --------------
Net cash used for operating activities (27,650,000) (20,840,000)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,074,000) (12,336,000)
Sale leaseback of property and equipment -- 237,000
Sales and maturities (purchases) of investments, net 22,429,000 24,587,000
-------------- --------------
Net cash provided by investing activities 21,355,000 12,488,000
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options and warrants 7,402,000 305,000
Principal payments on long-term debt (1,945,000) (6,087,000)
Proceeds from long-term debt 400,000 21,073,000
-------------- --------------
Net cash provided by financing activities 5,857,000 15,291,000
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (438,000) 6,939,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,565,000 11,063,000
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,127,000 $ 18,002,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
-----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. The Company and Summary of Significant Accounting Policies
----------------------------------------------------------
The Company
Cephalon, Inc. ("Cephalon" or the "Company") seeks to discover and
develop pharmaceutical products primarily for the treatment of neurological
disorders, such as ALS, narcolepsy, peripheral neuropathies, Alzheimer's
disease, head and spinal injury and stroke. The Company has not received
regulatory approval for the commercial sale of any of its products under
development. The Company markets and sells, to neurologists in the United
States, two proprietary pharmaceutical products of Bristol-Myers Squibb ("BMS")
under a co-promotion agreement. The Company has funded its operations primarily
from the proceeds of public and private placements of its equity securities and
the receipt of payments under research and development agreements.
The Company's business of developing and marketing pharmaceutical
products is subject to a number of significant risks, including risks inherent
in research and development activities and in conducting business in a highly
regulated environment. The success of the Company depends to a large degree upon
obtaining FDA and foreign regulatory approval to market products currently under
development. There can be no assurance that any of the Company's product
candidates will be approved by any regulatory authority for marketing in any
jurisdiction.
Basis of presentation
These consolidated financial statements of Cephalon, Inc. are unaudited
and include all adjustments which, in the opinion of management, are necessary
to present fairly the financial condition and results of operations as of and
for the periods set forth in the Consolidated Balance Sheets, Consolidated
Statements of Operations and Consolidated Statements of Cash Flows. All such
adjustments are of a normal, recurring nature. The consolidated financial
statements do not include all of the information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K, filed with the Securities and Exchange Commission,
which includes financial statements as of and for the three years ended December
31, 1995. The results of the Company's operations for any interim period are not
necessarily indicative of the results of the Company's operations for any other
interim period or for a full year.
2. Cash, Cash Equivalents and Investments
--------------------------------------
Cash, cash equivalents and investments are valued at market as of the
indicated dates and were as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Cash and cash equivalents............... $ 6,127,000 $ 6,565,000
Repurchase agreements collateralized by
U.S. Treasury securities............... 12,218,000 23,126,000
U.S. Treasury bills and notes........... 122,531,000 140,966,000
Corporate obligations................... 14,324,000 7,410,000
------------ ------------
$155,200,000 $178,067,000
============ ============
</TABLE>
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. As of the
indicated periods, the Company was in compliance with all financial covenants
required under certain of its debt and lease agreements that obligated the
Company to maintain a custodial account and certain minimum cash and investment
balances and financial ratios.
<PAGE>
3. Commitments and Contingencies
-----------------------------
Leases
The Company leases certain of its offices, automobiles, manufacturing
facilities and equipment under operating leases. The Company's future annual
minimum payments under the facilities and equipment leases are approximately
$1,700,000 for the remainder of 1996, $3,400,000 in each of the years 1997 to
1998, $550,000 in 1999, $425,000 in 2000 and $50,000 in 2001.
Other
The Company maintains agreements to fund research at a number of
educational and scientific institutions. These agreements are generally
renewable on an annual basis and provide the Company with the right to obtain
exclusive, royalty-bearing licenses to the results of the research. The Company
is obligated under several other cancelable agreements, including those entered
into for the purpose of conducting clinical trials. The Company has obligations
to fund certain marketing programs under its co-promotion agreement with BMS,
including an obligation of approximately $1,200,000 in the remainder of 1996.
The Company is obligated to make royalty, license fee and milestone payments
under certain of its other licensing and research and development agreements,
including for the remainder of 1996, payments to Lafon of $1,500,000 to maintain
the license to modafinil.
Related party
In 1992, the Company entered into a research and development agreement
(the "Partnership Development Agreement") with Cephalon Clinical Partners, L.P.
(the "Partnership") under which the Company granted the Partnership an exclusive
license in the United States, Canada and Europe (''the Territory'') to certain
technology, principally Myotrophin, and received a non-refundable license fee of
$500,000.
The Partnership granted the Company an exclusive license (the "Interim
License") to manufacture and market Myotrophin within the Territory in return
for certain royalty payments and a payment of approximately $16,000,000 (the
''Milestone Payment'') that is to be made if Myotrophin receives regulatory
approval in the United States or certain other countries within the Territory.
The Company has the option to pay the Milestone Payment in cash, common stock,
or a combination thereof.
The Company has a contractual option to purchase all of the limited
partnership interests in the Partnership (the ''Purchase Option''). In order to
exercise the Purchase Option, Cephalon will be required to make an advance
payment of $40,275,000 in cash or, at Cephalon's election, $42,369,000 in shares
of the Company's Common Stock, valued at the market price at the time the
Purchase Option is exercised. The Purchase Option will become exercisable for a
45-day period commencing on the date which is the earlier of (a) the date which
is the later of (i) the last day of the first month in which the Partnership
shall have received Interim License payments equal to fifteen percent (15%) of
the limited partners' capital contributions (excluding the Milestone Payment),
and (ii) the last day of the 24th full month after the date of the Company's
first commercial sale, if any, of Myotrophin within the Territory that generates
a payment to the Partnership, and (b) the last day of the 48th full month after
the date of such first commercial sale, if any, in the Territory. In addition to
the advance payments, the exercise of the Purchase Option requires the Company
to make future payments to the former limited partners for a period of eleven
years after exercise at a royalty rate of 10.1% (reducing to 5.0% after a
specified return is earned by the former limited partners) of Myotrophin sales
in the Territory, provided that royalties on sales of Myotrophin in Europe will
only be paid to the extent necessary to meet specified targets. If the Company
does not exercise the Purchase Option prior to its expiration date the Interim
License will terminate and all development and marketing rights to Myotrophin in
the Territory would revert to the Partnership, which may commercialize
Myotrophin itself or license or assign its rights to a third party. The Company
would not receive any benefits from any such commercialization.
Legal proceedings
The Company and certain of its officers have been named as defendants
in a number of civil actions filed in the U.S. District Court for the Eastern
District of Pennsylvania, which have been consolidated. Although the complaints
differ in some respects, they allege, in general, that the Company and the
officers violated the federal securities laws by failing to disclose material
information about the methods and results of the North American and European
clinical studies of Myotrophin for use in treating ALS. The plaintiffs seek to
maintain these actions as class actions on behalf of purchasers of the Company's
securities and options to purchase or sell those securities
<PAGE>
during specified periods between June 1995 and January 19, 1996. One complaint
has been amended to modify some of the allegations and to include new
allegations purporting to reflect the presentations of the study results made at
the public hearing on June 7, 1996, before the FDA's Peripheral and Central
Nervous System Drugs Advisory Committee. The plaintiffs in the actions seek
unspecified damages and other relief. The Company believes that it has
meritorious defenses to the allegations of the actions filed to date and intends
to vigorously defend the actions. The Company's response to the complaints as
well as discovery related to the merits of the allegations in the complaints
have been delayed until the lead plaintiff is selected by the court. Although,
it is too early in the proceedings to predict the outcome of these actions with
any certainty, based on current knowledge, the Company does not currently expect
the ultimate resolution of these actions to have a material adverse effect on
the Company's financial position.
4. Stockholders' Equity
--------------------
At June 30, 1996, the Company had 2,870,007 stock options outstanding
at exercise prices ranging from $0.15 per share to $31.00 per share, of which
1,358,285 options were exercisable, including 464,000 options exercisable at
prices below $10.00 per share.
In addition, at June 30, 1996, warrants to purchase 3,005,133 shares of
the Company's common stock were outstanding as follows:
<TABLE>
<CAPTION>
Number of shares issuable Exercise Price
upon exercise of warrants Exercise Period per share
------------------------- ----------------------------------- --------------
<S> <C> <C>
1,840,642 September 1, 1993 - August 31, 1997 $11.32
September 1, 1997 - August 31, 1999 $13.82
392,700 September 1, 1994 - August 31, 1999 $13.70
21,791 September 1, 1993 - August 31, 1999 $11.77
750,000 February 9, 1994 - February 8, 2002 $18.50
</TABLE>
During the six months ended June 30, 1996, 475,815 warrants and 93,587
stock options were exercised for an aggregate exercise price of $5,556,000 and
$695,000, respectively.
5. Revenues
--------
Related Party - Cephalon Clinical Partners, L.P.
Under the Partnership Development Agreement, the Company is performing
the development and clinical testing of Myotrophin within the Territory and was
reimbursed by the Partnership for 110% of the Company's incurred costs, based
upon budgetary maximums and the Partnership's available funding. For the three
and six month period ended June 30, 1995, the Company recorded revenue of
$2,726,000 and $3,557,000, respectively, and incurred related budgeted expense
of $1,818,000 and $3,727,000 for the same period under the Partnership
Development Agreement, net of warrant amortization. For the three and six month
period ended June 30, 1995, the Company incurred expenses of approximately
$4,300,000 and $9,000,000, respectively, for which it was not reimbursed. Late
in 1995, the Partnership depleted all of its available funding and will not
provide further funding of Myotrophin development costs to the Company. The
January 1994 collaboration between the Company and Chiron is subject to the
rights of the Partnership (see Note 6).
<PAGE>
Revenue - Other
Other revenues consisted primarily of the revenue recorded under the
Company's collaboration agreements as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
TAP Holdings......... $1,675,000 $1,329,000 $3,003,000 $2,430,000
SmithKline Beecham... 716,000 698,000 1,422,000 1,391,000
Kyowa Hakko Kogyo.... 919,000 740,000 919,000 740,000
Schering-Plough...... 750,000 500,000 1,500,000 500,000
Chiron (see Note 6).. -- 8,817,000 944,000 8,817,000
</TABLE>
TAP Holdings
In July 1996, the Company and TAP amended the research and development
agreement of May 1994 to include additional molecules and to expand the field to
include all cancers. Additionally, the level of TAP's funding for the Company's
research & development efforts in 1996 was finalized.
Schering-Plough
In August 1996, the Company and Schering-Plough revised the terms of
the May 1990 research and development agreement, as renewed in November 1995, to
reduce the notice period to 90 days if Schering-Plough elects to terminate
funding. In the event of such termination, Cephalon has agreed not to enter into
any arrangement with a third party for research and development in the same
field of activity as the agreement with SP for a period of one year following
notice of termination.
6. Research and Development
------------------------
Chiron Corporation
The Company and Chiron are jointly developing Myotrophin for the
treatment of ALS and certain peripheral neuropathies. Under the collaboration,
each party funded its own collaboration-related expenses through 1994. Chiron
provided the Company with a revolving credit facility (the "Note") to assist the
Company in funding its costs incurred. During the six months ended June 30,
1995, the Company drew down $5,274,000 against the Note and repaid $4,408,000.
Also during this period, the Company received $8,817,000 from Chiron
representing reimbursement of North American ALS program costs incurred by the
Company in the first half of 1995.
In September 1995, the Company and Chiron adjusted their contributions
to the collaboration program to result in equal aggregate funding by each party
through that date and agreed to fund equal amounts of Myotrophin program costs
thereafter. For the quarter ended March 31, 1996, the equalization of program
costs resulted in net revenue from Chiron of $944,000. For the quarter ended
June 30, 1996, the equalization of program costs resulted in the Company
recording $838,000 of expense and a corresponding liability to Chiron for
estimated second quarter program costs incurred, related primarily to
manufacturing activities conducted by Chiron.
Laboratoire L. Lafon
The license agreement with Lafon requires Cephalon to endeavor to file
an NDA for Provigil(TM) (modafinil) by July 31, 1996, and provides that Cephalon
will not be deemed to be in breach of that provision if Cephalon is required to
submit to the FDA any preclinical data other than the data provided by Lafon, or
for any other reason outside of Cephalon's control. Cephalon is collecting
additional data, including preclinical data, to supplement the data provided by
Lafon, which Cephalon believes is required to be included in the NDA. The
Company believes that the NDA filing requirement has been postponed pending
completion of this activi ty.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition And Results
-----------------------------------------------------------------------
Of Operations
-------------
The discussion under this caption contains, in addition to historic
information, forward-looking statements about the business and financial
condition of Cephalon, which are subject to certain risks and uncertainties that
could cause actual results to differ materially from those set forth in this
discussion. Factors which could cause or contribute to such differences include,
but are not limited to, the factors identified under the caption "Certain Risks
Related to Cephalon's Business." Shareholders and potential investors are urged
to consider those factors in evaluating the forward-looking statements in this
Report and presented elsewhere by management from time to time.
The following discussion also should be read in conjunction with the
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements on pages 1 to 7 of this Report.
Since its inception in 1987, Cephalon has been engaged in the discovery
and development of pharmaceutical products to treat neurological disorders. The
Company has not received regulatory approval to market or any revenue from the
sale of any product developed by the Company, and has been unprofitable since
inception. As of June 30, 1996, the Company had an accumulated deficit of
$136,520,000.
The Company has funded its operations primarily from the proceeds of
public and private placements of its equity securities and the receipt of
payments under research and development agreements. The Company entered into a
collaborative research agreement (the "Schering-Plough Agreement") with
Schering-Plough Corporation ("Schering-Plough" or "SP") in May 1990. In May
1992, the Company licensed from Kyowa Hakko Kogyo Co., Ltd. ("Kyowa Hakko") a
class of small molecules that the Company refers to as tyrosine kinase ("TK")
modulators. In August 1992, the Company formed Cephalon Clinical Partners, L.P.
(the "Partnership") and entered into agreements with the Partnership including
an agreement (the "Partnership Development Agreement") for the research and
development of Myotrophin(R) (rhIGF-1) in the United States, Canada and Europe
(the "Territory"). In January 1993, the Company entered into a licensing
agreement with Laboratoire L. Lafon ("Lafon"), in which the Company received the
exclusive rights to market and sell Provigil(TM) (modafinil) in the United
States, Mexico, the United Kingdom, Ireland and Japan. In June 1993, the Company
entered into a collaborative research, development and commercialization
agreement (the "SmithKline Beecham Agreement") with SmithKline Beecham ("SB").
In July 1993, the Company entered into an agreement (the "Kyowa Hakko Myotrophin
Agreement") with Kyowa Hakko to develop and market Myotrophin in Japan. In
January 1994, the Company entered into a collaboration with Chiron Corporation
("Chiron") for the development of Myotrophin and certain other compounds in the
neurology field worldwide, excluding Japan and subject to the rights of the
Partnership. In May 1994, the Company and TAP Holdings Inc. ("TAP") entered into
a research and development and license agreement (the "TAP Agreement") to
develop and commercialize specific compounds for the treatment of prostate
disease in the United States. In July 1994, the Company and Bristol-Myers Squibb
Company ("BMS") entered into a co-promotion agreement (the "BMS Agreement") to
market the BMS proprietary product, Stadol NS(R) (butorphanol tartrate) Nasal
Spray ("Stadol NS"), to neurologists in the United States. The arrangement was
expanded in February 1996 to include the co-promotion of another BMS proprietary
product, Serzone(R) (nefazodone hydrochloride), to neurologists in the United
States.
Certain Risks Related to Cephalon's Business
The statements under this caption are intended to serve as cautionary
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and should be read in conjunction with the forward-looking statements in
this Report as well as statements presented elsewhere by management of the
Company. The following information is not intended to limit in any way the
characterization of other statements or information in this Report as cautionary
statements for such purpose.
The Company's business of developing and marketing pharmaceutical
products is subject to a number of significant risks, including those inherent
in research and development activities and in conducting business in a regulated
environment. The success of the Company depends to a large degree upon obtaining
favorable action by the U.S. Food and Drug Administration ( the "FDA") and
foreign regulatory authorities in the process of obtaining approvals to
clinically test and ultimately market products currently under development by
the Company. The Company has had only limited experience in preparing, filing
and pursuing the applications necessary to gain such
<PAGE>
regulatory approvals. The Company's analysis of the results of its clinical
studies is subject to confirmation and interpretation by regulatory authorities,
whose conclusions may differ from those of the Company. In addition, there can
be no assurance that any application by the Company to test or market a product
will be reviewed in a timely manner, will be accepted as adequate for filing, or
that approval to test or market a product will be received from the appropriate
regulatory authority.
The Company is developing Myotrophin(R) (rhIGF-1) in collaboration with
Chiron Corporation for use in the treatment of ALS and other neurological
indications. During 1995, the Company and Chiron announced that, based on their
analysis and interpretation of data from two Phase III studies of Myotrophin in
patients suffering from ALS, Myotrophin showed a beneficial effect in slowing
the progression of the disease. The first such study was conducted in North
America and the second study was conducted in Europe. In October 1995, the
Company submitted the results of the North American study to the FDA in support
of a treatment investigational new drug application ("T-IND") to permit the
Company and Chiron to provide expanded access to Myotrophin by patients
suffering from ALS. The T-IND process was developed by the FDA to make available
promising investigational drugs with sufficient evidence of safety and
effectiveness to treat patients with serious or immediately life-threatening
diseases, where no comparable or satisfactory alternative therapies exist. While
the FDA was reviewing that application, the Company and Chiron announced certain
results of the European study, which were also supplied to the FDA. The FDA
subsequently requested additional information about the European study as part
of its review of the T-IND.
In January 1996, the Company and Chiron announced that the FDA had
raised concerns as to whether the data submitted and reviewed by the FDA from
the European study confirm the results from the North American study. The FDA's
Peripheral and Central Nervous System Drugs Advisory Committee held a public
hearing on June 7, 1996 to review data for purposes of recommending to the FDA
whether there was sufficient evidence to support use of Myotrophin under a T-
IND. At the hearing, representatives of the FDA indicated their disagreement
with the Company's various analyses of the European study, and their opinion
that the study failed to support the results of the North American study. At the
conclusion of the Advisory Committee hearing, the panel members unanimously
recommended approval of the T-IND.
The FDA approved the T-IND application on June 19, 1996. The FDA's
approval letter noted the views of several Advisory Committee members at the
hearing, including the chairman, concerning the need for an additional study to
support an NDA, and invited Cephalon and Chiron to work with the Agency to
develop plans for future studies. The Company continues to believe that the
studies show the beneficial treatment effect of Myotrophin in ALS patients,
particularly those with more rapidly progressing disease. The Company and
Chiron have indicated their willingness to conduct an additional study of
Myotrophin as a post-approval activity, and plan to discuss the issue of further
studies and the NDA filing with the FDA.
There can be no assurance that the FDA ultimately will grant
authorization to commercialize Myotrophin in the United States on the basis of
the results of the two completed studies. If the FDA were to require additional
data prior to approval of Myotrophin for commercialization, whether through an
additional study or further analysis of the completed studies, there can be no
assurance that the Company can obtain such data at all or in a timely manner. An
additional study comparable to either of the completed studies would take
several years to complete. Any other type of study design would involve the
testing of a new and therefore unproven hypothesis. Furthermore, there can be no
assurance that Cephalon and Chiron would be willing to conduct any additional
studies as a Phase III activity or that the results of any additional study, if
conducted, would be positive.
Based on the Company's review to date of the safety data from the two
Phase III studies, the Company believes that Myotrophin was well-tolerated.
Generally mild injection site inflammation, changes in hair growth or texture,
sweating, mild knee pain, sinusitis and hip pain were observed in all study
groups but occurred more frequently in Myotrophin-treated patients. Because ALS
is a fatal disease, it is expected that some mortalities will occur while
conducting clinical trials in ALS patients. Mortalities have occurred during the
Company's Phase III studies of Myotrophin. During the double-blind portion of
the European study, an imbalance in death rates was observed in the drug-treated
group compared to the placebo-treated group. The Company believes those
mortalities are due to the normal progression of the disease or other
circumstances not attributable to Myotrophin.
<PAGE>
FDA regulations require the reporting of all patient adverse events experienced
in ongoing trials. The company plans to initiate the T-IND program for ALS
patients in the near future and is continuing to furnish Myotrophin to patients
who participated in the ALS studies and to patients in its Phase II program in
peripheral neuropathies. There can be no assurance that adverse events will not
occur and that the reporting of any such events will not result in any
subsequent FDA action adverse to the company.
The efficacy and safety data from the North American and European
studies of Myotrophin have not yet been formally reviewed by any regulatory
authority outside the United States. If foreign regulatory authorities do not
agree with the Company's interpretation of the results from the two studies, one
or more additional positive studies might be required to be completed and
submitted before Myotrophin could be marketed in such territories.
There can be no assurance that any regulatory authority will accept the
North American and European studies as evidence of sufficient safety and
efficacy to support marketing approval or that Myotrophin will receive marketing
approval in any jurisdiction for any indication. A failure to obtain any
regulatory approval for Myotrophin would seriously adversely affect the
Company's business and the price of its common stock. A delay in obtaining
approval to market Myotrophin would have a negative effect on the Company and
its common stock because of the lost revenue during the delay and also because
of competition from existing and potential products and potential limitations on
reimbursement, discussed below, which could limit the volume of sales or the
price of Myotrophin, resulting in lower revenues to the Company.
Chiron has completed a U.S. manufacturing facility to produce
recombinant proteins which it intends to use to produce Myotrophin. There can be
no assurance that Chiron will be able to produce adequate quantities of
Myotrophin in a cost-effective manner. The Company and Chiron also will be
required to demonstrate that the material produced from the Chiron facility is
equivalent to the material used in the ALS clinical trials. Although the
companies believe that the material is equivalent, if bioequivalence can not be
demonstrated to the satisfaction of regulatory authorities, regulatory approval
of Myotrophin could be delayed.
The manufacturing facilities of the Company and Chiron used to produce
Myotrophin are required to comply with all applicable FDA requirements,
including Good Manufacturing Practices, and are subject to FDA inspection to
determine compliance with those requirements. There can be no assurance that the
manufacturing facilities for Myotrophin will comply with applicable
requirements.
During the first quarter of 1996, the Company announced positive
results from two Phase III studies of Provigil in the treatment of the excessive
daytime sleepiness associated with narcolepsy. The results of those clinical
trials have not been reviewed by the FDA or any other regulatory authority.
There can be no assurance that the FDA or other regulatory authorities will
consider that the results generated from the Company's clinical trials
demonstrate sufficient safety and efficacy data to allow the filing of an NDA to
obtain marketing approval, or that, if such application is filed that any such
approval could be obtained. The license agreement with Lafon requires Cephalon
to endeavor to file an NDA for Provigil by July 31, 1996, and provides that
Cephalon will not be deemed to be in breach of that provision if Cephalon is
required to submit to the FDA any preclinical data, other than the data provided
by Lafon, or for any other reason outside of Cephalon's control. Cephalon is
collecting additional data, including preclinical data, to supplement the data
provided by Lafon, which Cephalon believes is required to be included in the
NDA. The Company believes that the NDA filing requirement has been postponed
pending completion of this activity.
Lafon has filed for marketing approval of modafinil throughout the
European Union through the multi-state procedures promulgated by the Committee
for Proprietary Medicinal Products ("CPMP"), which includes applications in the
United Kingdom and the Republic of Ireland. As part of the CPMP review process,
Lafon has received questions from the CPMP regarding its application. There can
be no assurance that the questions can be answered to the satisfaction of the
CPMP countries, that the application will be reviewed by the CPMP in a timely
manner or that Provigil will be approved by the CPMP. Even if the CPMP approves
the application, the Company will be required to obtain separate marketing
authorizations from the applicable regulatory authorities in the United Kingdom
and the Republic of Ireland prior to marketing Provigil in those countries.
There can be no assurance that any such approvals will be obtained.
Lafon's manufacturing facilities for the active substance used in
Provigil are required to comply with all applicable FDA requirements, and are
subject to FDA inspection both before and after NDA approval. There can be no
assurance that the manufacturing facilities for Provigil will comply with
applicable requirements.
Lafon has licensed rights to modafinil to third parties in Canada as
well as certain countries in Europe, and may license other territories to other
third parties in the future. There is no contractual requirement that the
<PAGE>
licensees and Lafon coordinate their marketing activities related to modafinil.
Furthermore, individual reimbursement policies in each country and applicable
antitrust laws prohibit the coordination of the pricing of modafinil in various
jurisdictions. The marketing activities of the other licensees, therefore, may
affect the Company's marketing of Provigil in its territories.
The results of clinical studies of Myotrophin to be conducted by the
Company's licensee in Japan and the results of clinical studies of modafinil
being conducted by licensees of Lafon in other countries are required to be
reported by the Company to the FDA and other regulatory authorities. The
reporting of the results of these other studies, if negative, could adversely
affect the regulatory review of the Company's product approval applications.
Negative results from trials by third parties or negative assessments from
regulatory authorities would adversely affect the Company's business and the
price of its common stock.
Even if Myotrophin and Provigil are approved for commercialization, the
Company can not predict at this time the potential revenues to be received from
sales of Myotrophin for use in treating ALS or from sales of Provigil for use in
connection with narcolepsy. ALS and narcolepsy each qualify as orphan diseases
under the Orphan Drug Law, which generally means that the potential patient
population for each indication is limited. Rilutek(R) (riluzole) has been
approved in the U.S. and certain countries in Europe for use in treating ALS,
which is now being commercialized in the United States and Europe by Rhone-
Poulenc Rorer. It is not clear whether ALS patients, given the constraints of
drug reimbursement programs, would be able to support both Rilutek and
Myotrophin (as well as any other drugs which may be approved in the future for
use in treating ALS), especially if Myotrophin has a higher price than
competitive drugs. Competition for Provigil also is likely, because narcolepsy
is currently treated with several drugs, all of which are available generically
and have been available for a number of years.
The major source of the Company's current revenue is derived from
collaborative research and development agreements that are subject to periodic
review by the respective third parties and achievement of certain milestones by
the Company. There can be no assurance that any of the collaborations will
continue in the future.
The Company's business is subject to additional significant risks,
including but not limited to the need to obtain additional funds to support its
research, development and commercialization efforts, the Company's dependence on
collaborative partners and third party suppliers and other manufacturing
uncertainties, the Company's relative inexperience in marketing and distributing
commercial products, uncertainties associated with obtaining and enforcing its
patents and uncertainties associated with the patent rights of others,
uncertainties regarding government reforms and of product pricing and
reimbursement levels, technological change and competition from companies and
institutions developing products for the same indications as the Company's
product candidates, the product liability risks associated with being the
manufacturer or seller of pharmaceutical products, and reliance by the Company
on key personnel.
Future announcements concerning the Company's competitors or other
companies in the biopharmaceutical industry, including regulatory delays,
technological innovations or commercial products, patents, government
regulations, developments concerning proprietary rights, litigation or public
concern as to the safety or commercial value of the Company's products may have
a significant effect on the market price of the Company's common stock.
<PAGE>
Liquidity and Capital Resources
Cash, cash equivalents and investments at June 30, 1996 and December
31, 1995 were $155,200,000 and $178,067,000, respectively, representing 80% of
total assets for each period.
Cash equivalents and investments consisted primarily of short to
intermediate term obligations of the United States government, repurchase
agreements collaterallized by such obligations, short term commercial paper and
short to intermediate term corporate obligations. Certain of the Company's debt
and lease agreements contain covenants that obligate the Company to maintain
certain minimum cash and investment balances and financial ratios, under one of
which, $5,000,000 was held in a custodial account as of June 30, 1996.
The following is a summary of selected cash flow information for the
six months ended June 30:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net cash used for operating activities.. $(27,650,000) $(20,840,000)
Net cash provided by investing
activities............................. 21,355,000 12,488,000
Net cash provided by financing
activities............................. 5,857,000 15,291,000
</TABLE>
Net cash used for operating activities
Operating cash inflows
A summary of the major sources of receipts reflected in net cash used
for operating activities for the six months ended June 30 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cephalon Clinical Partners............ $ -- $1,138,000
Bristol-Myers Squibb.................. 2,032,000 --
TAP Holdings.......................... 2,742,000 2,304,000
SmithKline Beecham.................... 1,423,000 1,385,000
Schering-Plough....................... 1,500,000 500,000
Chiron Corporation.................... 3,747,000 8,817,000
</TABLE>
Pursuant to the Partnership Development Agreement, the Company's share
of the costs to develop Myotrophin within the Territory were reimbursed by the
Partnership to the extent of the Partnership's available funds. Due to the
depletion of the Partnership's available funding late in 1995, the Company has
not received payments from the Partnership in 1996.
Pursuant to the BMS Agreement, BMS makes quarterly payments to the
Company based primarily on a percentage of certain product sales within the
neurology market in excess of a predetermined base amount. Activity under the
BMS Agreement was initiated in the fourth quarter of 1994. The payments related
to the fourth quarter of 1994 and the first two quarters of 1995 were received
in the third quarter of 1995. The payments received from BMS in 1996 represent
payments earned in the fourth quarter of 1995 and first quarter of 1996. At June
30, 1996, $1,524,000 was receivable from BMS, representing second quarter 1996
payments earned under the co-promotion agreement.
Under the terms of the 1994 TAP Agreement, the Company performs
research and preclinical development for which it is compensated quarterly by
TAP, based on a contract rate per individual assigned to the program for that
quarter and reimbursement of certain external costs, all subject to annual
budgetary maximums. At June 30, 1996, $1,623,000 was receivable from TAP.
Under the terms of the June 1993 SmithKline Beecham Agreement, the
Company performs research and preclinical development for which it is
compensated quarterly by SB, based on a contract rate per individual assigned to
the program for that quarter, and subject to annual budgetary maximums, periodic
review by SB and achievement of certain milestones by the Company. At June 30,
1996, $179,000 was receivable from SB.
Under the terms of the 1990 Schering-Plough Agreement, through May
1995, the Company received annual milestone payments from SP, generally in the
second quarter, the last of which in the amount of $500,000
<PAGE>
was received in 1995. Under the renewed agreement, effective May 1995, the
Company performs research and development for which it is compensated quarterly
by SP based on a contract rate per individual assigned to the program for that
quarter and certain external costs, all subject to budgetary maximums, periodic
review by SP and achievement of certain milestones by the Company.
The Company and Chiron are currently developing Myotrophin for the
treatment of ALS and certain peripheral neuropathies. Under the collaboration,
each party funded its own collaboration-related expenses through 1994. Chiron
provided the Company with a revolving credit facility (the "Note") to assist the
Company in funding its costs incurred. During the six months ended June 30,
1995, the Company received $8,817,000 from Chiron representing reimbursement of
North American ALS program costs incurred by the Company in the first half of
1995. In September 1995, the Company and Chiron adjusted their contributions to
the collaboration program to result in equal aggregate funding by each party
through that date and, agreed to fund equal amounts of Myotrophin program costs
thereafter. The payments received from Chiron in 1996 represent equalization of
fourth quarter 1995 and first quarter 1996 program costs incurred. At June 30,
1996, $838,000 was payable to Chiron for estimated second quarter 1996 costs
incurred.
Outlook
Effective late in 1995, the Partnership depleted all of its available
funds and therefore, the Company will not receive further payments from the
Partnership for the development of Myotrophin, although expenses associated with
Myotrophin development will continue. The Company expects to receive payments
under the BMS Agreement in 1996, but does not expect receipts to be in excess of
related expenses incurred. The agreement with SP calls for payments in 1996 to
approximate payments received in 1995. Payments in 1996 under the TAP and SB
agreements are budgeted to approximate 1995 levels. The continuation of the
research funding under the agreements with TAP, SB and SP, during 1996 and
thereafter, are subject to the achievement of certain development milestones and
periodic review by those companies. Under the collaboration with Chiron, the
Company expects receipts in 1996 to be substantially less than 1995. The Company
may be required to continue to make payments to Chiron depending on the relative
costs incurred by the two companies in the development and commercialization of
Myotrophin.
Operating cash outflows
Net cash used for operating activities increased in the first six
months of 1996 as compared to the same 1995 period reflecting increases in the
funding of expenses due primarily to an increase in selling, general and
administrative expenses. The increase in the funding of selling, general and
administrative expenses is due primarily to the costs associated with the
Company's sales and marketing activities, including pre-marketing efforts in
support of the products in development, increases in other external costs and a
22% increase in staffing levels. Funding for research and development expenses
was relatively even in the 1996 period as compared to the 1995 period as
decreases in funding clinical trials due to the completion of the double-blind
portion of clinical studies of Myotrophin and modafinil were offset by an 8%
staff increase and increases in the funding of expenses associated with the
production of clinical supplies of Myotrophin at the Company's manufacturing
facility.
Outlook
The Company expects to continue substantial spending on research and
development.
The costs to develop modafinil are expected to continue to be
significant in 1996, even though the double-blind portion of the clinical
studies have concluded, due to the cost of conducting data analyses, the
expected continuation of open label extensions of those studies and preparations
for the filing of an NDA. Additionally, the Company expects to pay $1,500,000 in
the third quarter of 1996 to Lafon to maintain the license to modafinil. The
overall funding of the modafinil program will be assessed as the analyses of the
results of the clinical trials are further evaluated and are discussed with
regulatory authorities (see "Certain Risks Related to Cephalon's Business").
The costs to develop Myotrophin are expected to continue to be
significant during the remainder of 1996 due to the cost of conducting
continuing data analyses, continuing open label extensions of two Phase III ALS
<PAGE>
clinical studies, preparations for potential filings with regulatory
authorities and continuation of a Phase II clinical program to test the
potential utility of Myotrophin in the treatment of peripheral neuropathies. In
addition, substantial funding will be required for the planned T-IND in ALS
patients in the U.S., an expanded access program in Europe or additional
clinical studies in ALS patients. The Company has decreased the level of
operations required at its Beltsville manufacturing facility as the
collaboration's requirements of Myotrophin are expected to be provided by
Chiron. The Company is considering various alternatives that would allow it to
defray the costs of operating and maintaining its Beltsville facility. There is
no assurance the Company will find any such alternatives. The Company may also
seek to acquire additional interests in the Partnership and may incur
significant costs to acquire such interests. In addition, if Myotrophin receives
regulatory approval in certain countries within the Territory, the Company will
pay to the Partnership a milestone payment of approximately $16,000,000 in cash,
common stock or a combination thereof. The amount the Company spends in 1996 on
its Myotrophin programs depends to a great degree on the results of discussions
with regulatory authorities (see "Certain Risks Related to Cephalon's
Business").
The Company also expects to incur significant expenses under the
collaborations with SB, TAP and SP, which may exceed payments received under the
related agreements, as well as significant costs in its other development
programs.
The actual costs to develop Myotrophin, modafinil, and other potential
therapeutic products are subject to a number of uncertainties which could
greatly influence the level and timing of development costs, including among
other items, the duration, size, and expense of the required preclinical and
clinical testing, costs of manufacturing clinical supplies, the level and timing
of patient enrollment and the expense of any filing for regulatory approval.
Pursuant to the BMS Agreement the Company is obligated to fund, in the
remainder of 1996, $1,200,000 of promotional and support activities targeting
neurologists. Additionally, the Company has begun to expand its selling,
general and administrative activities in the United States and Europe. The
Company will assess the degree of expansion required in the selling, general and
administrative area as the Company evaluates the progress of the Myotrophin and
modafinil programs. There can be no assurance that the Company will receive
marketing approval for any of its product candidates under development or that
the funds expended if the Company expands these areas, will be recovered in the
future by sales, if any, of such products (see "Certain Risks Related to
Cephalon's Business").
Operating cash requirements outlook
Net cash used for operating activities is expected to continue to
increase in the remainder of 1996 as compared to 1995 principally due to
decreases in payments the Company expects to receive under its collaboration
agreements, including the Chiron agreement and the Partnership Development
Agreement and, as further described above, operating cash outflows are expected
to increase in 1996.
Net cash provided by investment activities
A summary of net cash provided by investment activities for the six
months ended June 30 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Purchases of property and equipment............ $(1,074,000) $(12,336,000)
Sale leaseback of property and equipment....... -- 237,000
Sales and maturities (purchases) of
investments, net.............................. 22,429,000 24,587,000
----------- ------------
Net cash provided by investment
activities.................................... $21,355,000 $ 12,488,000
=========== ============
</TABLE>
Purchases of property and equipment decreased in 1996 as compared to
the same period in 1995 because the 1995 period includes the March 1995 purchase
of the two buildings currently housing the Company's administrative offices and
research facilities in West Chester, Pennsylvania and a third adjacent 49,000
square foot building, for a total purchase price of $11,000,000.
The Company may incur additional capital expenditures in 1996 as it
continues to assess its facility and equipment requirements.
<PAGE>
Sales and maturities (purchases) of investments, net represent the
investment of cash generated primarily from the Company's financing activities,
net of cash used to fund operations and other investing activities.
Net cash provided by financing activities
A summary of cash provided by financing activities for the six months
ended June 30 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Proceeds from exercise of common stock
options and warrants........................ $ 7,402,000 $ 305,000
Principal payments on long-term debt......... (1,945,000) (6,087,000)
Proceeds from long-term debt................. 400,000 21,073,000
----------- -----------
Net cash provided by financing
activities.................................. $ 5,857,000 $15,291,000
=========== ===========
</TABLE>
During the six months ended June 30, 1996, the Company received cash
from the exercise of 558,113 warrants and 102,563 stock options in the amount of
$6,518,000 and $884,000, respectively. The extent and timing of future warrant
and option exercises, if any, are primarily dependent upon the market price of
the Company's common stock and general financial market conditions, as well as
the exercise prices and expiration dates of the warrants and options.
Proceeds from long-term debt in the 1995 period include $15,799,000
borrowed to finance the West Chester building purchase. The building purchase
was financed through the assumption of a $6,900,000 first mortgage and from
mortgage loans provided by the Commonwealth of Pennsylvania (the "State
Funding") in the amount of $11,600,000. The State Funding includes a 2% interest
rate that is subject to increase if the Company fails to hire a specified number
of new employees in Chester County, Pennsylvania by the end of 1999. The Company
borrowed an additional $400,000 in State Funding in June 1996 and the remaining
$2,700,000, held in escrow, is earmarked to fund future improvements. The
Company also drew $5,274,000 in the 1995 period against the Note provided by
Chiron to fund collaboration-related expenses.
Commitments and contingencies
Leases
The Company leases certain of its offices, automobiles, manufacturing
facilities and equipment under operating leases. The Company's future annual
minimum payments under the facilities and equipment leases are approximately
$1,700,000 for the remainder of 1996, $3,400,000 in each of the years 1997 to
1998, $550,000 in 1999, $425,000 in 2000 and $50,000 in 2001.
Other
The Company maintains agreements to fund research at a number of
educational and scientific institutions. These agreements are generally
renewable on an annual basis and provide the Company with the right to obtain
exclusive, royalty-bearing licenses to the results of the research. The Company
is obligated under several other cancelable agreements, including those entered
into for the purpose of conducting clinical trials. The Company has obligations
to fund certain marketing programs under its co-promotion agreement with BMS,
including an obligation of approximately $1,200,000 in the remainder of 1996.
The Company is obligated to make royalty, license fee and milestone payments
under certain of its other licensing and research and development agreements,
including for the remainder of 1996, payments to Lafon of $1,500,000 to maintain
the license to modafinil.
Related party
In 1992, the Company entered into a research and development agreement
(the "Partnership Development Agreement") with Cephalon Clinical Partners, L.P.
(the "Partnership") under which the Company granted the Partnership an exclusive
license in the United States, Canada and Europe (''the Territory'') to certain
technology, principally Myotrophin, and received a non-refundable license fee of
$500,000.
The Partnership granted the Company an exclusive license (the "Interim
License") to manufacture and market Myotrophin within the Territory in return
for certain royalty payments and a payment of approximately $16,000,000 (the
"Milestone Payment") that is to be made if Myotrophin receives regulatory
approval in the United
<PAGE>
States or certain other countries within the Territory. The Company has the
option to pay the Milestone Payment in cash, common stock, or a combination
thereof.
The Company has a contractual option to purchase all of the limited
partnership interests in the Partnership (the ''Purchase Option''). In order to
exercise the Purchase Option, Cephalon will be required to make an advance
payment of $40,275,000 in cash or, at Cephalon's election, $42,369,000 in shares
of the Company's Common Stock, valued at the market price at the time the
Purchase Option is exercised. The Purchase Option will become exercisable for a
45-day period commencing on the date which is the earlier of (a) the date which
is the later of (i) the last day of the first month in which the Partnership
shall have received Interim License payments equal to fifteen percent (15%) of
the limited partners' capital contributions (excluding the Milestone Payment),
and (ii) the last day of the 24th full month after the date of the Company's
first commercial sale, if any, of Myotrophin within the Territory that generates
a payment to the Partnership, and (b) the last day of the 48th full month after
the date of such first commercial sale, if any, in the Territory. In addition to
the advance payments, the exercise of the Purchase Option requires the Company
to make future payments to the former limited partners for a period of eleven
years after exercise at a royalty rate of 10.1% (reducing to 5.0% after a
specified return is earned by the former limited partners) of Myotrophin sales
in the Territory, provided that royalties on sales of Myotrophin in Europe will
only be paid to the extent necessary to meet specified targets. If the Company
does not exercise the Purchase Option prior to its expiration date the Interim
License will terminate and all development and marketing rights to Myotrophin in
the Territory would revert to the Partnership, which may commercialize
Myotrophin itself or license or assign its rights to a third party. The Company
would not receive any benefits from any such commercialization.
Legal proceedings
The Company and certain of its officers have been named as defendants
in a number of civil actions filed in the U.S. District Court for the Eastern
District of Pennsylvania, which have been consolidated. Although the complaints
differ in some respects, they allege, in general, that the Company and the
officers violated the federal securities laws by failing to disclose material
information about the methods and results of the North American and European
clinical studies of Myotrophin for use in treating ALS. The plaintiffs seek to
maintain these actions as class actions on behalf of purchasers of the Company's
securities and options to purchase or sell those securities during specified
periods between June 1995 and January 19, 1996. One complaint has been amended
to modify some of the allegations and to include new allegations purporting to
reflect the presentations of the study results made at the public hearing on
June 7, 1996, before the FDA's Peripheral and Central Nervous System Drugs
Advisory Committee. The plaintiffs in the actions seek unspecified damages and
other relief. The Company believes that it has meritorious defenses to the
allegations of the actions filed to date and intends to vigorously defend the
actions. The Company's response to the complaints as well as discovery related
to the merits of the allegations in the complaints have been delayed until the
lead plaintiff is selected by the court. Although, it is too early in the
proceedings to predict the outcome of these actions with any certainty, based on
current knowledge, the Company does not currently expect the ultimate resolution
of these actions to have a material adverse effect on the Company's financial
position.
Funding Requirements Outlook
The Company expects that more cash will be required to fund operations
in 1996 than was required in 1995. The Company also expects to use cash to fund
purchases of property and equipment and to service its long-term debt.
The Company believes that its cash and investment resources are
adequate to fund its anticipated level of cash requirements for a period in
excess of one year. However, the Company's funding requirements may change due
to numerous factors including, but not limited to, the results of the Company's
ongoing clinical trials and other research and development programs, the
expansion of research and development and administrative facilities,
technological advances and competition and regulatory requirements (see "Certain
Risks Related to Cephalon's Business"). Additionally, the Company may seek to
acquire some or all of the partnership interests in the Partnership or may seek
to acquire other entities, additional technologies, product candidates or
products.
Because of the Company's long-term capital requirements it may seek to
access the public or private markets whenever conditions are favorable by
issuing debt, common or preferred stock, warrants or other securities. The
Company may also seek additional funding through corporate collaborations and
other financing
<PAGE>
vehicles, potentially including "off-balance sheet" financing through limited
partnerships or corporations. There can be no assurance that such funding will
be available at all or on terms acceptable to the Company.
Furthermore, market reaction to the Company's financing activities may
adversely affect the price of the Company's common stock. If adequate funds are
not available, the Company may be required to significantly curtail one or more
of its research, development or strategic initiatives or obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates or
products on terms less favorable than if it developed the product on its own.
Results of Operations
This section should be read in conjunction with the more detailed
discussion under "Liquidity and Capital Resources."
A summary of revenues and expenses for the six months ended June 30 is
as follows:
<TABLE>
<CAPTION>
% change
1996 1995 1996 vs. 1995
---- ---- -------------
<S> <C> <C> <C>
Revenues............................... $ 7,788,000 $ 17,541,00 (56)%
Research and development expenses...... 30,540,000 30,393,000 --
Selling, general and administrative
expenses.............................. 11,763,000 6,288,000 87
Interest income, net................... 2,677,000 2,577,000 4
</TABLE>
The decrease in revenues in the 1996 period from the 1995 period
primarily resulted from decreases in revenue recognized under the Chiron
collaboration and the Partnership Development Agreement. The decrease was
partially offset by increases in revenue recognized in the 1996 period under the
agreements with TAP and SP.
In August 1995, the Partnership collected the final limited partner
subscription installment payments. The Company will not recognize revenue from
the Partnership under the Partnership Development Agreement in 1996. The Company
and Chiron are to share equally in collaboration-related costs in 1996. The
Company expects revenues under the Chiron collaboration in 1996 to be
substantially less than 1995 and, depending on the relative costs incurred by
the two companies, the Company may incur expenses from payments made to Chiron.
Under the BMS Agreement, the Company will only recognize revenue upon the
attainment of sales levels in excess of the base amount specified in the
agreement, which, if attained, is expected to occur in the latter half of 1996.
Revenues to be recognized in 1996 under the agreements with TAP, SB and SP are
expected to approximate 1995 levels. Revenues recognized under the supply
agreement with Kyowa are expected to continue in 1996 as the Company makes
shipments of Myotrophin to Kyowa to supply clinical trials in Japan.
Research and development expenses in the 1996 period as compared to the
1995 period were relatively even due to an 8% increase in staffing levels in the
1996 period that were offset by decreases in the costs associated with
conducting clinical trials of Myotrophin and modafinil, due to the completion of
the double-blind portion of those studies.
The significant increase in the selling, general and administrative
area in the 1996 period as compared to the same 1995 period is attributable to
the sales and marketing activities to co-promote Stadol NS and Serzone with BMS
and pre-marketing of other products in development, and increased staffing
levels, compensation and other external expenses in the administrative area.
Summary of Results of Operations
The Company expects that revenues will be substantially less in 1996
than in 1995 due primarily to the reduction in revenues from the Chiron
collaboration and the Partnership. A substantial portion of the Company's
revenues are derived from collaboration agreements with TAP, SB and SP, the
continuation of which is subject to periodic review and achievement of certain
milestones. The Company expects that it will continue to incur significant
research and development costs which may increase in 1996 and also expects its
selling, general and administrative costs to increase as it continues to further
expand its marketing efforts. The costs to be incurred by
<PAGE>
the Company depend to a large degree on the results of regulatory actions with
respect to Myotrophin, Provigil and other product programs. In summary, the
Company expects its loss in 1996 will be larger than losses incurred in prior
years.
The Company does not believe that inflation has had a material impact
on the results of its operations since inception.
Loss Per Share
Options, restricted stock grants and warrants outstanding have been
excluded from the per share calculations, because their inclusion would be
antidilutive. At June 30, 1996, the Company had approximately 2,870,007 options
outstanding under its stock option plan with exercise prices ranging from $0.15
to $31.00 per share. As further described in the Notes to the Consolidated
Financial Statements, at June 30, 1996, warrants to purchase 3,005,133 shares of
common stock were exercisable with prices ranging from $11.32 to $18.50, with
various exercise periods through February 2002.
<PAGE>
PART II - OTHER INFORMATION
- ----------------------------
Item 4. Submission of Matters to a Vote of Security-Holders:
The following was voted upon at the annual meeting of stockholders of Cephalon,
Inc., held in Malvern, Pennsylvania on May 7, 1996:
I. On the election of the following persons as directors:
<TABLE>
<CAPTION>
NUMBER OF VOTES
------------------------------
FOR WITHHELD
--- --------
<S> <C> <C>
Dr. Frank Baldino, Jr. 20,460,289 220,475
William P. Egan 20,460,289 220,475
Dr. Robert J. Feeney 20,460,289 220,475
Martyn D. Greenacre 20,460,289 220,475
Kevin E. Moley 20,460,289 220,475
Bruce A. Peacock 20,460,289 220,475
Dr. Horst Witzel 20,460,289 220,475
</TABLE>
II. To approve the increase in the number of authorized shares of the Company's
Common Stock from 40 million to 100 million:
<TABLE>
<CAPTION>
NUMBER OF VOTES
- ----------------------------------------
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
15,709,311 4,938,541 32,912
</TABLE>
Broker no-vote: 0
III. To approve the amendment to the Company's Stock Option Plan:
<TABLE>
<CAPTION>
NUMBER OF VOTES
- ----------------------------------------
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
14,614,478 4,559,184 55,344
</TABLE>
Broker no-vote: 1,451,758
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
During the quarter ended June 30, 1996, the Registrant filed
Current Reports on Form 8-K for the following events:
(i) On April 16, 1996, Cephalon and its partner, Chiron
Corporation, announced that the two companies will submit to the U.S. Food and
Drug Administration, a New Drug Application to market Myotrophin (R) (rhIGF-1)
for the treatment of amyotrophic lateral sclerosis in the United States.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEPHALON, INC.
(Registrant)
August 13, 1996 By /s/ Frank Baldino, Jr., Ph.D.
---------------------------------
Frank Baldino, Jr., Ph.D.
President, Chief Executive Officer
and Director
(Principal executive officer)
By /s/ J. Kevin Buchi
-----------------------------------
J. Kevin Buchi
Senior Vice President, Finance and Chief
Financial Officer
(Principal financial and accounting officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM Cephalon,
Inc.'s Form 10Q for the quarterly period ended June 30, 1996 AND IS QUALIFIED IN
ITS ENTIRITY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000873364
<NAME> CEPHALON, INC.
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 JUN-30-1995
<CASH> 6,127,000 6,565,000
<SECURITIES> 149,073,000 171,502,000
<RECEIVABLES> 37,000 33,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 7,923,000 10,382,000
<PP&E> 29,049,000 30,002,000
<DEPRECIATION> 11,570,000 9,652,000
<TOTAL-ASSETS> 195,130,000 221,330,000
<CURRENT-LIABILITIES> 17,651,000 18,402,000
<BONDS> 0 0
0 0
0 0
<COMMON> 244,000 238,000
<OTHER-SE> 155,739,000 179,967,000
<TOTAL-LIABILITY-AND-EQUITY> 195,130,000 221,330,000
<SALES> 0 0
<TOTAL-REVENUES> 11,653,000 21,500,000
<CGS> 0 0
<TOTAL-COSTS> 42,303,000 36,681,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,187,000 1,382,000
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (31,838,000) (16,563,000)
<EPS-PRIMARY> (1.32) (.90)
<EPS-DILUTED> 0 0
</TABLE>
