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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to__________
Commission File Number 0-19119
Cephalon, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2484489
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
145 Brandywine Parkway,
West Chester, Pennsylvania 19380
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 344-0200
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X]. No [_] .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant is approximately $536,673,964. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the Nasdaq National Market on March 10, 1997. For purposes of making this
calculation only, the registrant has defined affiliates as including all
directors and beneficial owners of more than ten percent of the Common Stock of
the Company.
The number of shares of the registrant's Common Stock outstanding as of
March 10, 1997 was 24,674,665.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 1997 annual
meeting of stockholders are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
Cephalon, Inc. ("Cephalon" or the "Company") seeks to discover and develop
pharmaceutical products for the treatment of neurological disorders. The
Company's research and development efforts focus primarily on neurodegenerative
disorders, which are characterized by the death of neurons, the specialized
conducting cells of the nervous system. The Company utilizes its technical
expertise in molecular biology, molecular pharmacology, biochemistry, cell
biology and chemistry to develop products in four core technology areas:
neurotrophic factors, protease inhibitors, signal transduction modulators and
regulators of gene transcription. Cephalon believes that its multidisciplinary
technology approach provides the basis for the development of a portfolio of
potential products for the treatment of neurodegenerative disorders such as
amyotrophic lateral sclerosis ("ALS"), peripheral neuropathies, Alzheimer's
disease and stroke.
Cephalon's business strategy includes forming alliances with other
pharmaceutical companies where collaborations can provide strategic advantages
in technological, financial, marketing, manufacturing and other areas. In these
arrangements, the Company seeks, where appropriate, to retain the rights to
co-promote or otherwise share in the marketing of products, particularly to
neurologists. The Company also seeks to selectively in-license late stage
compounds for development.
The Company has established a 36-person sales organization in the United
States focusing on neurologists, which is presently co-promoting two
Bristol-Myers Squibb Company ("BMS") proprietary products, Stadol NS(R)
(butorphanol tartrate), for the management of pain when the use of an opioid
analgesic is appropriate and Serzone(R) (nefazodone hydrochloride), which is
indicated for the treatment of depression.
The Company has not received approval from any regulatory authority to
market any drug candidate. Two new drug applications ("NDA") have been submitted
by the Company to the Food and Drug Administration ("FDA"): one for the use of
MYOTROPHIN(R) (rhIGF-I) in treating ALS, and one for the use of PROVIGIL(R)
(modafinil) in treating the excessive daytime sleepiness associated with
narcolepsy. Additionally, marketing applications for PROVIGIL (modafinil) are
pending in the United Kingdom and the Republic of Ireland, and a marketing
authorization application for MYOTROPHIN (rhIGF-I) is being prepared for filing
in Europe. There can be no assurance that the applications will be approved or
that the Company will successfully commercialize any of its potential products.
See "Management's Discussion and Analysis--Certain Risks Related to Cephalon's
Business."
Background
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The central nervous system ("CNS") consists of the brain and spinal cord
and is responsible for controlling a variety of physical functions as well as
the processing, storage and retrieval of information. These activities are
mediated by a complex network of neurons which, unlike most other cells, lose
their capacity for cell division at birth. Although neurons possess a limited
ability to repair themselves after sustaining an injury, they cannot regenerate.
Thus, in neurodegenerative disorders, neurons that are compromised by injury or
disease degenerate progressively over time until they are lost. An important
consideration in the development of products to treat CNS disorders is the
presence of a protective barrier known as the blood-brain barrier, which
prevents the free passage of many molecules, especially large molecules such as
proteins, between the bloodstream and the CNS. Unlike the CNS, the peripheral
nervous system ("PNS") lies outside the brain and spinal cord and is not
protected by the blood-brain barrier, thus making it feasible to treat disorders
of the PNS with proteins such as neurotrophic factors.
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Core Technologies
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From its inception, the Company's research strategy has focused on
exploiting the potential of neurotrophic recombinant proteins, or trophic
factors, for appropriate, focused neurologic disorders (e.g. ALS) and on
understanding the mechanism of trophic factor-induced neuronal survival. This
understanding may allow medicinal chemical approaches toward creating novel
small synthetic molecules which would cross the blood-brain barrier and mimic
the action of proteins by intervening in the progression of neurodegenerative
disorders. The Company's broad-based research program currently focuses on four
core technology areas: neurotrophic factors, protease inhibition, signal
transduction modulation and regulation of gene transcription.
. Neurotrophic Factors. A major advance in neuroscience was the discovery
of naturally-occurring proteins, referred to as neurotrophic or trophic factors,
that promote the survival of neurons. Several different neurotrophic factors
have been identified by the Company and others which affect the survival of
different types of neurons. However, neurotrophic factors cannot cross the
blood-brain barrier. The Company is focusing its development efforts in this
area on disorders such as ALS and peripheral neuropathies, where the projections
of the damaged neurons lie or extend outside the blood-brain barrier and are
therefore accessible to trophic factors.
. Protease Inhibition. A protease is a naturally-occurring enzyme which is
responsible for the processing or cleavage of a protein. Certain proteases have
been implicated in the pathogenesis of neurodegenerative disorders, either
directly by causing neuronal death or indirectly by cleaving proteins into
smaller peptide fragments, which may threaten the survival of neurons. The
Company has developed expertise in identifying, isolating, and assaying specific
types of proteases believed to be involved in certain neurodegenerative
disorders. In addition, the Company's expertise in chemistry has enabled the
synthesis of molecules which, in preclinical studies, specifically inhibit the
action of these proteases. Although the application of this core technology can
be extended to any number of proteases and disorders, the majority of the
Company's efforts in this area focus on developing small molecule therapeutics
that inhibit the actions of specific proteases thought to play a role in causing
the neuronal damage associated with Alzheimer's disease and stroke.
. Signal Transduction Modulation. The intracellular signal transduction
pathways through which neurotrophic factors regulate the processes for survival
of neurons provide novel therapeutic targets for small molecules. Initiation of
the signal transduction process occurs when the protein binds to a specific
receptor (a tyrosine kinase) on the surface of the neuron. Once bound, this
results in activation of the tyrosine kinase which results in the
phosphorylation (an activation process) of other kinases, in sequence, in the
pathway. Ultimately, this signal is transmitted to the nucleus to regulate
molecular processes important for survival. The Company has focused its efforts
on identifying small molecules that modulate this signal transduction process.
Small molecule modulators of signal transduction provide the opportunity to
either facilitate or inhibit signal transduction events. The Company has
developed an extensive proprietary library of small molecule kinase modulators
with neurotrophic activity which promote the survival of neurons in cell culture
on isolated neurons and in vivo in animals models where neuronal death has been
induced. The Company is pursuing the development of these modulators for the
treatment of Alzheimer's disease and other neurodegenerative disorders. In
addition, the Company has developed a number of modulators which act as
antagonists to these growth factors, inhibiting growth factor signal
transduction. The Company believes that these modulators may be useful in
treating certain types of cancer, such as prostate cancer, where tumor growth
and development may be mediated by the excessive activity of an endogenous
growth factor.
. Regulators of Gene Transcription. To address disorders of the CNS where
the neurons as well as their axonal projections lie within the blood brain
barrier, the inability of systemically administered trophic factors to cross the
blood brain barrier must be overcome. The Company is developing orally active
small molecules which cross the blood-brain barrier and initiate transcriptional
events at the genes responsible for the production of certain neurotrophic
factors within the CNS. Elevating levels of neurotrophic factors in the CNS
through the regulation of gene transcription may provide a way to circumvent the
blood-brain barrier as a limitation on the potential of neurotrophic proteins to
treat neurodegenerative disorders.
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Product Development Programs
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The following table outlines the Company's product development programs.
<TABLE>
<CAPTION>
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Indication Compound Status(1)(2) Commercial Rights
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<S> <C> <C> <C>
ALS......................MYOTROPHIN (rhIGF-I) NDA Cephalon/Chiron/Kyowa Hakko(3)
Peripheral Neuropathies..MYOTROPHIN (rhIGF-I) Phase II Cephalon/Chiron/Kyowa Hakko(3)
Narcolepsy...............PROVIGIL (modafinil) NDA(4) United States
United Kingdom, Republic of Ireland
Mexico, Japan
Alzheimer's Disease......Signal Transduction Modulators Development Cephalon/Kyowa Hakko(5)
......Regulators of Gene Transcription Development Cephalon/Leo(6)
......AP Inhibitors Research Cephalon/Schering-Plough(7)
Stroke...................Calpain Inhibitors Research Cephalon/SmithKline Beecham(8)
Prostate Disease.........Signal Transduction Modulators Phase I Cephalon/TAP/Kyowa Hakko(9)
--------------
(1) "Research" includes the development of assay systems, discovery and
evaluation of prototype compounds in vitro and in animals. "Development"
includes product formulation, toxicology and additional animal testing of a
lead compound. "Phase I" clinical trials involve administration of a product
to a limited number of patients to assess safety and determine appropriate
dosage. "Phase II" clinical trials generally involve administration of a
product to a limited number of patients with a particular disorder to
determine dosage, efficacy and safety. "Phase III" clinical trials generally
examine the clinical efficacy and safety of a product in an expanded patient
population at multiple clinical sites. "NDA" indicates that a new drug
application has been filed with the FDA in the United States for the
treatment of the indication listed.
(2) There can be no assurance that the Company or its collaborators
will be able to demonstrate to the FDA or any other regulatory authority
that the compounds under development are sufficiently safe and efficacious
to support marketing approval of any of these compounds for any indication
in any market. With respect to certain of the compounds listed, see the
uncertainties described under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Risks
Related to Cephalon's Business."
(3) Cephalon and Chiron are jointly developing MYOTROPHIN (rhIGF-I) for
certain neurological uses outside of Japan. Cephalon is developing
MYOTROPHIN (rhIGF-I) in the United States and Europe for the Partnership. A
marketing authorization application for the use of MYOTROPHIN (rhIGF-I) in the
treatment of ALS is being prepared for filing in Europe. Cephalon and Kyowa
Hakko are developing MYOTROPHIN (rhIGF-I) in Japan. See "Corporate
Collaborations--Chiron," "Corporate Collaborations--Kyowa Hakko Kogyo Co.,
Ltd." and "Cephalon Clinical Partners, L.P."
(4) Requests for approval to market are also pending in the United
Kingdom and the Republic of Ireland. See "Corporate Collaborations--
Laboratoire L. Lafon. "
(5) Cephalon has exclusive rights in the United States and
semi-exclusive rights with Kyowa Hakko in other territories. See "Corporate
Collaborations--Kyowa Hakko Kogyo Co., Ltd."
(6) Cephalon has exclusive rights to market and sell jointly developed
products in the United States and Mexico in the neurological field. See
"Corporate Collaborations--Leo Pharmaceutical Products, Ltd."
(7) Schering-Plough has the exclusive right to commercialize products
resulting from the collaboration; Cephalon has an option to co-promote such
products with Schering-Plough in the United States. See "Corporate
Collaborations--Schering-Plough Corporation."
(8) SmithKline Beecham has the worldwide right to commercialize these
compounds. Cephalon has an option to co-promote products resulting from the
collaboration in certain markets. See "Corporate Collaborations--SmithKline
Beecham p.l.c."
(9) TAP is to develop and market certain of these compounds for the
treatment of prostate disease in the United States. Cephalon and Kyowa
Hakko have rights in other markets. See "Corporate Collaborations--TAP
Holdings Inc." and "Corporate Collaborations--Kyowa Hakko Kogyo Co., Ltd."
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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. Amyotrophic Lateral Sclerosis
Amyotrophic lateral sclerosis is a fatal disorder of the nervous system
characterized by the chronic, progressive degeneration of motor neurons. The
term "amyotrophic" refers to the loss of lower motor neurons which project from
the spinal cord to the muscle, and "lateral sclerosis" refers to the loss of
upper motor neurons which project from the brain to motor neurons in the spinal
cord. Although both groups of motor neurons are affected in this disease, it is
the loss of the spinal (lower) motor neurons that leads to muscle weakness,
muscle atrophy and, eventually, to the patient's death.
ALS affects approximately 20,000 people in the United States. The Company
believes that there is a proportionate incidence of ALS in the populations of
Europe and Japan. The first symptom of ALS is muscle weakness, which progresses
to muscle atrophy and loss of muscle function. The disease usually progresses
over a three- to five-year period, with death usually resulting from loss of
respiratory muscle control rendering the patient unable to breathe. The only
currently approved therapeutic for the treatment of ALS in the United States is
Rilutek(R) (riluzole), which is being marketed by Rhone-Poulenc Rorer, Inc.
The Company is developing MYOTROPHIN (rhIGF-I) in collaboration with
Chiron Corporation ("Chiron") for use in the treatment of ALS and other
neurological disorders. See "Corporate Collaborations--Chiron Corporation."
The Company, in collaboration with Chiron, recently filed an NDA with the
FDA requesting that MYOTROPHIN (rhIGF-I) be approved for the treatment of ALS in
the United States, and a marketing application is being prepared for filing in
Europe. There can be no assurance that the FDA will ultimately approve
MYOTROPHIN (rhIGF-I) for commercialization. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Risks Related
to Cephalon's Business."
Cephalon's rights to MYOTROPHIN (rhIGF-I) are subject to the terms of the
license granted by Cephalon Clinical Partners, L.P. (the "Partnership"), and the
rights of the Partnership to receive payments from Cephalon. See "Cephalon
Clinical Partners, L.P."
. Peripheral Neuropathies
Peripheral neuropathies are disorders of the peripheral nervous system
characterized by a degeneration of sensory and motor nerves. The disability
produced by any particular neuropathy depends on the nerves affected. Sensory
neuropathies are accompanied by burning sensations, imbalance, numbness and
pain. Motor neuropathies are characterized by muscular weakness and motor
abnormalities, including problems with coordination, movement and respiration.
In the most severe cases, peripheral neuropathy may eventually lead to
significant limitations in normal physical activity.
In preclinical studies conducted by the Company and in studies conducted
by others, rhIGF-I has indicated the ability to rescue motor neurons in a model
of motor nerve transection and enhance functional recovery of motor neurons in
traumatic nerve injury models. Further, the Company believes that, unlike other
nervous system disorders, the preclinical animal models for a variety of
peripheral neuropathies may be representative of the disorder in humans and may
effectively predict the activity of potential human therapeutic agents. For
example, animals treated with the chemotherapeutic agents vincristine, Taxol(R),
or cisplatin, develop a neuropathy that appears similar to that developed by
cancer patients undergoing treatment with these neurotoxic agents.
Administration of rhIGF-I in these models significantly reduces the severity and
in some instances completely prevents the development of neuropathy. There is
currently no effective treatment for the peripheral neuropathies induced by
cancer chemotherapy. The Company believes that chemotherapy-induced peripheral
neuropathies affect approximately 200,000 people in the United States. Other
peripheral neuropathies, such as post-polio syndrome and small fiber neuropathy,
affect other patient populations. The Company has initiated a Phase II clinical
program to test the potential utility of MYOTROPHIN (rhIGF-I) in the treatment
of certain peripheral neuropathies.
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. Narcolepsy
Narcolepsy is a debilitating, lifelong disorder that often originates in
late childhood. Its most notable symptom is an uncontrollable propensity to fall
asleep during the day. There is no cure for narcolepsy, which is estimated to
affect over 125,000 people in the United States. Current therapies that treat
disorder symptoms, such as amphetamine-like stimulants, are often addictive, may
have undesirable side effects, and may require increasing dosages to maintain
therapeutic effect.
The Company has an exclusive license from Laboratoire L. Lafon ("Lafon") to
develop, market and sell PROVIGIL (modafinil) in the United States, Mexico, the
United Kingdom, the Republic of Ireland and Japan. See "Corporate
Collaborations--Laboratoire L. Lafon."
The Company recently submitted an NDA to the FDA requesting that PROVIGIL
(modafinil) be approved for the treatment of the excessive daytime sleepiness
associated with narcolepsy, based on the results of two Phase III studies
conducted in the United States. There can be no assurance that the FDA or other
regulatory authorities will grant marketing approval. See "Management's
Discussion and Analysis--Certain Risks Related to Cephalon's Business."
. Alzheimer's Disease
Alzheimer's disease is an intractable, chronic, and progressively
incapacitating disease characterized by the presence of core neuritic plaques,
neurofibrillary tangles, and gliosis in the brain which is believed to result in
the observed death of several types of neurons. Patients affected with this
disease become severely demented. Alzheimer's disease afflicts an estimated 5%
to 10% of the population over the age of 65 or approximately four million
individuals in the United States, with more than 100,000 new cases diagnosed
each year. The age-dependent nature of the disorder implies that an increasing
percentage of the population will be affected as the population ages. There are
currently two drugs approved by the FDA for the treatment of Alzheimer's
disease.
Cephalon is utilizing three distinct scientific approaches to the discovery
of therapeutics which retard or halt the neuronal death that is associated with
Alzheimer's disease: signal transduction modulators, gene transcription
regulators, and amyloid-protease inhibitors.
- Signal Transduction Modulation. A variety of protein growth factors that
naturally exist in the human body, including nerve growth factor ("NGF"),
brain-derived neurotrophic factor and IGF-I, have been shown to promote the
survival of neurons via their interaction with specific receptors (tyrosine
kinases) at the cell surface of neurons. Binding of a neurotrophic protein
to its receptor activates specific intracellular neuronal pathways leading
to a series of intracellular events which ultimately result in neuronal
survival. These pathways involve a cascade of activation and inactivation
of intracellular enzymes called kinases. Modulation of this enzymatic
cascade in such pathways represent a potentially novel approach to
developing new drugs to treat neurodegenerative disorders. Proteins can not
be effectively delivered to the CNS via non-invasive means because they are
too big to effectively cross the blood-brain barrier. In collaboration with
Kyowa Hakko Kogyo Co., Ltd. ("Kyowa Hakko"), Cephalon has synthesized and
identified a class of novel small molecules which activate intracellular
pathways for survival and/or block those involved in cellular death, but
are cell- and blood-brain barrier permeable. Cephalon has identified an
orally active lead molecule, CEP-1347, that prevents neuronal death in
vitro and in several models of neuronal death in vivo. CEP-1347 is
currently in preclinical development for use as a potential treatment for
Alzheimer's disease.
This program is being conducted under the terms of a license agreement
with Kyowa Hakko which provides Cephalon with exclusive marketing rights in
the United States, semi-exclusive rights in the rest of the
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world (excluding Japan) and an option to obtain semi-exclusive rights in
Japan. See "Corporate Collaborations--Kyowa Hakko Kogyo Co., Ltd."
- Regulators of Gene Transcription (Neurotrophic factor-enhancing small
molecules). Cephalon's second approach to Alzheimer's disease is being
pursued in a program to discover small molecules, referred to as regulators
of gene transcription, which can be delivered via oral or parenteral routes
of administration and cross the blood-brain barrier to increase the
endogenous production of NGF or other neurotrophic factors. This approach,
if successful, would eliminate the need to deliver neurotrophic proteins
into the CNS by invasive means.
Cephalon is pursuing a class of regulators of gene transcription which,
in preclinical studies, have demonstrated the ability to enhance the
endogenous expression of NGF and promote neuronal survival in regions of
the brain known to be affected by Alzheimer's disease. This program is
being conducted in collaboration with Leo Pharmaceutical Products, Ltd.
("Leo"). See "Corporate Collaborations--Leo Pharmaceutical Products, Ltd."
- AP Inhibitors (Amyloid-protease inhibitors). One of the hallmarks of
Alzheimer's disease is the formation in the brain of core neuritic plaques
comprised predominantly of the peptide known as beta-amyloid. Beta-amyloid
peptide forms when the amyloid precursor protein is cleaved by the activity
of certain proteases. Beta-amyloid has been demonstrated to be neurotoxic
to neurons. The Company's third program for Alzheimer's disease is based on
the hypothesis that the deposition of beta-amyloid into neuritic plaques
contributes to neuronal loss and the progression of Alzheimer's disease.
The Company believes that an inhibitor of this protease that would prevent
the formation of the neurotoxic amyloid peptide may slow or halt the
progression of the disease by preventing further neuronal death and
neuritic plaque formation.
The Company has identified, and is in the process of isolating, one of
the specific proteases responsible for this cleavage. The Company believes
that inhibitors of this protease may represent important therapeutic leads
directed at the underlying pathogenesis of Alzheimer's disease. This
research program was funded through March 1997 under a collaboration
agreement with Schering-Plough Corporation ("SP"). See "Corporate
Collaborations--Schering-Plough Corporation."
. Stroke
Each year, approximately 400,000 people in the United States suffer from
the neuronal damage induced by stroke, resulting in approximately 150,000
deaths. Current treatments show limited usefulness in reducing the degree of
neuronal damage caused by stroke.
Stroke, or cerebral ischemia, results from an interruption of blood flow to
the brain. The resulting deprivation of blood flow is an acute, life-threatening
event that causes brain damage due to neuronal death, often resulting in
paralysis or loss of functions such as memory and speech. The neuronal death
resulting from this initial insult triggers a series of events, mediated by a
number of inter- and intracellular factors including intracellular proteases,
potentially leading to damage to other neurons. The Company's research efforts
focus on developing inhibitors of calpain, an intracellular protease activated
as a consequence of stroke and ischemic injury. Cephalon believes that such
calpain inhibitors may mitigate the effects of stroke and also might have
beneficial effects in other neurodegenerative disorders. The Company has
synthesized novel, specific inhibitors of calpain under a program being
conducted in collaboration with SmithKline Beecham p.l.c. ("SB"). See "Corporate
Collaborations--SmithKline Beecham p.l.c."
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. Prostate Disease
Prostate cancer is the most common form of cancer in men and the second
leading cause of cancer death in men. The Company believes that more than
1,000,000 men in the U.S. may be afflicted with prostate cancer. Current therapy
includes surgery to remove the cancer and treatment with anti-androgen agents
such as leuprolide. Of particular clinical relevance, if these treatments fail
and the tumor becomes androgen-refractory, there are no effective treatments and
death usually results.
The Company believes that its small molecule technology has potential
application in disorders outside the neurology area. The Company has identified
certain molecules which modulate signal transduction by blocking (antagonizing)
the action of certain growth factors. The Company believes these inhibitors may
be useful in treating certain diseases such as prostate cancer, where tumor
growth and development may be mediated by an uncontrolled activation of the
endogenous growth factor. This approach has been demonstrated by the Company to
be active against androgen-refractory tumors in preclinical models.
Cephalon and TAP Holdings Inc. ("TAP") entered into a license and research
and development agreement in May 1994 to develop signal transduction modulators
for the treatment of prostate cancer and benign prostatic hypertrophy in the
United States. TAP has begun a Phase I clinical study of a compound being
developed in collaboration with the Company for the treatment of various
cancers, including prostate cancer. The objective of the multi-center study is
to examine the drug's pharmacokinetic and safety profile in patients with
advanced cancer. See "Corporate Collaborations--TAP Holdings Inc."
Sales and Marketing
- -------------------
The Company has established a sales force in the United States which
initially is being used to co-promote Stadol NS and Serzone, approved products
of BMS, to neurologists in the United States. The co-promotion agreements expire
at the end of 1998 unless BMS and Cephalon elect to renew the arrangements.
Cephalon does not have a sales, marketing or distribution organization outside
the United States. The Company is in the process of establishing a sales and
marketing capability focusing on neurology in certain countries in Europe. The
Company's agreement with Lafon requires the Company to commence sales and
marketing activities within three months after receiving approval to market
PROVIGIL (modafinil) in the United Kingdom and the Republic of Ireland. If the
Company fails to initiate such activities within the specified time frame, its
license could be terminated by Lafon in the applicable country. Cephalon may
choose to augment any of its own sales efforts through sales and marketing
arrangements with other pharmaceutical companies.
Under the collaborative agreement with Chiron, the Company believes that
the existing Chiron distribution infrastructure will be used for MYOTROPHIN
(rhIGF-I). The Company is evaluating alternatives for the distribution of its
other product candidates.
Corporate Collaborations
- ------------------------
Cephalon's business strategy includes forming alliances with other
pharmaceutical companies where collaborations can provide strategic advantages
in technological, financial, marketing, manufacturing or other areas. In these
arrangements, the Company seeks, where appropriate, to retain the rights to
co-promote or otherwise share in the marketing of products, particularly to
neurologists. The Company also seeks to selectively in-license late stage
compounds for development. To date, the Company has entered into the following
corporate collaborations.
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. Leo Pharmaceutical Products, Ltd.
In November 1996, the Company and Leo entered into a two-year, renewable
agreement to collaborate in the development of regulators of gene transcription
for potential use in the treatment of neurological disorders.
Under this agreement, Cephalon and Leo will utilize Cephalon's proprietary
technology to evaluate molecules synthesized by Leo. The companies intend to
jointly develop selected products and will share the cost of development. Leo is
responsible for the cost of Phase I studies, Cephalon is responsible for the
cost of Phase II, and the two companies will share equally in the cost of Phase
III. Cephalon will have the exclusive rights to market and sell these jointly
developed products in the United States and Mexico in the neurological field,
and will pay Leo a portion of net sales as a royalty and for supply of product.
Cephalon will receive a royalty from Leo's net sales of jointly developed
products in other territories. A lead molecule has been identified for
development as a potential treatment for Alzheimer's disease.
. Bristol-Myers Squibb Company
In July 1994, the Company and BMS entered into a co-promotion agreement
under which Cephalon markets Stadol NSR (butorphanol tartrate) to neurologists
in the United States. Stadol NS, which received U.S. marketing approval from the
FDA in 1992, is indicated for the management of pain when the use of an opioid
analgesic is appropriate. In February 1996, the Company and BMS entered into a
new arrangement for Cephalon to co-promote to neurologists Serzone(R)
(nefazodone hydrochloride), a treatment for depression which received U.S.
marketing approval in 1995.
The co-promotion agreements expire at the end of 1998 unless BMS and
Cephalon elect to renew the arrangements. Under the agreements, Cephalon
receives compensation based primarily on the percentage of certain prescriptions
written by neurologists in excess of a predetermined base amount. Cephalon is
required to make a specified number of sales calls on neurologists. The Company
also is obligated to fund certain neurology-focused promotional activities.
. TAP Holdings Inc.
In May 1994, the Company and TAP entered into a licensing and research and
development collaboration to develop and commercialize certain compounds for the
treatment of prostate disease in the United States. The compounds belong to a
family of inhibitors from the Company's signal transduction modulator program.
In July 1996, the Company and TAP amended the research and development agreement
to include additional molecules and to expand the field to include all cancers.
Under the terms of the agreement, the Company is to perform research and
preclinical development of these compounds 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. The research under the agreement may be extended for
one-year periods. TAP may terminate the research under the agreement upon 90
days' prior written notice at the end of any extension period.
TAP is responsible for conducting and funding all U.S. clinical trials and
additional activities for regulatory submissions for U.S. marketing approval.
The agreement provides for TAP to make milestone payments upon the achievement
of specific events and to purchase commercial supplies of product from Cephalon
at a price equal to a fixed percentage of sales plus royalties on product sales.
In connection with the collaboration, TAP purchased 1,225,532 shares of
common stock for $14,400,000 in May 1994.
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. Chiron Corporation
Since January 1994, the Company and Chiron have collaborated in the
development of MYOTROPHIN (rhIGF-I) in the neurological field, for
commercialization in all countries of the world other than Japan. Under the
agreement, Chiron contributed its intellectual property rights within the
neurology field related to certain compounds, including rhIGF-I. The Company
contributed certain patent rights related to MYOTROPHIN (rhIGF-I), subject to
the rights of the Partnership. See "Cephalon Clinical Partners, L.P."
The Company and Chiron have established joint committees to develop and
oversee the clinical and marketing strategies and budgets for compounds to be
developed under the collaboration. The collaboration is currently developing
MYOTROPHIN (rhIGF-I) for the treatment of ALS and certain peripheral
neuropathies. The costs of the program are shared equally by the two companies.
Profits and losses from the marketing of MYOTROPHIN (rhIGF-I) for the
treatment of ALS and certain peripheral neuropathies in North America, the
countries of the European Community and certain other European countries
("Western Europe") generally will be shared equally by the Company and Chiron.
In addition, the Company will receive a royalty on sales of MYOTROPHIN
(rhIGF-I), if any, in Western Europe to treat ALS. Chiron is to market the
products in the collaboration's territory outside of North America and Western
Europe, in return for royalties to the collaboration, which also will be shared
equally by the Company and Chiron.
The collaboration may be terminated by either party if there is no
reasonable basis for developing any of the collaboration's compounds. If the
Company is the non-terminating party, it may continue to license the technology
or require Chiron to supply product on a "cost plus" basis for a certain period
of time. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Certain Risks Related to Cephalon's Business." In
addition to customary termination events such as breach by the other party, the
agreement also is subject to termination if Cephalon does not exercise the
Purchase Option. See "Cephalon Clinical Partners, L.P."
Under the collaboration, Chiron has an option to obtain the Company's IGF-I
technology outside the neurology field for compensation to be determined if such
option is exercised.
The Company's collaboration with Chiron is subject to the rights of the
Partnership, which has licensed the Company the right to develop MYOTROPHIN
(rhIGF-I) in North America and Europe in return for receiving certain payments.
The Company is solely responsible for making any royalty and milestone payments
owed to the Partnership and is responsible for funding the Purchase Option if it
exercises the option. See "Cephalon Clinical Partners, L.P."
The Company, in collaboration with Chiron, recently filed an NDA with the
FDA requesting that MYOTROPHIN (rhIGF-I) be approved for the treatment of ALS in
the United States, and a marketing authorization application is being prepared
for filing in Europe. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Risks Related to Cephalon's
Business."
In connection with the collaboration, in February 1994, Chiron purchased
800,000 shares of common stock and a warrant to purchase 750,000 shares of
common stock with an exercise price of $18.50 per share, for an aggregate
purchase price of $15,000,000.
. SmithKline Beecham p.l.c.
In June 1993, the Company and SB entered into a collaboration for the
research, development and commercialization of compounds that inhibit calpain, a
protease that has been shown to be an important mediator of cell death. See
"Product Development Programs--Stroke."
Under the terms of the agreement, the Company is to perform research and
preclinical development of these compounds for which it is compensated by SB,
based on a contract rate per individual assigned to the program,
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subject to annual budgetary maximums. SB may terminate the research under the
agreement in which case, in certain circumstances, the licenses granted by each
company to the other also terminate and the technology provided by Cephalon
reverts to Cephalon. In addition, SB may terminate the agreement as to any
particular country covered by the collaboration, under certain circumstances, in
which event the licenses granted by Cephalon to SB in that country terminate.
The agreement is also subject to termination in customary circumstances such as
a breach of contract by the other party.
The Company may elect to co-promote, in the United States and certain other
territories, up to a certain specified percentage of the sales of products
resulting from the collaboration by paying to SB, during the development
program, a share of the development costs equal to the percentage of
co-promotion rights received. If the Company chooses to exercise its option to
co-promote a product, it is required to reimburse SB for a portion of all
research payments made to the Company by SB under the research agreement. Each
party is to receive a percentage of the profits from co-promoted products equal
to its specified percentage of co-promotion sales of such products. The Company
also is to receive royalty payments on the non co-promotion sales. Should a
product resulting from the collaboration receive marketing approval, the Company
also is to receive certain milestone payments. SB is responsible for the
manufacture of any products developed under the collaboration.
. Laboratoire L. Lafon
In January 1993, the Company licensed from Lafon, a French pharmaceutical
company, the exclusive rights in the United States and Mexico to develop, market
and sell PROVIGIL (modafinil). The license was expanded in July 1993 to add the
United Kingdom and the Republic of Ireland and was further expanded in September
1995 to include Japan.
Under the terms of this arrangement, Lafon is to supply finished product
for the Company's use in conducting clinical trials, and is to supply modafinil
in bulk form for the Company's commercial uses in its territories. In addition
to compensation based upon product sales payable under the supply agreement,
trademark and license royalties are payable to Lafon upon commercial sales of
PROVIGIL (modafinil) by Cephalon.
Modafinil is being sold by Lafon in France under the trade name Modiodal(R)
under certain prescription requirements for the treatment of narcolepsy. The
Company recently submitted an NDA to the FDA requesting that PROVIGIL
(modafinil) be approved for the treatment of the excessive daytime sleepiness
associated with narcolepsy. The Company is pursuing applications seeking
authorization to market PROVIGIL (modafinil) in the Republic of Ireland and the
United Kingdom. The regulatory authorities in both countries have requested that
additional information be provided with respect to the applications (which were
filed by Lafon under the multi-state procedures of the Committee for Proprietary
Medicinal Products "CPMP"). There can be no assurance that the Company will be
able to provide sufficient additional information in order to permit approval of
the applications. Even if those applications are approved, the Company must also
request permission to vary the applications with respect to certain
manufacturing procedures and other matters. There can be no assurance that any
regulatory approvals or variations will be obtained at all or in a timely
manner. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Certain Risks Related to Cephalon's Business."
The Company's rights in Japan are contingent upon entering into an
agreement for commercialization of PROVIGIL (modafinil) with a Japanese partner
by August 1997. The agreement also is subject to termination in customary
circumstances, such as a breach of contract by the other party.
. Kyowa Hakko Kogyo Co., Ltd.
In May 1992, the Company licensed from Kyowa Hakko the patent rights to a
class of small molecules which the Company has identified as signal transduction
modulators. The Company is currently evaluating these and other newly
synthesized compounds for their application in a number of neurodegenerative
disorders, including Alzheimer's disease, as well as potential applications
outside neurology. See "Alzheimer's Disease" and "Prostate Disease."
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Under the terms of the license, the Company has exclusive marketing rights
to these compounds in the United States and has an option to acquire semi-
exclusive marketing rights in Japan. Kyowa Hakko and the Company each have semi-
exclusive marketing rights throughout the rest of the world, including Europe.
Pursuant to the arrangement, Kyowa Hakko is to supply the molecules in bulk form
and the Company will pay Kyowa Hakko for commercial supplies as well as
royalties on product sales. See "Manufacturing and Product Supply." The royalty
and supply costs, which are to be negotiated in the future, are subject to a
specified maximum amount of the Company's net sales of the licensed product.
Cephalon has obtained an option to acquire the exclusive rights to develop
compounds for prostate cancer in Europe, Canada, Mexico and the United States,
which include the compound now being developed in the United States in
collaboration with TAP. In return for the exclusive European rights, Kyowa Hakko
is to receive exclusive rights to develop the compound for prostate cancer in
Asia and is to receive a royalty on European sales of the compound by Cephalon.
The license agreement will automatically terminate if the Company
discontinues the development of licensed molecules because of lack of safety or
efficacy. The agreement also is subject to termination in customary
circumstances, such as a breach of contract by the other party.
In July 1993, the Company entered into a separate agreement with Kyowa
Hakko providing for the development of MYOTROPHIN (rhIGF-I) for the treatment of
neurological disorders, including ALS, in Japan. Kyowa Hakko is funding product
development activities in Japan, is conducting human clinical trials in Japan
and is responsible for seeking authorization to market MYOTROPHIN (rhIGF-I) in
Japan for the treatment of neurological disorders. The Company is to receive
certain licensing, milestone and royalty payments. The Company is to supply
MYOTROPHIN (rhIGF-I) at its cost to Kyowa Hakko for use in Japanese clinical
trials, and has agreed to supply the product for Kyowa Hakko's commercial use.
See "Manufacturing and Product Supply." Under certain circumstances, the Company
has an option to co-promote MYOTROPHIN (rhIGF-I) in Japan.
The Company may terminate the agreement if (i) Kyowa Hakko fails to file
for marketing approval of MYOTROPHIN (rhIGF-I) in Japan within five years from
the date of the agreement, except where such failure is not within Kyowa Hakko's
control or (ii) if Kyowa Hakko discontinues the development of MYOTROPHIN
(rhIGF-I) because of a lack of its safety or efficacy. The agreement also is
subject to termination in customary circumstances, such as a breach of contract
by the other party.
In July 1995, the Company entered into a stock purchase agreement with
Kyowa Hakko, pursuant to which Kyowa Hakko purchased 538,310 shares (the "Kyowa
Shares") of the Company's common stock for an aggregate price of $11,396,000.
The Company agreed to use the net proceeds from the sale of the Kyowa Shares
solely to fund the Company's collaborations with Kyowa Hakko to (i) develop
MYOTROPHIN (rhIGF-I) for use in treating ALS and other neurodegenerative
disorders and (ii) develop a series of small molecules for the treatment of
neurodegenerative disorders as well as potential applications outside neurology
including the treatment of prostate cancer. Pursuant to the stock purchase
agreement, Kyowa Hakko agreed not to dispose of the Kyowa Shares without first
giving the Company the right to offer to purchase such shares.
. Schering-Plough Corporation
In May 1990, the Company and Schering-Plough Corporation, through its
subsidiary Schering Corporation, entered into an agreement under which the
Company conducted a research program to identify inhibitors of beta-amyloid as
potential therapeutic agents for the treatment of Alzheimer's disease and other
neurodegenerative disorders. SP recently decided to conclude its funding of the
research program with the Company. See "Product Development
Programs--Alzheimer's Disease."
SP retains an exclusive, world-wide royalty-bearing license to the products
developed under the research programs. SP has the primary responsibility for
conducting clinical development of any product candidates emerging from the
research program and Cephalon is to receive milestone payments as well as
royalties on product sales. The Company may elect to co-promote in the United
States a specified percentage of the sales of products
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<PAGE>
resulting from the collaboration by paying to SP, during the development
program, a specified share of the development costs. The Company will receive no
royalty in any territory in which it elects to co-promote.
The provisions of the agreement continue after the research funding ends,
including Cephalon's non-exclusive right to use the technology developed in the
program. The Company intends to continue research in the beta-amyloid field
using its own resources. Under the terms of the agreement with SP, the Company
may not conduct the same research as the funded research program with a third
party until the end of 1997.
. Cephalon Clinical Partners, L.P.
In August 1992, Cephalon exclusively licensed to Cephalon Clinical
Partners, L.P. rights to MYOTROPHIN (rhIGF-I) for human therapeutic use within
the United States, Canada and Europe (the "Territory") in return for a
non-refundable license fee of $500,000. Through a concurrent offering of 900
limited partnership interests, the Partnership raised approximately $38,714,000
in net proceeds (payable to the Partnership in annual installments, the last of
which was paid in August 1995) which it used to fund the development of
MYOTROPHIN (rhIGF-I). In August 1995, the Company purchased 67 limited
partnership interests (comprising an 8% non-controlling interest) in the
Partnership at a cost of $3,350,000. (The future payments by the Company to the
Partnership detailed herein have been adjusted to reflect the acquisition of
these partnership interests.)
The Company is performing the development and clinical testing of
MYOTROPHIN (rhIGF-I) on behalf of the Partnership under a research and
development agreement with the Partnership (the "Partnership Development
Agreement"). Under the Partnership Development Agreement, the Company's costs
incurred to develop MYOTROPHIN (rhIGF-I) in the Territory were reimbursed by the
Partnership to the extent of its available funds and subject each year to the
Partnership Development Agreement budget for that year. The Partnership
exhausted its available funding in 1995. Since that time, the Company has been
funding the continued development of MYOTROPHIN (rhIGF-I) from its own cash
resources.
The Partnership has granted an exclusive license to the Company (the
"Interim License") to manufacture and market MYOTROPHIN (rhIGF-I) for human
therapeutic use within the Territory in return for certain royalty payments and
a payment of approximately $16,000,000 (the "Milestone Payment") if MYOTROPHIN
(rhIGF-I) receives regulatory approval in certain countries within the
Territory. The Company has a contractual option to purchase all of the limited
partnership interests in the Partnership (the "Purchase Option").
To exercise the Purchase Option, Cephalon is required to make an advance
payment of $40,275,000 in cash or, at Cephalon's election, $42,369,000 in shares
of 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 (rhIGF-I) 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.
If the Company does not exercise the Purchase Option, its license will
terminate and all rights to manufacture or market MYOTROPHIN (rhIGF-I) in the
Territory will revert to the Partnership, which may then commercialize
MYOTROPHIN (rhIGF-I) itself or license or assign its rights to a third party.
The Company would not receive any benefits from such commercialization.
The current general partner of the Partnership is a wholly-owned subsidiary
of the Company, which owns 1% of the Partnership. The board of directors of the
Partnership is 50% controlled by a third-party investor. The general partner
cannot adversely modify the economic terms of the Partnership without a vote of
the limited partners. The general partner may be removed at any time by a vote
of the limited partners. The obligations of the general partner include i)
enforcing agreements (described above) entered into by the Partnership, ii)
prosecuting
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and defending the intellectual property owned by the Partnership and iii)
entering into loan agreements and other transactions on behalf of the
Partnership. No such borrowings, commitments, or obligations are outstanding.
Patents and Proprietary Technologies
- ------------------------------------
An important part of the Company's product development strategy is to seek,
when appropriate, protection for its product candidates and proprietary
technology through the use of various U.S. and foreign patents, trademarks and
contractual arrangements. The degree of the Company's success depends in part on
its ability to obtain patents, maintain trade secret protection and operate
without infringing the proprietary rights of third parties. The Company believes
that patent protection of product or processes that may result from the research
and development efforts of the Company, its licensees or its collaborators also
is important to the potential commercialization of the Company's product
candidates. The Company has filed various applications for U.S. and foreign
patents, has licensed various U.S. and foreign patent applications from third
parties, and owns or licenses certain U.S. and foreign patents.
. MYOTROPHIN (rhIGF-I)
The Company believes that the composition of rhIGF-I is in the public
domain and therefore cannot be patented under a composition-of-matter patent.
However, Cephalon owns issued U.S. and Japanese patents which include claims
covering the use of IGF-I for the treatment of diseases caused by the death of
non-mitotic, cholinergic neurons, including motor neurons compromised in ALS,
and patent applications for the same use are pending in Canada and major
countries in Europe. Two U.S. patents were recently issued to Cephalon claiming
the use of IGF-I in treating certain types of chemotherapy-induced peripheral
neuropathy, and the Company has filed similar applications for such peripheral
neuropathies in Canada, Europe and Japan. Cephalon also has filed patent
applications in the United States, Canada, Europe and Japan covering the use of
IGF-I in certain other peripheral neuropathies (including post-polio syndrome)
and other neurological disorders. The issued patents and all patent applications
relating to IGF-I in the United States, Canada and Europe have been licensed to
the Partnership.
Under an agreement with SIBIA Neurosciences, Inc. ("SIBIA"), the Company
has obtained a license for use in the field of neurodegenerative diseases,
certain patent rights and other technology related to the production of
recombinant IGF-I in certain strains of yeast host cells. The issued patent and
all patent applications relating to rhIGF-I in the United States, Canada and
Europe have been licensed to the Partnership. In October 1995, the Company paid
SIBIA a total purchase price of $1,500,000 to reduce the royalty payable under
the SIBIA license agreement on future sales of MYOTROPHIN (rhIGF-I) in the
neurology field.
Subject to the rights of the Partnership, the Company and Chiron
cross-licensed all of their respective patents and patent applications related
to IGF-I and certain other compounds (excluding the Company's rights under the
SIBIA license, which Chiron has the option to sublicense) in the field of
neurological diseases and disorders, including Chiron's rights under certain
U.S. and foreign patents for the use of IGF-I to treat secondary effects of
hyperinsulinemia, which effects the Company believes may include diabetic
neuropathy.
There can be no assurance that any of the Company's patent applications for
rhIGF-I uses will issue, that patents, if obtained, will be as broad in scope as
such patent applications or that the claims of any issued patent will withstand
challenge. Even in those jurisdictions where rhIGF-I is or may be covered by the
claims of a use patent, "off-label" sales by a third party might occur,
especially if another company markets rhIGF-I for other uses at a price that is
less than the price of MYOTROPHIN (rhIGF-I), thereby potentially reducing sales
of MYOTROPHIN (rhIGF-I). It is not always possible to detect "off-label" sales
and therefore enforcement of use patents can be difficult. Furthermore, some
jurisdictions outside of the United States restrict the manner in which patents
claiming uses of a product may be enforced.
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Under its collaboration with Chiron, Chiron has the primary responsibility
for manufacturing commercial supplies of MYOTROPHIN (rhIGF-I). One of Chiron's
issued patents related to certain methods for the manufacture of recombinant
proteins, including rhIGF-I, is currently the subject of an interference
proceeding before the U.S. Patent and Trademark Office ("USPTO") involving
patent applications owned by an unrelated third-party. It is not known when or
how the USPTO will ultimately conclude the interference proceeding. Another
related patent application of Chiron, which may cover the current process for
manufacturing rhIGF-I, was the subject of another interference proceeding.
Chiron prevailed in the interference proceeding and thereafter prevailed in a
district court appeal brought by the other party. That decision has been
appealed to the Court of Appeals for the Federal Circuit by the other party.
There can be no assurance that Chiron will prevail in any appeal of the
decision. The Company is aware of other patents and patent applications owned by
third parties, which patents and patent applications, if issued with the claims
as filed, may cover certain aspects of the current method of manufacturing
rhIGF-I. The Company and Chiron intend to either seek licenses under any valid
patents related to the manufacturing of rhIGF-I as required or, alternatively,
modify the manufacturing process. There can be no assurance that, if required,
such licenses can be obtained at all or on acceptable terms or that a modified
manufacturing process can be implemented at all or without substantial cost or
delay. If neither approach were feasible, the Company could be subject to a
claim of patent infringement which, if successful, could prevent the Company
from manufacturing or selling MYOTROPHIN (rhIGF-I) in the United States. In such
event, the Company could be materially adversely affected. See "Manufacturing
and Product Supply."
Even if patents issue on the pending applications owned or licensed by the
Company, there can be no assurance that applications filed by others will not
result in patents that would be infringed by the manufacture, use or sale of
MYOTROPHIN (rhIGF-I). The Company is aware of a published application filed
under the Paris Convention Treaty, designating the United States, that relates
to the use of IGF-I in treating certain disorders of the nervous system. The
Company believes that even if the subject matter were deemed to overlap the
subject matter of a patent application filed by the Company in the United
States, based on the filing date of the third party's application, it would not
take priority over the Company's application. Further, the Company believes that
a third party has filed a U.S. patent application which may contain a claim
which, if issued, might broadly cover the use of rhIGF-I to treat many
neurological conditions, including ALS and peripheral neuropathies. Clark &
Elbing, LLP, patent counsel to the Company, has advised the Company that, in its
opinion, such a claim would not be patentable. If such a claim should issue, the
Company could be prevented from selling MYOTROPHIN (rhIGF-I) in the United
States for use in treating ALS or peripheral neuropathy unless it obtained a
license to the patent. The third-party patent application might also contain a
narrower claim covering the use of rhIGF-I to treat diabetic neuropathy. If such
a claim should issue, the Company could be prevented from selling MYOTROPHIN
(rhIGF-I) in the United States for use in treating diabetic neuropathy unless it
obtained a license to the patent. The owner of such third-party patent
application has asserted for several years that the subject matter claimed in
its application interferes with claims of the Company's patent with respect to
the use of rhIGF-I in treating ALS. Clark & Elbing, LLP has advised the Company
that, in its opinion, no interference should be declared between such
third-party patent application and the Company's patent, but there can be no
assurance that the USPTO will agree with that opinion. If an interference were
declared and the third party prevailed, the Company could be prevented from
selling MYOTROPHIN (rhIGF-I) in the United States for use in treating ALS and
peripheral neuropathies unless it obtained a license to the patent. There can be
no assurance that any such licenses could be obtained from the third party at
all or on acceptable terms. Furthermore, one or more claims of the Company's
existing patents could be declared invalid.
. PROVIGIL (modafinil)
PROVIGIL (modafinil), which the Company has exclusively licensed from Lafon
for the United States, Mexico, the United Kingdom, the Republic of Ireland and
Japanese markets, is covered by the claims of a composition-of-matter patent in
the United States that expires in 1998 (under the transitional provisions of the
General Agreement on Tariffs and Trade ("GATT")). The Company may also seek an
extension of the patent under the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "DPC Act") equal to one-half the period of time
elapsed between the filing of an investigational new drug application ("IND")
for PROVIGIL (modafinil) and the filing of the corresponding NDA plus the period
of time between the filing of the NDA for
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PROVIGIL (modafinil) and FDA approval. However, to obtain the full length of any
such extension, the Company must receive FDA approval of PROVIGIL (modafinil)
before expiration of the original term of the patent. There can be no assurance
that the Company will be able to take advantage of the patent extension benefits
of the DPC Act. Also included in the license from Lafon are rights to a U.S.
patent that issued in January 1993 for the use of PROVIGIL (modafinil) in
treating Parkinson's disease and a U.S. patent issued in 1990 which claims the
composition of isomers of PROVIGIL (modafinil). The particle size of the
composition and various other uses of PROVIGIL (modafinil) are included in
claims of pending U.S. patent applications of the Company and Lafon. See
"Corporate Collaborations--Laboratoire L. Lafon."
. Other
Cephalon also has filed patent applications, including applications on the
composition of peptides derived from IGF-2, a process for manufacturing human
nerve growth factor, compositions of inhibitors of certain proteases,
compositions and uses of certain indolocarbazoles for use in the treatment of
pathological conditions of the prostate (including prostate cancer),
compositions and uses of certain novel classes of small molecules for inhibition
of calpain, compositions and uses of a novel class of small molecules for
inhibition of multicatalytic protease, and compositions and uses of a novel
class of small molecules referred to as "fused pyrrolocarbazoles." These patent
applications have been filed in the United States and other foreign countries,
as appropriate.
Through collaborative agreements with researchers at several academic
institutions, Cephalon has licenses to or the right to license, generally on an
exclusive basis, patents and patent applications issued or filed in the United
States and certain other countries arising under or related to such
collaborations. The Company also has licensed U.S. composition-of-matter and use
patents and various European patent applications for novel compositions under
its collaborative agreement with Kyowa Hakko. See "Corporate
Collaborations--Kyowa Hakko Kogyo Co., Ltd."
No assurance can be given that any additional patents will issue on any of
the patent applications owned by the Company or licensed from third parties.
Furthermore, even if such patents issue, there can be no assurance that any
issued patents will provide protection against competitive products or otherwise
be commercially valuable, or that applications filed by others will not result
in patents that would be infringed by the manufacture, use or sale of the
Company's products. In addition, patent law relating to the scope of claims in
the biotechnology field is still evolving and the biotechnology patent rights of
the Company are subject to this additional uncertainty. There can be no
assurance that others will not independently develop similar products, duplicate
any of the Company's products, or, if patents are issued to the Company, design
around any products developed by the Company.
The products of the Company could infringe the patent rights of others. If
licenses required under any such patents or proprietary rights of third parties
are not obtained, the Company could encounter delays in product market
introductions, or could find that the development, manufacture or sale of
products requiring such licenses is foreclosed. In addition, patent litigation
is both costly and time-consuming, even if the outcome is favorable to the
Company. In the event that the Company is a defendant in such litigation, an
adverse outcome would subject the Company to significant liabilities to third
parties, require the Company to license disputed rights from third parties, or
require the Company to cease selling its products.
The Company also relies upon trade secrets and other unpatented proprietary
information in its product development activities. All of the Company's
employees have entered into agreements providing for confidentiality and the
assignment of rights to inventions made by them while employed by the Company.
The Company also has entered into non-disclosure agreements to protect its
confidential information delivered to third parties in conjunction with possible
corporate collaborations and other purposes. There can be no assurance that
these types of agreements will effectively prevent disclosure of the Company's
confidential information.
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Manufacturing and Product Supply
- --------------------------------
The Company's ability to conduct clinical trials on a timely basis, to
obtain regulatory approvals and to commercialize its products will depend in
part upon its ability to manufacture its products, either directly or through
third parties, at a competitive cost and in accordance with applicable FDA and
other regulatory requirements, including Good Manufacturing Practice ("GMP")
regulations.
Cephalon expects to rely on Chiron for all of its manufacturing
requirements for rhIGF-I (including for clinical and commercial supplies of
rhIGF-I for Japan). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Risks Related to Cephalon's
Business." If Chiron ceases its participation in the collaboration, Cephalon,
under some circumstances, would have the right to purchase supplies of these
products from Chiron or it could have the manufacturing technology transferred
to Cephalon on a royalty basis. There can be no assurance that supplies of
products could be obtained from Chiron on a cost-effective basis, that Cephalon
would be able to manufacture the products itself in a cost-effective manner and
without an interruption of supplies or that a suitable alternative source of
MYOTROPHIN (rhIGF-I) could be located. Failure to locate an alternative supply
of MYOTROPHIN (rhIGF-I) could result in significant costs and delays to the
program, damage the commercial prospects for MYOTROPHIN (rhIGF-I) and have a
material adverse effect on the Company.
The Company is aware of patents and patent applications owned by third
parties that may cover certain aspects of the collaboration's method of
manufacturing MYOTROPHIN (rhIGF-I). See "Patents and Proprietary Technologies."
The Company expects to rely on Lafon for all its requirements of bulk
modafinil. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Certain Risks Related to Cephalon's Business."
Kyowa Hakko is responsible for manufacturing bulk compounds under its
agreement with the Company . The facilities used for manufacture of drug
substance 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 facilities or the material produced by Kyowa Hakko will
comply with regulatory standards or that sufficient quantities will be available
to meet the Company's needs. If Kyowa Hakko is unable to supply the Company with
the applicable compound, Cephalon is permitted to make the compound itself or to
purchase it from third parties. There can be no assurance that Cephalon will be
able to manufacture any such compound, that a third-party manufacturer can be
located or that either alternative will be cost-effective. The Company will be
responsible for producing finished product from the bulk compounds produced by
Kyowa Hakko. The Company is also responsible for the synthesis of compounds for
use in clinical trials using chemical intermediates supplied by Kyowa Hakko.
There can be no assurance that a cost-effective commercial manufacturing process
can be developed.
Under the Company's agreement with TAP, the Company is obligated to provide
finished product for use in clinical trials and ultimately for commercial
purposes. The Company has contracted with a third-party supplier to manufacture
material for use in clinical trials. The Company has not contracted for
synthesis of product for commercial use. There can be no assurance that the
Company can contract with a facility to manufacture finished products or enter
into a suitable third-party manufacturing arrangement for its commercial needs.
SB is responsible for the manufacture of any products developed under its
arrangement with the Company.
Cephalon currently has no manufacturing facilities of its own for clinical
or commercial production of any products under development. Cephalon will need
to either construct and operate facilities for these products or will have to
find other manufacturing sources.
17
<PAGE>
Competition
- -----------
Competition in the Company's fields of interest from large and small
companies is intense and is expected to increase. Furthermore, academic
institutions, governmental agencies, and other public and private research
organizations will continue to conduct research, seek patent protection, and
establish collaborative arrangements for product development. Products developed
by any of these entities may compete directly with those developed by the
Company. Many of these companies and institutions have substantially greater
capital resources, research and development staffs and facilities than the
Company, and substantially greater experience in conducting clinical trials,
obtaining regulatory approvals and manufacturing and marketing pharmaceutical
products. These entities represent significant competition for the Company. In
addition, competitors developing products for the treatment of neurodegenerative
diseases might succeed in developing technologies and products that are more
effective than any being developed by the Company or that would render its
technology and products obsolete or noncompetitive. There can be no assurance
that competition and innovation from these or other sources will not materially
adversely affect any sales of products which might be developed by the Company
or make them obsolete. Advances in current treatment methods may also adversely
affect the market for such products. The approval and introduction of
therapeutic products that compete with compounds being developed by the Company
could also adversely affect the Company's ability to attract and maintain
patients in clinical studies for the same indication or otherwise successfully
complete its clinical studies.
With respect to MYOTROPHIN (rhIGF-I), Rilutek (riluzole) has been approved
and is being marketed by Rhone-Poulenc Rorer in the U.S. and certain countries
in Europe for the treatment of ALS. In addition, the Company believes that other
companies are developing therapeutic agents for the treatment of ALS and
peripheral neuropathies. Because the potential patient population for ALS is
limited, competition from other products may adversely affect potential sales of
MYOTROPHIN (rhIGF-I).
Other companies are developing rhIGF-I as a therapeutic product for
diseases other than ALS or peripheral neuropathy, including Genentech, Inc.,
which is evaluating rhIGF-I in diabetes. Notwithstanding the Company's patents
and patent applications relating to MYOTROPHIN (rhIGF-I), if the sale of rhIGF-I
by third parties is approved for other indications, such products might compete
with MYOTROPHIN (rhIGF-I) through "off-label" use, especially if such product is
priced below MYOTROPHIN (rhIGF-I).
With respect to PROVIGIL (modafinil), there are presently several products
used in the United States to treat narcolepsy. Although the Company believes
that PROVIGIL (modafinil) may have advantages over those products, such as lower
abuse potential and reduced side effects, there can be no assurance that the
Company will be able to demonstrate the value of potential advantages of
PROVIGIL (modafinil) to prescribing physicians and their patients.
There are significant efforts by others, including many large
pharmaceutical companies and academic institutions, to develop therapeutic
products which may compete with the products being developed by the Company,
including Alzheimer's disease and stroke. Some of these products may be at a
more advanced stage of development than the Company's products.
Cephalon is marketing two proprietary products of BMS to neurologists in
the United States: Stadol NS, indicated for the management of pain, including
migraine pain; and Serzone, indicated for the treatment of depression. A number
of therapeutic agents are currently approved and are being marketed both for the
treatment of migraine and for the treatment of depression. Stadol NS also
competes directly with other pain medications, including narcotics, and
indirectly with medications approved explicitly for treatment of migraine. The
Company also believes that other products to treat migraine with a nasal spray
delivery system may be introduced into the U.S. market in 1997 and may compete
directly with Stadol NS.
18
<PAGE>
Government Regulation
- ---------------------
The manufacture and sale of therapeutics are subject to extensive
regulation by U.S. and foreign governmental authorities. In particular,
pharmaceutical products are subject to rigorous preclinical and clinical trials
and other approval requirements by the FDA in the United States under the
federal Food, Drug and Cosmetic Act and by comparable agencies in most foreign
countries.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animals to identify potential safety
problems. Additionally, for certain diseases, animal models exist which are
believed to be potentially predictive of human efficacy. For such diseases, a
drug candidate may also be tested in any such animal models. The results of the
preclinical studies are submitted to regulatory authorities as a part of an IND,
which is filed with regulatory agencies prior to beginning human clinical
studies. For several of the Company's drug candidates, no potentially predictive
animal model exists. As a result, no in vivo indication of efficacy would be
available until these candidates progress to human clinical trials.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, which frequently begins with the
initial introduction of the drug into healthy human subjects prior to
introduction into patients, the compound is tested for safety (adverse effects),
dosage tolerance, absorption, biodistribution, metabolism, excretion, clinical
pharmacology and, if possible, to gain early information on effectiveness. Phase
II typically involves studies in a small sample of the intended patient
population to assess the efficacy of the drug for a specific indication, to
determine dose tolerance and the optimal dose range as well as to gather
additional information relating to safety and potential adverse effects. Phase
III trials are undertaken to further evaluate clinical safety and efficacy in an
expanded patient population, often at multiple study sites, in order to
determine the overall risk-benefit ratio of the drug, and to provide an adequate
basis for physician labeling. Each trial is conducted in accordance with certain
standards under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. In the United States, each protocol must be submitted to the FDA as
part of the IND. Further, each clinical study must be evaluated by an
independent Institutional Review Board ("IRB") at the institution at which the
study will be conducted. The IRB considers, among other things, ethical factors,
the safety of human subjects and the possible liability of the institution.
Similar procedures and requirements must be fulfilled to conduct studies in
other countries.
Data from preclinical and clinical trials are submitted to the FDA in an
NDA for marketing approval and to foreign health authorities as a marketing
authorization application ("MAA"). The process of completing clinical trials for
a new drug is likely to take a number of years and require the expenditure of
substantial resources. Preparing an NDA or MAA involves considerable data
collection, verification, analyses and expense, and there can be no assurance
that the FDA or any foreign health authority will grant an approval on a timely
basis, or at all. The approval process is affected by a number of factors,
primarily the risks and benefits demonstrated in clinical trials as well as the
severity of the disease and the availability of alternative treatments. The FDA
or foreign health authorities may deny an NDA or MAA, in their sole discretion,
if that authority determines that its regulatory criteria have not been
satisfied or may require additional testing or information. Among the conditions
for marketing approval is the requirement that the prospective manufacturer's
quality control and manufacturing procedures conform to the GMP regulations of
the health authority. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, money and effort in the
area of production, quality control and quality assurance to ensure full
technical compliance. Manufacturing establishments, both foreign and domestic,
also are subject to inspections by or under the authority of the FDA and by
other federal, state, local or foreign agencies.
Even after initial FDA or foreign health authority approval has been
obtained, further studies, including Phase IV post-marketing studies, may be
required to provide additional data on safety and will be required to gain
approval for the use of a product as a treatment for clinical indications other
than those for which the product was initially tested. Also, the FDA or foreign
regulatory authority will require post-marketing reporting to monitor the side
effects of the drug. Results of post-marketing programs may limit or expand the
further marketing of the products. Further, if there are any modifications to
the drug, including any change in indication, manufacturing
19
<PAGE>
process, labeling or manufacturing facility, an application seeking approval of
such changes may be required to be submitted to the FDA or foreign regulatory
authority.
In the United States the Orphan Drug Act provides incentives to drug
manufacturers to develop and manufacture drugs for the treatment of either (i)
rare diseases, currently defined as diseases that affect fewer than 200,000
individuals in the United States or, (ii) for a disease that affects more than
200,000 individuals in the United States, where the sponsor does not
realistically anticipate its product becoming profitable. The FDA has designated
MYOTROPHIN (rhIGF-I) as an orphan drug for use in treating ALS and modafinil as
an orphan drug for use in treating narcolepsy because each indication currently
affects fewer than 200,000 individuals in the United States. Under the Orphan
Drug Act, a manufacturer of a designated orphan product can seek certain tax
benefits, and the holder of the first FDA approval of a designated orphan
product will be granted a seven-year period of marketing exclusivity for that
product for the orphan indication. While the marketing exclusivity of an orphan
drug would prevent other sponsors from obtaining approval of the same compound
for the same indication, it would not prevent approval of the compound for other
indications. In addition, other types of drugs may be approved for the same use.
The U.S. Congress has considered, and may consider in the future, legislation
that would restrict the duration of the market exclusivity of an orphan drug
and, thus, there can be no assurance that the benefits of the existing statute
will remain in effect.
In the United States under the Drug Price Competition and Patent Term
Restoration Act of 1984, a sponsor may be granted a maximum five year extension
of the term of a patent for a period of time following FDA approval of certain
drug applications, if FDA approval is received before the expiration of the
patent's original term. The statute specifically allows a patent owner to extend
the term of the patent for a period equal to one-half the period of time elapsed
between the filing of an IND and the filing of the corresponding NDA plus the
complete period of time between the filing of the NDA and FDA approval, up to a
maximum of five years of patent term extension. Additionally under this statute,
five years of marketing exclusivity is granted for the first approved indication
for a new chemical entity. PROVIGIL (modafinil) may qualify as a new chemical
entity. During this period of exclusivity, a third party would be prevented
from filing an Abbreviated New Drug Application ("ANDA") for a drug similar or
identical to PROVIGIL (modafinil) for the treatment of excessive daytime
sleepiness associated with narcolepsy. An ANDA is the application form typically
used by manufacturers seeking approval of a generic version of an approved drug.
Subsequent approved indications for the new chemical entity are entitled, under
this statute, to three years of partial marketing exclusivity; during this three
year period, a third party may file an ANDA, but would be prohibited from
marketing a generic version of the new chemical entity for the subsequent
approved indication until the expiration of three years from marketing
authorization for such subsequent approved indication. The Company intends to
seek the benefits of this statute as applicable, but there can be no assurance
that the Company will be able to obtain any such benefits.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals vary
widely from country to country, and the time required for approval may be longer
or shorter than that required for FDA approval. Although there are some
procedures for unified filings for certain European countries, in general, each
country at this time has its own additional procedures and requirements,
especially related to pricing of new pharmaceuticals. Further, the FDA regulates
the export of products produced in the U.S. and may prohibit the export even if
such products are approved for sale in other countries.
The Controlled Substances Act (the "CSA") imposes various registration,
record-keeping and reporting requirements, procurement and manufacturing quotas,
labeling and packaging requirements, security controls and a restriction on
prescription refills on certain pharmaceutical products in the CNS field. A
principal factor in determining the particular CSA requirements, if any,
applicable to a product is its actual or potential abuse profile. The Company is
conducting abuse liability studies on PROVIGIL (modafinil) to evaluate the
drug's potential for abuse, as well as human clinical trials to evaluate
efficacy. Depending upon these results and other factors, PROVIGIL (modafinil)
may be subject to the CSA. Additionally, PROVIGIL (modafinil) may be subject to
various state statutes regulating controlled substances which, in some cases,
may be more restrictive than the CSA. A number of state regulatory agencies in
the United States have independently controlled the distribution of Stadol
20
<PAGE>
NS under their local authority. There can be no assurance that Stadol NS will
not become subject to controls under the CSA or that additional future state or
federal control will not adversely impact sales.
In addition to the statutes and regulations described above, the Company is
also subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state and local regulations.
Employees
- ---------
As of December 31, 1996, the Company had a total of 303 full-time
employees, of which 257 were employed at the Company's main facility in West
Chester, Pennsylvania, 10 were located at the Company's facilities in Europe,
and 36 were U.S. sales specialists located in major metropolitan areas
throughout the United States. The Company believes that it has been highly
successful in attracting skilled and experienced personnel; however, competition
for such personnel is intense. None of the Company's employees are covered by
collective bargaining agreements. Management considers relations with its
employees to be good.
ITEM 2. PROPERTIES
The Company owns its administrative offices and research facilities, which
currently occupy approximately 107,000 square feet of space in a facility in
West Chester, Pennsylvania. This facility, along with an adjacent 49,000 square
foot building, were purchased by the Company in March 1995.
The Company also leases approximately 4,850 square feet of office space in
Surrey, England, which serves as the Company's European headquarters. The lease
runs through December 31, 1997 at an annual cost of approximately $155,000. The
Company also leases two small offices in France and the Netherlands at an annual
cost of approximately $28,000.
The Company believes that its current facilities are adequate for its
present purposes.
ITEM 3. 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. Several of the
plaintiffs have been designated by the Court, collectively, as the "lead
plaintiff" for purposes of the Private Securities Litigation Reform Act of 1995.
The consolidated complaint, filed in October 1996 by the lead plaintiffs,
extended and expanded the class period to include purchasers of the Company's
securities as well as options to purchase or sell those securities during the
period between June 12, 1995 and June 7, 1996. Plaintiffs allege, based in part
on statements and opinions expressed at the June 7, 1996 meeting of an FDA
advisory committee, that earlier statements by the Company about the North
American and European trial results were misleading. The plaintiffs seek
unspecified damages and other relief. The Company's motion to dismiss the case
is pending, and discovery related to the merits of the allegations in the
complaint has been postponed until the motion is decided. The Company intends to
vigorously defend the action. However, management believes that it is too early
in the proceedings to predict the outcome of this action with any certainty.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of security holders during the fourth
quarter of fiscal 1996.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of Cephalon, Inc. is quoted on the NASDAQ National Market
under the symbol "CEPH." The following table sets forth the range of high and
low sale prices for the Common Stock as reported on the NASDAQ National Market
for the periods indicated below.
High Low
---- ---
1995
First Quarter................................. 9.00 5.75
Second Quarter................................ 21.50 6.63
Third Quarter................................. 31.00 17.00
Fourth Quarter................................ 41.50 23.50
1996
First Quarter................................. 40.88 17.38
Second Quarter................................ 33.13 19.13
Third Quarter................................. 25.13 13.38
Fourth Quarter................................ 25.00 16.63
1997
First Quarter (through March 10, 1997)...... 28.50 19.88
As of December 31, 1996 there were 461 holders of record and approximately
12,000 beneficial holders of the Common Stock. On March 10, 1997, the last
reported sale price of the Common Stock as reported on the NASDAQ National
Market was $21.75 per share.
Cephalon has never declared or paid cash dividends on its capital stock
and does not anticipate paying any cash dividends in the foreseeable future.
22
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data have been derived from
the consolidated financial statements of Cephalon, Inc. as of and for each of
the five years in the period ended December 31, 1996 which have been audited by
Arthur Andersen LLP, independent public accountants. This data should be read in
conjunction with the Company's consolidated financial statements, including
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
Statement of Operations Data: 1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 21,366,000 $ 46,999,000 $ 21,681,000 $ 16,922,000 $ 9,057,000
Operating Expenses:
Research and development..................... 62,096,000 73,994,000 51,613,000 33,158,000 16,271,000
Selling, general and administrative.......... 28,605,000 15,762,000 9,180,000 4,794,000 3,043,000
------------- ------------- ------------- ------------- -------------
Total operating expenses........................ 90,701,000 89,756,000 60,793,000 37,952,000 19,314,000
Interest income, net............................ 6,205,000 9,754,000 3,047,000 1,794,000 3,102,000
Gain on sale of assets.......................... 9,845,000 -- -- -- --
------------- ------------- ------------- ------------- -------------
Loss ........................................... $ (53,285,000) $ (33,003,000) $ (36,065,000) $ (19,236,000) $ (7,155,000)
------------- ------------- ------------- ------------- -------------
Loss per share.................................. $ (2.19) $ (1.63) $ (2.13) $ (1.77) $ (.80)
Weighted average number of shares outstanding... 24,319,163 20,262,071 16,928,516 10,885,057 8,913,264
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------------------
Balance Sheet Data: 1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and investments(1)....... $ 146,848,000 $ 178,067,000 $ 114,458,000 $ 49,438,000 $ 43,847,000
Total assets.................................... 177,891,000 221,330,000 140,173,000 78,108,000 71,061,000
Long-term debt(3)............................... 18,224,000 21,668,000 16,088,000 11,570,000 12,010,000
Accumulated deficit(2).......................... (157,967,000) (104,682,000) (71,679,000) (35,614,000) (16,378,000)
Stockholders' equity(2),(3)..................... 137,326,000 180,205,000 112,767,000 63,105,000 56,733,000
</TABLE>
- ----------
(1) Maintenance of certain cash and investment balances is required by specific
debt and lease agreements.
(2) No cash dividends have been declared on the capital stock since the
inception of the Company.
(3) In February 1997, the Company entered into an agreement to issue $30,000,000
of senior convertible notes. See Note 12 of "Notes to Consolidated Financial
Statements."
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
pharmaceutical research and development activities and in conducting business in
a regulated environment. The success of the Company depends to a large degree
upon obtaining U.S. Food and Drug Administration (the "FDA") and foreign
regulatory approval to market products currently under development. Cephalon has
had only limited experience in filing and pursuing applications necessary to
gain regulatory approvals. There can be no assurance that the data or the
Company's interpretation of data will be accepted by any regulatory authority.
In addition, there can be no assurance that any application by the Company to
market a product will be reviewed in a timely manner or that approval to market
a product will be received from the appropriate regulatory authority.
. Uncertainties Related to MYOTROPHIN (rhIGF-I)
In 1995, the Company submitted to the FDA a treatment investigational new
drug application ("T-IND") to permit expanded access to MYOTROPHIN(R) (rhIGF-I)
by patients in the United States suffering from amyotrophic lateral sclerosis
("ALS"). The FDA referred the application to the Peripheral and Central Nervous
System Drugs Advisory Committee (the "Advisory Committee"), which held a public
hearing in June 1996 to review data from two Phase III studies, one conducted in
North America and one in Europe, for purposes of recommending to the FDA whether
there was sufficient evidence to support use of MYOTROPHIN (rhIGF-I) 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 expressed
at the hearing, including the chairman, concerning the need for an additional
study to support a new drug application ("NDA"), and invited Cephalon and Chiron
Corporation ("Chiron") to work with the FDA to develop plans for future studies.
The Company continues to believe that the two completed studies show the
beneficial treatment effect of MYOTROPHIN (rhIGF-I) in ALS patients,
particularly those with more rapidly progressing disease and, in collaboration
with Chiron, recently filed an NDA with the FDA requesting that MYOTROPHIN
(rhIGF-I) be approved for the treatment of ALS in the United States. The
companies are preparing a marketing authorization application for filing in
Europe.
There can be no assurance that the FDA will ultimately grant authorization
to commercialize MYOTROPHIN (rhIGF-I) in the United States on the basis of the
results of the two completed studies. In connection with its review of the NDA,
the FDA may seek the Advisory Committee's recommendation as to the safety and
efficacy of MYOTROPHIN (rhIGF-I) in the treatment of ALS, some of whose members
have expressed the view that an additional study is desirable. The Company has
indicated its willingness to conduct additional studies of MYOTROPHIN (rhIGF-I)
as a post-approval activity. If the FDA were to require additional data prior to
approval of MYOTROPHIN (rhIGF-I) for commercialization, there can be no
assurance that the Company and Chiron would be willing or able to conduct any
study as a Phase III activity or that the results of such study, if conducted,
would be positive. A new study also would be expensive and would take several
years to complete.
24
<PAGE>
Because ALS is a fatal disease, it is expected that some mortalities will
occur while conducting clinical trials in ALS patients. 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
that mortalities observed in the North American and European clinical studies
are due to the normal progression of the disease or other circumstances not
attributable to MYOTROPHIN (rhIGF-I). FDA regulations require the reporting of
all patient adverse events experienced in ongoing trials. The Company is
continuing to furnish MYOTROPHIN (rhIGF-I) to patients who participated in the
ALS studies, to patients in its Phase II program in peripheral neuropathies, and
to patients under the recently initiated T-IND program. 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 (rhIGF-I) 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 (rhIGF-I) 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 (rhIGF-I) will receive
marketing approval in any jurisdiction for any indication. A delay in obtaining
approval or a failure to obtain any regulatory approval for MYOTROPHIN (rhIGF-I)
would seriously adversely affect the Company's business and the price of its
common stock.
Chiron has completed a U.S. manufacturing facility to produce recombinant
proteins at which the collaboration is producing MYOTROPHIN (rhIGF-I) (the
"Chiron Facility"). Once the existing inventory of material from the Company's
former manufacturing facility (the "Beltsville Facility") has been depleted, the
Chiron Facility will be the sole source of supply for any commercial or clinical
needs of MYOTROPHIN (rhIGF-I), including any material which Cephalon may need to
supply for use in Japan, as well as for use in the Company's ongoing clinical
trials. There can be no assurance that Chiron will be able to produce adequate
quantities of MYOTROPHIN (rhIGF-I) in a cost-effective manner or, in the case of
material purchased by Cephalon for use outside the collaboration, on terms
satisfactory to Cephalon.
The Company and Chiron will be required to demonstrate that the material
produced from the Chiron Facility is equivalent to the material used in the ALS
clinical trials, which was manufactured at the Beltsville Facility. Although
the companies believe they have demonstrated that the material is equivalent, if
regulatory authorities do not agree with that assessment, regulatory approval of
MYOTROPHIN (rhIGF-I) could be delayed.
The manufacturing facilities and operations of the Company and Chiron
used to produce MYOTROPHIN (rhIGF-I) are required to comply with all applicable
FDA requirements, including Good Manufacturing Practice ("GMP") regulations, and
are subject to FDA inspection, both before and after NDA approval, to determine
compliance with those requirements. The GMP regulations are complex, and failure
to be in compliance could lead to the need for remedial action, penalties and
delays in production of material acceptable to the FDA. The Company has only
limited experience in manufacturing activities. There can be no assurance that
the facilities for MYOTROPHIN (rhIGF-I) have complied and will continue to
comply with applicable requirements. Should the Chiron facility fail to operate
for any reason or not be able to produce sufficient quantities of MYOTROPHIN
(rhIGF-I) in accordance with applicable regulations, the collaboration would
have to obtain MYOTROPHIN (rhIGF-I) from another source. There can be no
assurance that Cephalon or the collaboration would be able to locate an
alternative, cost-effective source of supply of MYOTROPHIN (rhIGF-I).
. Uncertainties Related to PROVIGIL (modafinil)
The Company recently submitted an NDA with the FDA requesting that
PROVIGIL(R) (modafinil) be approved for the treatment of the excessive daytime
sleepiness associated with narcolepsy, based on the results of two Phase III
studies conducted in the United States. There can be no assurance that the FDA
or other regulatory authorities will agree with the Company's opinion that the
results generated from the Company's clinical trials demonstrate sufficient
safety and efficacy to permit marketing approval.
The Company also is pursuing applications seeking authorization to market
PROVIGIL (modafinil) in the Republic of Ireland and the United Kingdom, which
are other territories licensed from Laboratoire L. Lafon
25
<PAGE>
("Lafon"). The regulatory authorities in both countries have requested that
additional information be provided with respect to the applications (which were
filed by Lafon under the multi-state procedures of the Committee for Proprietary
Medicinal Products "CPMP"). There can be no assurance that the Company will be
able to provide sufficient additional information in order to permit approval of
the applications. Even if those applications are approved, the Company must also
request permission to vary the applications with respect to certain
manufacturing procedures and other matters. There can be no assurance that any
regulatory approvals or variations will be obtained at all or in a timely
manner. The Company is in the process of establishing a sales force in the
United Kingdom and the Republic of Ireland to sell PROVIGIL (modafinil). Any
delays in accomplishing these activities could delay launch of the product, if
it is approved. The Company is required, under the terms of its license with
Lafon, to use its best efforts to launch the product no later than three months
after approval.
Lafon is responsible for manufacturing bulk compounds for the Company. The
facilities used for manufacture of drug substance 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 facilities or the
material produced by Lafon will comply with regulatory standards or that
sufficient quantities will be available to meet the Company's needs. If Lafon is
unable to supply the Company with modafinil, Cephalon is permitted to make the
compound itself or to purchase it from third parties. There can be no assurance
that Cephalon will be able to manufacture modafinil, that a third-party
manufacturer can be located or that either alternative will be cost-effective.
The Company will be responsible for producing tablets from the bulk
modafinil produced by Lafon. The Company has entered into an agreement with a
third party to manufacture tablets for commercial use from bulk modafinil
provided by Lafon. There can be no assurance that such manufacturer will be able
to make sufficient quantities of tablets in accordance with appropriate FDA
guidelines, including GMP, and in a cost effective manner. Should such a
manufacturer be unable to supply tablets for any reason, there can be no
assurance that the Company would be able to identify a suitable alternative
supplier at all or without delaying the launch of PROVIGIL (modafinil).
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 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
adversely affect the Company's marketing of PROVIGIL (modafinil) in its
territories.
. Other Risks
The results of clinical studies of MYOTROPHIN (rhIGF-I) 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 (rhIGF-I) and PROVIGIL (modafinil) are approved for
commercialization, the Company can not predict at this time the potential
revenues to be received from sales of MYOTROPHIN (rhIGF-I) for use in treating
ALS or from sales of PROVIGIL (modafinil) 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) is being commercialized in the United States
and Europe by Rhone-Poulenc Rorer, Inc. for use in treating ALS. It is not clear
whether ALS patients, given the constraints of drug reimbursement programs,
would be able to support both Rilutek and MYOTROPHIN (rhIGF-I) (as well as any
other drugs which may be approved in the future for use in treating ALS),
especially if MYOTROPHIN (rhIGF-I) has a higher price than competitive drugs.
Competition for PROVIGIL (modafinil) 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.
26
<PAGE>
TAP Holdings Inc. ("TAP") has begun a Phase I clinical study of a compound
being developed in collaboration with the Company for the treatment of various
cancers, including prostate cancer. The objective of the multi-center study is
to examine the drug's pharmacokinetic and safety profile in patients with
advanced cancer. Because the compound has never been tested in humans, the risk
of safety problems is unknown. There can be no assurance that the compound will
prove to be safe in humans, or that it will show any therapeutic benefit.
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, 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 adverse effect on the market price of the Company's common stock.
The Company expects to satisfy its need for additional operating funds
through public or private placements of its securities. Any such financings
using either equity securities or options or warrants to acquire equity
securities of the Company would result in the issuance of additional shares and
in the reduction of the percentage ownership of the Company by existing
shareholders. The exercise of outstanding options and warrants also would result
in such a reduction. If the currently-outstanding options and warrants were to
be exercised in accordance with their terms, the outstanding number of shares of
common stock would increase by approximately 25%. See "Results of Operations."
27
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Cash, cash equivalents and investments at December 31, 1996 and December
31, 1995 were $146,848,000 and $178,067,000, respectively, representing 83% and
80%, respectively, of total assets.
Cash equivalents and investments consisted primarily of short- to
intermediate-term obligations of the United States government, overnight reverse
repurchase agreements that are collateralized 102% by such government
obligations, 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 $3,750,000 was held in a custodial account as of
December 31, 1996.
The following is a summary of selected cash flow information for each of
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Net cash used for operating activities........................ $ (53,215,000) $ (25,781,000) $ (25,850,000)
Net cash provided by (used for) investing activities.......... 45,886,000 (80,988,000) (57,444,000)
Net cash provided by financing activities..................... 6,435,000 102,271,000 89,797,000
</TABLE>
. Net cash used for operating activities
- ----------------------------------------
- Operating cash inflows
A summary of the major sources of cash receipts reflected in net cash used
for operating activities for each of the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
TAP Holdings........................................................ $ 5,889,000 $ 4,748,000 $ 3,892,000
Bristol-Myers Squibb................................................ 4,879,000 2,891,000 --
Chiron.............................................................. 4,100,000 22,929,000 --
Schering-Plough..................................................... 3,000,000 2,750,000 1,500,000
SmithKline Beecham.................................................. 2,856,000 2,781,000 2,708,000
Kyowa Hakko......................................................... 1,700,000 1,358,000 --
Cephalon Clinical Partners.......................................... -- 6,167,000 12,923,000
Interest............................................................ 8,489,000 10,454,000 4,228,000
</TABLE>
In May 1994, the Company and TAP entered into a research and development
and license agreement (the "TAP Agreement") to develop and commercialize certain
compounds for the treatment of all cancers in the United States. Under the terms
of the 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 December 31, 1996
and 1995, $1,548,000 and $1,415,000, respectively, was receivable from TAP.
The Company and Bristol-Myers Squibb Company ("BMS") entered into two
co-promotion agreements (the "BMS Agreement"), the first full year of which was
1995. Under the BMS Agreement, Cephalon markets two BMS proprietary products,
Stadol NS(R) (butorphanol tartrate) Nasal Spray ("Stadol NS") and Serzone(R)
(nefazodone hydrochoride) to neurologists in the United States. Pursuant to the
BMS Agreement, BMS makes quarterly payments to the Company based primarily on
the percentage of certain prescriptions written by neurologists in excess of a
predetermined base amount. In addition to these quarterly payments, $500,000 was
received in 1995 as BMS's contribution to the Stadol NS Phase IV clinical trial
conducted by the Company. At December 31, 1996 and 1995, $453,000 and
$1,027,000, respectively, was receivable from BMS.
28
<PAGE>
The Company and Chiron are jointly developing MYOTROPHIN (rhIGF-I) 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. 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. As a result of this
equalization, the Company received $22,929,000 from Chiron representing
reimbursement of the Company's prior costs incurred for the peripheral
neuropathy and European ALS programs and payment to equalize the companies'
funding of the North American ALS program costs incurred by the Company through
September 1995. The Company also received interest on the reimbursement payments
in the amount of $2,051,000. At December 31, 1996 and 1995, $2,465,000 and
$3,247,000, respectively, was receivable from Chiron.
In May 1990, the Company entered into a collaborative research agreement
(the "Schering-Plough Agreement") with Schering-Plough Corporation ("SP"). Under
the terms of the Schering-Plough Agreement, the Company received annual
milestone payments from SP. The last annual payment in the amount of $500,000
was received in 1995. Beginning in May 1995, the Company performed research and
development for which it was compensated quarterly by SP based on a contract
rate per individual assigned to the program for that quarter and reimbursement
of certain external costs, all subject to budgetary maximums, periodic review by
SP and achievement of certain milestones by the Company.
Under the terms of a June 1993 agreement with SmithKline Beecham ("SB"),
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 December
31, 1996 and 1995, $179,000 and $180,000, respectively, was receivable from SB.
In July 1993, the Company entered into an agreement (the "Kyowa Hakko
Myotrophin Agreement") with Kyowa Hakko Kogyo Co., Ltd. ("Kyowa Hakko") to
develop and market MYOTROPHIN (rhIGF-I) in Japan. The Company is reimbursed for
supplying MYOTROPHIN (rhIGF-I) for the clinical trials conducted in Japan by
Kyowa Hakko. At December 31, 1996 and 1995, $611,000 and $415,000, respectively,
was receivable from Kyowa Hakko.
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 (rhIGF-I) in the United States, Canada, and Europe
(the "Territory"). Pursuant to the Partnership Development Agreement, the
Company's share of the costs to develop MYOTROPHIN (rhIGF-I) 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 any payments from the Partnership
since September 1995.
The decrease in interest income received in 1996 as compared to 1995 was
primarily due to a one-time interest payment received from Chiron in 1995. The
increase in interest received in 1995 compared to 1994 was primarily due to
interest received from Chiron and higher investment balances and interest rates.
29
<PAGE>
- Outlook
In future periods, receipt of payments from Chiron or payments by the
Company to Chiron will depend on the relative costs incurred in the MYOTROPHIN
program by the two companies. Late in 1995, the Partnership depleted its
available funding and will not provide further funding of MYOTROPHIN development
costs to the Company. The continuation of the research funding under the
agreements with TAP and SB beyond 1996 are subject to the achievement of certain
development milestones and periodic review by those companies and may be
terminated without cause with prior notice. The Company expects annual payments
from BMS in 1997 to approximate current levels; the ability to maintain the
current level of product sales and therefore the current level of payments to
Cephalon is subject to a number of uncertainties, including competition from new
and existing products and the impact of any regulatory actions. SP has decided
to conclude its funding of the companies' research collaboration under the
Schering-Plough Agreement effective March 1997. Receipts from Kyowa Hakko are
expected to continue in 1997 as the Company ships MYOTROPHIN clinical supplies
to Kyowa Hakko.
- Operating cash outflows
A summary of the cash outflows reflected in net cash used for operating
activities for the year ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C>
$(83,098,000) $(84,668,000) $(51,101,000)
</TABLE>
Net cash used for selling, general and administrative activities increased
in 1996 as compared to 1995 due to funding increases in costs associated with
the Company's sales and marketing activities, including increases in
pre-marketing efforts in support of the products in development, a 39% increase
in sales and marketing staffing levels and increases in administrative external
costs. The funding of research and development expenses decreased in 1996 as
compared to 1995 primarily due to decreases in the costs associated with the
completion of the double-blind portion of clinical trials of MYOTROPHIN
(rhIGF-I) and PROVIGIL (modafinil) and because 1995 includes $3,350,000 in
payments to acquire 67 limited partnership interests in the Partnership. Also,
1995 includes a $1,500,000 payment to SIBIA Neurosciences, Inc. ("SIBIA") to
exercise an option to reduce future royalties payable on sales of MYOTROPHIN
(rhIGF-I) and costs of a Phase IV clinical trial of Stadol NS conducted in 1995.
Net cash used for operating activities increased in 1995 as compared to
1994 due to increases in funding both the research and development and selling,
general and administrative areas. The increase in the funding of research and
development expenses in 1995 as compared to 1994 resulted primarily from an
increase in staffing levels, increases in the funding of clinical trials
resulting primarily from costs of two Phase III trials of PROVIGIL (modafinil)
and a Phase IV clinical trial of Stadol NS, and the payments made, as described
above, to acquire 67 limited partnership interests in the Partnership and to
SIBIA. The increase in the funding of selling, general and administrative
expenses was due primarily to the costs associated with a full year of
operations in 1995 by the Company's sales and marketing staff in conjunction
with the BMS Agreement and increases in external costs.
- Outlook
The Company, in collaboration with Chiron, recently filed an NDA with the
FDA requesting that MYOTROPHIN (rhIGF-I) be approved for the treatment of ALS in
the United States, and a marketing authorization application is being prepared
for filing in Europe. The costs to develop MYOTROPHIN (rhIGF-I) are expected to
continue to be significant in 1997 due to the cost of continuing open label
extensions of two Phase III ALS clinical studies, preparations for filings with
other regulatory authorities, continuation of a Phase II clinical program to
test the potential utility of MYOTROPHIN (rhIGF-I) in the treatment of
peripheral neuropathies, conducting the T-IND expanded access program in ALS
patients in the United States, a planned early access program in ALS patients in
Europe, and potential additional clinical studies in ALS patients.
30
<PAGE>
If the Company is required to make the Milestone Payment and elects to do
so in cash, or if it elects to exercise the Purchase Option for cash, the
Company will be required to make a substantial cash payment, as further
described under "Commitments and contingencies." The Company may consider the
purchase of some or all of the remaining partnership interests other than
through exercise of the Purchase Option. The Company expects that the cost per
interest associated with any such purchase would be substantially greater than
the cost incurred in the 1995 purchase of 67 limited partner interests and that,
if the Company were to elect to purchase some or all of the partnership
interests in cash, significant funds could be required.
The Company recently submitted an NDA to the FDA requesting that
PROVIGIL (modafinil) be approved for the treatment of the excessive daytime
sleepiness associated with narcolepsy, based on the results of two Phase III
studies conducted in the United States. The costs to develop PROVIGIL
(modafinil) are expected to continue to be significant in 1997 due to open label
extensions of the double-blind portions of clinical studies and potential Phase
II studies in other neurological disorders.
Pursuant to the BMS Agreement, the Company is obligated to fund $1,250,000
in 1997 for promotional and support activities of Stadol NS targeting
neurologists. The Company also expects to incur significant expenses under the
collaborations with SB and TAP, which may exceed payments received under the
related agreements, as well as significant costs in its other development
programs.
Selling, general and administrative activities in the United States and
Europe may be expanded as the Company evaluates the potential for obtaining
regulatory approvals of MYOTROPHIN (rhIGF-I) and PROVIGIL (modafinil). Any such
expansion would require substantial funding. The Company may also build
inventories of MYOTROPHIN (rhIGF-I) and PROVIGIL (modafinil), which also would
require substantial funding.
- Operating cash requirements outlook
The Company expects its negative operating cash flow to continue due to
funding of research, development, clinical trial, regulatory filing and other
costs. The capital required to fund the Company's operations for 1997 may be
greater than that of the prior year. The amount needed to fund operations will
depend upon many factors, including the success of the Company's research and
development programs, the extent of any collaborative research or other funding
arrangements, the costs and timing of seeking regulatory approvals, if any, of
its products, technological changes, competition and the success of the
Company's sales and marketing activities. See "Certain Risks Related to
Cephalon's Business."
. Net cash provided by (used for) investing activities
- ------------------------------------------------------
A summary of net cash provided by (used for) investing activities for each
of the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Repayments from (advances to) related party............................. $ -- $ 4,337,000 $ ( 134,000)
Purchases of property and equipment..................................... (2,058,000) (17,455,000) (10,543,000)
Sale leaseback of property and equipment................................ 427,000 237,000 11,750,000
Proceeds from sale of assets............................................ 17,192,000 -- --
Sales and maturities (purchases) of investments,net..................... 30,325,000 (68,107,000) (58,517,000)
------------ ------------ ------------
Net cash provided by (used for) investing activities............... $ 45,886,000 $(80,988,000) $(57,444,000)
============ ============ ============
</TABLE>
In September 1995, the Company received the outstanding balance due on its
loan to the Partnership.
Purchases of property and equipment decreased in 1996 as compared to 1995.
The 1995 expenditures include the purchase of the two buildings housing the
Company's administrative offices and research facilities in West
31
<PAGE>
Chester, Pennsylvania and a third adjacent 49,000 square foot building, for a
total purchase price of $11,000,000. The Company may continue to incur
significant capital expenditures as it assesses its facility and equipment
requirements.
In December 1994, the Company entered into a sale leaseback transaction in
which the Company's Beltsville, Maryland manufacturing assets were sold at the
assets' net book value of $9,989,000; concurrently, the Company entered into a
four year operating lease in which the lessor obtained a security interest in
the remaining manufacturing assets. In November 1996, the Company sold the
assets of its Beltsville, Maryland pilot-scale manufacturing facility for a
total purchase price of $24,864,000. In the transaction, the Company received
$17,192,000 in cash, and transferred $7,712,000 of equipment lease obligations
to the purchaser.
. Net cash provided by financing activities
- -------------------------------------------
A summary of cash provided by financing activities for each of the years
ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Proceeds from sales of common stock and warrants.................... $ -- $ 84,237,000 $ 82,458,000
Proceeds from exercises of common stock options and warrants........ 8,516,000 14,387,000 1,541,000
Principal payments on long-term debt................................ (3,919,000) (17,426,000) (12,319,000)
Proceeds from long-term debt. 1,838,000 21,073,000 18,117,000
------------ ------------ ------------
Net cash provided by financing activities...................... $ 6,435,000 $102,271,000 $ 89,797,000
============ ============ ============
</TABLE>
For the year ended December 31, 1995, the Company received aggregate net
proceeds of $84,237,000 from the public offering of 3,450,000 shares of common
stock and 538,310 shares of common stock issued to Kyowa Hakko in August 1995.
During 1994, the Company received aggregate net proceeds of $82,458,000 from (i)
a public offering of 3,795,000 shares of common stock, (ii) the sale of 800,000
shares of common stock and a warrant to purchase 750,000 shares of common stock
to Chiron and (iii) the sale of 1,225,532 shares of common stock to TAP.
During 1996, the Company received cash from the exercise of 660,907
warrants and 175,574 stock options in the amount of $7,714,000 and $802,000,
respectively. During 1995, the Company received cash from the exercise of
1,225,366 warrants and 306,593 stock options in the amount of $12,419,000 and
$1,968,000, 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.
In September 1995, the Company repaid in full the then-outstanding balance
of $13,822,000 on the Note from Chiron.
Proceeds from long-term debt in 1995 include $15,799,000 borrowed to
finance the purchase of the West Chester building. The building purchase was
financed through the assumption of a $6,900,000 first mortgage with an annual
interest rate of 9 5/8% and from mortgage loans provided by the Commonwealth of
Pennsylvania (the "State Funding") in the amount of $11,600,000. The State
Funding, which is subordinate to the first mortgage, has a 15-year term and
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 mortgage loans require aggregate annual principal and interest
payments of $1,800,000. The mortgage loans are secured by the buildings and
fixtures therein and a portion of the State Funding is also secured by all
Company equipment located in Pennsylvania that is otherwise unsecured. The
Company also drew $5,274,000 in the 1995 period against the Note provided by
Chiron to fund collaboration-related expenses.
32
<PAGE>
The 1994 proceeds from long-term debt include $10,000,000 under an
unsecured bank loan and $8,548,000 drawn against the Note with Chiron. In March
1997, the Company repaid in full the balance due on the unsecured bank loan.
. Commitments and contingencies
- -------------------------------
- Leases
The Company leases certain of its offices and automobiles under operating
leases. The Company's future annual minimum payments under these leases are
approximately $483,000 for the period 1997 through 2001.
- Other
The Company maintains a number of agreements to fund research by third
parties. These agreements are generally renewable on an annual basis and provide
the Company with the right to obtain royalty-bearing licenses to the results of
the research. The Company has minimum funding commitments under these research
agreements of $746,000 in 1997. The Company has funding commitments under
several other cancelable agreements, including those entered into for the
purpose of conducting clinical trials. Pursuant to the BMS Agreement, the
Company is obligated to fund $1,250,000 in 1997 for promotional and support
activities of Stadol NS targeting neurologists. In addition, the Company has
obligations to make royalty, license and milestone payments under certain of its
licensing and research and development agreements, including milestone payments
of $2,000,000 and $268,000 upon regulatory approval of PROVIGIL (modafinil) in
the United States and the United Kingdom, respectively.
The purchaser of the Beltsville Facility, under the purchase agreement, has
the right to seek indemnification from the Company during the first year after
the sale for certain types of claims.
- Related party
Late in 1995, the Partnership depleted all of its available funding and
will not provide further funding of MYOTROPHIN (rhIGF-I) development costs to
the Company. The amount of additional funding required for further development
will be determined by the Partnership's general partner in advance of each
quarter, and each quarter the Company will have the right, but not the
obligation, to contribute such funds.
The Partnership granted the Company an exclusive license (the "Interim
License") to manufacture and market MYOTROPHIN (rhIGF-I) within the United
States, Canada, and Europe (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 (rhIGF-I) 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"). To exercise
the Purchase Option, Cephalon is 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 (rhIGF-I) 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 payment, the exercise of the Purchase Option requires the Company to
make future payments to the former limited partners for a period of eleven years
33
<PAGE>
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 MYOTROPHIN sales in Europe will only be
paid to the extent necessary to meet specified sales 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
(rhIGF-I) in the Territory would revert to the Partnership, which may
commercialize MYOTROPHIN (rhIGF-I) itself or license or assign its rights to a
third party. The Company would not receive any benefits from any such
commercialization.
The Company's collaboration with Chiron is subject to the rights of the
Partnership which has licensed the Company the right to develop MYOTROPHIN
(rhIGF-I) in North America and Europe in return for receiving certain payments.
The Company is solely responsible for making any royalty and milestone payments
owed to the Partnership and is responsible for funding the Purchase Option if it
exercises the option.
- 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. Several of the
plaintiffs have been designated by the Court, collectively, as the "lead
plaintiff" for purposes of the Private Securities Litigation Reform Act of 1995.
The consolidated complaint, filed in October 1996 by the lead plaintiffs,
extended and expanded the class period to include purchasers of the Company's
securities as well as options to purchase or sell those securities during the
period between June 12, 1995 and June 7, 1996. Plaintiffs allege, based in part
on statements and opinions expressed at the June 7, 1996 meeting of an FDA
advisory committee, that earlier statements by the Company about the North
American and European trial results were misleading. The plaintiffs seek
unspecified damages and other relief. The Company's motion to dismiss the case
is pending, and discovery related to the merits of the allegation in the
complaint has been postponed until the motion is decided. The Company intends to
vigorously defend the action. However, management believes that it is too early
in the proceedings to predict the outcome of this action with any certainty.
. Funding Requirements Outlook
- ------------------------------
As described above, the Company expects to continue to use cash to fund
operations. The Company may also require the use of cash for a number of other
reasons including to fund possible purchases of property and equipment and to
service its long-term debt. The Company expects that it may provide cash to fund
operations from the sale of investments.
The Company believes that its cash and investment resources are adequate
to fund its anticipated level of operations 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 decisions of regulatory authorities on the
two pending NDAs recently filed by the Company, the results of the Company's
ongoing clinical trials and other research and development programs, the ability
to meet clinical and commercial supply requirements, 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, as further described above, the Company may
seek to acquire some or all of the partnership interests outside of the Purchase
Option or may seek to acquire other entities, additional technologies, product
candidates or products. If MYOTROPHIN (rhIGF-I) receives regulatory approval in
the United States or certain other countries within the Territory, the Company
would be obligated to make the Milestone Payment of approximately $16,000,000,
all or a portion of which may be made in cash.
To satisfy its capital requirements, the Company may seek to access the
public or private equity markets whenever conditions are favorable. The Company
also intends to seek additional funding through corporate collaborations and
other financing vehicles, potentially including "off-balance sheet" financings
through limited partnerships or corporations. There can be no assurance that
such funding will be available at all or on terms
34
<PAGE>
acceptable to the Company. If adequate funds are not available, the Company may
be required to significantly curtail one or more of its research or development
programs or obtain funds through arrangements with existing or future
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates or products.
In 1997 the Company announced an agreement to issue, in a private
placement, $30,000,000 of senior convertible notes. The convertible notes mature
in January 1998 and bear interest at a rate of seven percent per annum. The
Company will record the notes at their face value and accrue interest at the
seven percent rate on the outstanding amount of the notes. The notes are
convertible into common stock of the Company, subject to certain limitations, at
a six percent discount to a market price formula at the time of conversion. If
not converted into common stock prior to maturity, the securities will be
exchanged for 10 3/4% debentures which mature in 2013. The convertible notes
cannot be converted at a price less than $25 per share until 75 days after the
effectiveness of the registration statement. The Company may redeem the notes,
at a redemption price equal to 110 percent of the outstanding principal amount
plus interest, if the conversion price falls below approximately $21 per share.
The closing of the placement is subject to the effectiveness of a registration
statement filed by the Company with the Securities and Exchange Commission
covering the resale by the investors of up to 1,430,000 shares of common stock
issuable upon conversion of the convertible notes.
35
<PAGE>
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 each of the years ended December 31
is as follows:
<TABLE>
<CAPTION>
% change % change
1996 1995 1994 1996 vs. 1995 1995 vs. 1994
--------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues................................ $21,366,000 $46,999,000 $21,681,000 (55)% 117%
Research and development expenses....... 62,096,000 73,994,000 51,613,000 (16) 43
Selling, general and administrative
expenses............................... 28,605,000 15,762,000 9,180,000 81 72
Gain on sale of assets.................. 9,845,000 -- -- -- --
Interest income, net.................... 6,205,000 9,754,000 3,047,000 (36) 220
</TABLE>
The decrease in revenues in 1996 from 1995 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 1996 under the agreements with BMS, TAP and SP.
The aggregate increase in revenues in 1995 from 1994 resulted primarily
from $22,929,000 of revenue recognized in 1995 from payments received from
Chiron. The Company did not recognize revenue under the agreement with Chiron in
1994 because Chiron provided funding through a loan to the Company.
Additionally, revenues recognized under the BMS Agreement increased by
$3,061,000 in 1995 compared to 1994, reflecting a full year of sales and
marketing activity. The increase in these revenues was partially offset by
decreases in revenue recognized under the Partnership Development Agreement in
1995. In 1995, the Partnership depleted its available funding. The Company did
not recognize any revenue from the Partnership in 1996.
Research and development expenses decreased in 1996 as compared to 1995
primarily due to decreases in the costs associated with the completion of the
double-blind portion of clinical trials of MYOTROPHIN (rhIGF-I) and PROVIGIL
(modafinil) and because 1995 includes $3,350,000 in payments to acquire 67
limited partnership interests in the Partnership. All interests in the general
partner and the Partnership acquired by the Company have been recorded as
in-process research and development expense in accordance with SFAS No. 2
"Accounting for Research and Development Costs." The Company believes that this
approach is appropriate, because under applicable accounting rules, neither
technological feasability nor alternative future uses of Myotrophin have yet
been established. Also, 1995 includes a $1,500,000 payment to SIBIA to exercise
an option to reduce future royalties payable on sales of MYOTROPHIN (rhIGF-I)
and costs of a Phase IV clinical trial of Stadol NS conducted in 1995.
The increase in research and development expenses in 1995 as compared to
1994, primarily resulted from an increase in staffing levels, increases in
clinical trial expenses resulting primarily from costs of two Phase III trials
of PROVIGIL (modafinil) and a Phase IV clinical trial of Stadol NS, and the
payments, as described above, to acquire 67 limited partnership interests in the
Partnership and to SIBIA.
The increase in the selling, general and administrative area in 1996 as
compared to 1995 was due to increases in costs associated with the Company's
sales and marketing activities, including increases in pre-marketing efforts in
support of the products in development, a 39% increase in sales and marketing
staffing levels and increases in administrative external costs.
The increase in the selling, general and administrative area in 1995 as
compared to 1994 was due primarily to the costs associated with a full year of
operations in 1995 by the Company's sales and marketing staff in conjunction
with the BMS Agreement and increases in external costs.
In 1996, the Company realized a $9,845,000 gain in connection with the
sale of assets at the Company's Beltsville, Maryland pilot-scale manufacturing
facility.
The decrease in net interest income in 1996 as compared to 1995 was
primarily due to a one-time interest payment received from Chiron in 1995. The
increase in net interest in 1995 compared to 1994 was primarily due
36
<PAGE>
to interest received from Chiron and higher investment balances and interest
rates, offset by increased interest payments which were incurred due to higher
debt balances, including the mortgages associated with the building purchase in
March 1995.
. Results of Operations Outlook
The Company expects to incur a net operating loss in 1997. The Company
expects to continue to incur operating losses unless and until such time as
product approvals are obtained and product sales, if any, exceed operating
expenses. The revenues received and costs incurred by the Company in 1997 depend
to a large degree on the results of regulatory actions with respect to the two
NDAs recently filed with the FDA with respect to MYOTROPHIN (rhIGF-I) and
PROVIGIL (modafinil), and other product programs. See "Certain Risks Related to
Cephalon's Business." The Company expects to have significant fluctuations in
quarterly results based on the level and timing of recognition of contract
revenues and the incurrence of expenses. A majority of the Company's revenues to
date have been under agreements with collaborative partners and the Partnership.
Revenue or expense to be recognized by the Company under the collaboration
with Chiron will depend on the relative costs incurred by the two companies. A
substantial portion of the Company's revenues are expected to be derived from
collaboration agreements with TAP and SB, the continuation of which is subject
to periodic review and achievement of certain milestones. Revenues to be
recognized in 1997 under the agreements with TAP and SB are currently expected
to approximate 1996 levels. The level of revenue to be recognized under the BMS
Agreement is dependent upon the success of marketing the co-promotion products.
Revenues recognized under the supply agreement with Kyowa Hakko are expected to
continue in 1997 as the Company makes shipments of MYOTROPHIN (rhIGF-I) to Kyowa
Hakko to supply clinical trials in Japan. SP has decided to conclude its funding
of the companies' research collaboration under the Schering-Plough Agreement
effective March 1997. The Company will not recognize any further revenue under
the Partnership Development Agreement.
The Company expects that it will continue to incur significant research,
development, clinical trial, regulatory filing and other costs. In addition,
selling, general and administrative activities in the United States and Europe
may be expanded as the Company evaluates the potential for obtaining regulatory
approvals of MYOTROPHIN (rhIGF-I) and PROVIGIL (modafinil). The Company may also
incur substantial expenses to build inventories of MYOTROPHIN (rhIGF-I) and
PROVIGIL (modafinil).
If the Company were to make the Milestone Payment, exercise the Purchase
Option, or purchase additional interests outside of the Purchase Option, a
material charge to earnings could result, depending upon the development status
of the underlying technology.
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 December 31, 1996, 190,700 restricted stock grants were
outstanding. At December 31, 1996, the Company had approximately 3,181,020
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 December 31, 1996, warrants to purchase
2,898,104 shares of common stock were exercisable with prices ranging from
$11.32 to $18.50, with various exercise periods through February 2002.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cephalon, Inc.:
We have audited the accompanying consolidated balance sheets of Cephalon,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cephalon, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
March 3, 1997
38
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION> December 31,
---------------------------------
1996 1995
-------------- --------------
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ($3,750,000 and $6,250,000 in custodial account)
(Notes 2 and 5) $5,671,000 $6,565,000
Reverse repurchase agreements (Note 2) 5,207,000 23,126,000
Short-term investments (Note 2) 135,970,000 148,376,000
Other 7,696,000 10,415,000
-------------- --------------
Total current assets 154,544,000 188,482,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $8,852,000 and $9,652,000 (Note 3) 22,086,000 30,002,000
OTHER (Note 5) 1,261,000 2,846,000
-------------- --------------
$177,891,000 $221,330,000
============== ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $1,638,000 $4,379,000
Accrued expenses (Note 4) 14,786,000 10,116,000
Current portion of long-term debt (Note 5) 5,164,000 3,907,000
-------------- --------------
Total current liabilities 21,588,000 18,402,000
LONG-TERM DEBT (Note 5) 16,974,000 21,668,000
OTHER 2,003,000 1,055,000
-------------- --------------
Total liabilities 40,565,000 41,125,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY: (Notes 7 and 12)
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,
24,618,223 and 23,837,204 shares issued and outstanding 246,000 238,000
Additional paid-in capital 296,868,000 286,123,000
Treasury stock (1,778,000) (1,487,000)
Accumulated deficit (157,967,000) (104,682,000)
Cumulative translation adjustment (43,000) 13,000
-------------- --------------
Total stockholders' equity 137,326,000 180,205,000
-------------- --------------
$177,891,000 $221,330,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 39
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
REVENUES: (Note 9)
Related party $ $ 5,235,000 $ 11,841,000
Contract 21,366,000 41,764,000 9,840,000
--------------- -------------- --------------
21,366,000 46,999,000 21,681,000
--------------- -------------- --------------
OPERATING EXPENSES: (Notes 9 and 10)
Research and development 62,096,000 73,994,000 51,613,000
Selling, general and administrative 28,605,000 15,762,000 9,180,000
--------------- -------------- --------------
90,701,000 89,756,000 60,793,000
--------------- -------------- --------------
LOSS FROM OPERATIONS (69,335,000) (42,757,000) (39,112,000)
--------------- -------------- --------------
INTEREST:
Income 8,491,000 12,866,000 4,473,000
Expense (Note 5) (2,286,000) (3,112,000) (1,426,000)
--------------- -------------- --------------
6,205,000 9,754,000 3,047,000
--------------- -------------- --------------
GAIN ON SALE OF ASSETS (Note 3) 9,845,000 -- --
--------------- -------------- --------------
LOSS (Note 11) $ (53,285,000) $(33,003,000) $(36,065,000)
=============== ============== ==============
LOSS PER SHARE (Note 1) $ (2.19) $(1.63) $ (2.13)
=============== ============== =============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 24,319,163 20,262,071 16,928,516
=============== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 40
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Additional Cumulative
Common Paid-in Treasury Deferred Accumulated Translation
Stock Capital Stock Compensation Deficit Adjustment
----- ------- ----- ------------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $120,000 $98,995,000 $-- $(416,000) $(35,614,000) $20,000
Sales of common stock and warrants 58,000 82,400,000 -- -- -- --
Issuance of common stock upon
exercise of stock options
and warrants 5,000 1,279,000 -- -- -- --
Amortization of warrants in connection
with Partnership transaction -
1994 portion (Notes 7 and 9) -- 1,376,000 -- -- -- --
Amortization of deferred
compensation (Note 7) -- -- -- 416,000 -- --
Employee benefit plan (Note 8) -- 260,000 -- -- -- --
Treasury stock aquired -- -- (69,000) -- -- --
Translation adjustment -- -- -- -- -- 2,000
Loss -- -- -- -- (36,065,000) --
---------- ------------- ----------- ---------- ------------- ----------
BALANCE, DECEMBER 31, 1994 183,000 184,310,000 (69,000) -- (71,679,000) 22,000
Sales of common stock 40,000 84,197,000 -- -- -- --
Issuance of common stock upon
exercise of stock options
and warrants 15,000 16,425,000 -- -- -- --
Amortization of warrants in connection
with Partnership transaction -
1995 portion (Notes 7 and 9) -- 815,000 -- -- -- --
Amortization of deferred
compensation (Note 7) -- -- -- -- -- --
Employee benefit plan (Note 8) -- 375,000 -- -- -- --
Treasury stock aquired -- -- (1,418,000) -- -- --
Translation adjustment -- -- -- -- -- (8,000)
Loss -- -- -- -- (33,003,000) --
---------- ------------- ----------- ---------- ------------- ----------
BALANCE, DECEMBER 31, 1995 238,000 286,122,000 (1,487,000) -- (104,682,000) 14,000
Issuance of common stock upon
exercise of stock options
and warrants 8,000 8,144,000 -- -- -- --
Restricted stock award plan -- 2,073,000 -- -- -- --
Employee benefit plan (Note 8) -- 529,000 -- -- -- --
Treasury stock aquired -- -- (291,000) -- -- --
Translation adjustment -- -- -- -- -- (57,000)
Loss -- -- -- -- (53,285,000) --
---------- ------------- ----------- ---------- ------------- ----------
BALANCE, DECEMBER 31, 1996 $246,000 $296,868,000 $(1,778,000) -- $(157,967,000) $(43,000)
========== ============= =========== ========== ============= ==========
<CAPTION>
Total
-----
<S> <C>
BALANCE, JANUARY 1, 1994 $63,105,000
Sales of common stock and warrants 82,458,000
Issuance of common stock upon
exercise of stock options
and warrants 1,284,000
Amortization of warrants in connection
with Partnership transaction -
1994 portion (Notes 7 and 9) 1,376,000
Amortization of deferred
compensation (Note 7) 416,000
Employee benefit plan (Note 8) 260,000
Treasury stock aquired (69,000)
Translation adjustment 2,000
Loss (36,065,000)
------------
BALANCE, DECEMBER 31, 1994 112,767,000
Sales of common stock 84,237,000
Issuance of common stock upon
exercise of stock options
and warrants 16,440,000
Amortization of warrants in connection
with Partnership transaction -
1995 portion (Notes 7 and 9) 815,000
Amortization of deferred
compensation (Note 7) --
Employee benefit plan (Note 8) 375,000
Treasury stock aquired (1,418,000)
Translation adjustment (8,000)
Loss (33,003,000)
------------
BALANCE, DECEMBER 31, 1995 180,205,000
Issuance of common stock upon
exercise of stock options
and warrants 8,152,000
Restricted stock award plan 2,073,000
Employee benefit plan (Note 8) 529,000
Treasury stock aquired (291,000)
Translation adjustment (57,000)
Loss (53,285,000)
------------
BALANCE, DECEMBER 31, 1996 $137,326,000
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 41
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1996 1995 1994
-------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss $(53,285,000) $(33,003,000) $(36,065,000)
Adjustments to reconcile loss to net cash
used for operating activities:
Depreciation and amortization 4,198,000 5,851,000 7,095,000
Gain on sale of assets (9,845,000) -- --
Non-cash compensation expense 2,602,000 -- --
(Increase) decrease in operating assets:
Other current assets 1,840,000 (5,773,000) (1,443,000)
Other long-term assets 121,000 190,000 (543,000)
Increase(decrease) in operating liabilities:
Accounts payable (2,741,000) 2,159,000 1,045,000
Accrued expenses 2,947,000 4,224,000 4,277,000
Advances from related party -- -- (700,000)
Other long-term liabilities 948,000 571,000 484,000
-------------- --------------- ---------------
Net cash used for operating activities (53,215,000) (25,781,000) (25,850,000)
-------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments from and (advances) to related party -- 4,337,000 (134,000)
Purchases of property and equipment (2,058,000) (17,455,000) (10,543,000)
Sale leaseback of property and equipment 427,000 237,000 11,750,000
Proceeds from sale of assets 17,192,000 -- --
Sales and maturities (purchases) of investments, net 30,325,000 (68,107,000) (58,517,000)
-------------- --------------- ---------------
Net cash provided by (used for) investing activities 45,886,000 (80,988,000) (57,444,000)
-------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and warrants -- 84,237,000 82,458,000
Proceeds from exercises of common stock options and warrants 8,516,000 14,387,000 1,541,000
Principal payments on long-term debt (3,919,000) (17,426,000) (12,319,000)
Proceeds from long-term debt, net 1,838,000 21,073,000 18,117,000
-------------- --------------- ---------------
Net cash provided by financing activities 6,435,000 102,271,000 89,797,000
-------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (894,000) (4,498,000) 6,503,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,565,000 11,063,000 4,560,000
-------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,671,000 $ 6,565,000 $ 11,063,000
============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 42
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
- --------
Cephalon, Inc. ("Cephalon" or the "Company") seeks to discover and develop
pharmaceutical products primarily for the treatment of neurological disorders
such as amyotrophic lateral sclerosis ("ALS"), peripheral neuropathies,
Alzheimer's disease and stroke. The Company also co-promotes, to neurologists in
the United States, two approved proprietary drugs of Bristol-Myers Squibb
Company ("BMS"). The Company has not received regulatory approval for the
commercial sale of any of its proprietary products under development. 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 the Food and Drug Administration ("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 for any
indication by any regulatory authority for marketing in any jurisdiction.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the results of operations of
the Company and its wholly owned subsidiaries. Intercompany transactions have
been eliminated.
Pervasiveness of Estimates
- --------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fixed Assets and Depreciation
- -----------------------------
Buildings, property and equipment are stated at cost and depreciated using
the straight-line method over the estimated lives of the assets, which range
from three to forty years. Leasehold improvements are amortized on a
straight-line basis over the life of the lease, or the expected useful life of
the improvement, whichever is shorter. Property and equipment under capital
leases are depreciated or amortized over the shorter of the lease term or the
expected useful life of the assets. Fixed assets are subject to periodic review
in accordance with Statement on Financial Accounting Standards ("SFAS") No. 121,
"Accounting for Impairment of Long-lived Assets;" however, no material
adjustment has been recorded to date. Expenditures for maintenance and repairs
are charged to expense as incurred, while major renewals and betterments are
capitalized.
Stockholders' Equity
- --------------------
The Company has equity compensation plans for which it applies Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans. The Company
amortizes the value of any warrants issued in connection with a product
development agreement against the related contract revenue in proportion to the
gross revenue expected to be earned by the company over the life of the related
agreement.
43
<PAGE>
Revenue Recognition
- -------------------
On contracts in which the Company receives payments based upon the level
of its related research and development expenses, revenues are recognized as the
related expenses are incurred. On contracts which provide for milestone
payments, revenues are recognized when all parties concur that the scientific
results stipulated in the agreement have been achieved and collection is
assured. On contracts which provide for payments based upon pre-determined rates
for personnel working on the contract and reimbursement of third-party expenses,
revenues are recognized as the work is performed and the third-party expenses
are incurred.
Payments received that relate to future performance are deferred and
recognized as revenue over the specified future performance periods. Under the
co-promotion agreement with Bristol-Myers Squibb Company ("BMS"), the Company
recognizes revenue for certain sales when they are in excess of preestablished
amounts (see Note 9). Under the supply agreement with Kyowa Hakko Kogyo Co.,
Ltd. ("Kyowa Hakko"), the Company recognizes revenue upon the shipment of
clinical supplies (see Note 9).
Research and Development
- ------------------------
All research and development costs, including the purchase of technology,
are expensed as incurred.
Loss Per Share
- --------------
The loss per share calculation uses the weighted average number of shares
outstanding. The computation excludes options, restricted stock awards and
warrants outstanding for all periods presented since their inclusion would be
antidilutive.
2. CASH, CASH EQUIVALENTS AND INVESTMENTS
At December 31, cash, cash equivalents and investments consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Cash and cash equivalents............................................................... $ 5,671,000 $ 6,565,000
Reverse repurchase agreements collateralized by U.S. Treasury securities................ 5,207,000 23,126,000
U.S. Treasury bills and notes........................................................... 125,158,000 140,966,000
Commercial paper........................................................................ 983,000 7,410,000
Other corporate obligations............................................................. 9,829,000 --
------------- -------------
$ 146,848,000 $ 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. The Company's
investments consisted primarily of U.S. Treasury backed securities, high grade
commercial paper and U.S. corporate obligations and asset-backed securities
having AAA ratings.
Investments in overnight reverse repurchase agreements are collateralized
102% by U.S. Treasury securities. These securities are held in a trust account
with a commercial bank on behalf of the Company. The Company believes that the
quantity and quality of the collateral are sufficient to secure its investment
in these instruments.
The Company considers its investments as being available for sale in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity." The Company classifies these investments as short-term and records them
at fair market value. The unrealized gains and losses in each of the three years
ended December 31, 1996 were immaterial. Certain of the Company's debt and lease
agreements contain covenants that obligate the Company to maintain a custodial
account and certain minimum cash and investment balances and financial ratios
(see Note 5).
44
<PAGE>
3. PROPERTY AND EQUIPMENT:
At December 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land and buildings............................................................. $19,423,000 $19,405,000
Laboratory and office equipment................................................ 11,515,000 12,603,000
Leasehold improvements......................................................... -- 2,123,000
Manufacturing equipment........................................................ -- 5,523,000
----------- -----------
30,938,000 39,654,000
Less allowances for depreciation and amortization.............................. (8,852,000) (9,652,000)
----------- -----------
Property and equipment, net.................................................... $22,086,000 $30,002,000
=========== ===========
</TABLE>
In November 1996, the Company sold the assets of its Beltsville, Maryland
pilot-scale manufacturing facility for a total purchase price of $24,864,000. In
the transaction, the Company received $17,192,000 in cash, transferred
$7,712,000 of operating lease obligations to the purchaser and recorded a gain
of $9,845,000.
In March 1995, the Company purchased the two buildings currently housing
its administrative offices and research facilities in West Chester,
Pennsylvania, along with a third adjacent building for a total purchase price of
$11,000,000.
4. ACCRUED EXPENSES
At December 31, accrued expenses consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accrued compensation and benefits................................................ $ 1,569,000 $ 501,000
Accrued professional and consulting fees......................................... 2,749,000 894,000
Accrued clinical trial fees and related expenses................................. 3,177,000 5,021,000
Accrued license fees and royalties............................................... 133,000 1,633,000
Accrued co-promotion expenses.................................................... 723,000 605,000
Other accrued expenses........................................................... 6,435,000 1,462,000
------------ ------------
$ 14,786,000 $ 10,116,000
============ ============
</TABLE>
45
<PAGE>
5. LONG-TERM DEBT
At December 31, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Unsecured bank loan............................................................... $ 3,750,000 $ 6,250,000
Capital lease obligations......................................................... 1,102,000 1,503,000
Mortgage loans.................................................................... 17,286,000 17,822,000
------------ ------------
22,138,000 25,575,000
Less current portion.............................................................. (5,164,000) (3,907,000)
------------ ------------
Long-term debt.................................................................... $ 16,974,000 $ 21,668,000
============ ============
</TABLE>
Aggregate maturities of long-term debt for the next five years are as
follows: 1997--$5,164,000; 1998--$1,454,000; 1999--$1,186,000; 2000--$1,194,000;
2001--$1,152,000. The current portion of long-term debt consists primarily of
payments due on the unsecured bank loan.
The Company paid interest of $1,388,000, $2,501,000, and $292,000 in 1996,
1995 and 1994, respectively. Interest payments in 1996 principally reflect
payments made on the unsecured bank loan and mortgage loans. Interest payments
in 1995 principally reflect payments made on the unsecured bank loan, mortgage
loans and collaboration loan (see Note 10). Interest payments in 1994
principally reflect payments made on the unsecured bank loan and capital lease
agreement.
. Unsecured Bank Loan
In June 1994, the Company entered into an unsecured four-year loan
agreement with a commercial bank under which it borrowed $10,000,000. Principal
payments of $625,000 with interest were due quarterly. Under the agreement, the
interest rate was 1 1/2 percent over the London Interbank Offered Rate ("LIBOR")
for periods selected by the Company. Under the terms of the loan agreement, the
Company was required to maintain, in a custodial account, a cash and investments
balance not less than the outstanding loan balance; however, there were no
restrictions on the Company's ability to move funds into or out of this account.
In March 1997, the Company repaid in full the balance due on the unsecured bank
loan.
. Collaboration Loan
In connection with the collaboration with Chiron Corporation ("Chiron"),
Chiron provided the Company with a revolving credit facility (the "Note"), to be
used to fund certain collaboration related expenses (see Note 10). Outstanding
balances under the Note bear interest at the greater of the prime rate or the
"Applicable Federal Rate" and mature in January 2000. At December 31, 1996 and
1995, there were no outstanding balances under the Note (see Note 10).
. Capital Lease Obligations
The Company currently leases $1,745,000 of laboratory and production
equipment under a February 1994 master lease agreement. Under the terms of the
agreement, the Company must maintain a minimum balance in unrestricted cash and
investments of $15,000,000 or deliver to the lessor an irrevocable letter of
credit in the amount of the then outstanding balance due on all leased
equipment. The agreement also provides the Company with an option to purchase
the leased equipment. The Company makes annual principal and interest payments
of approximately $600,000 under this four-year agreement. In connection with the
sale of the Company's Beltsville, Maryland pilot-scale manufacturing facility in
November 1996, $356,000 of outstanding capital lease obligations related to the
facility were assumed by the purchaser.
46
<PAGE>
. Mortgage Loans
In March 1995, the Company purchased the two buildings housing its
administrative offices and research facilities in West Chester, Pennsylvania
along with a third adjacent 49,000 square foot building for $11,000,000. The
Company financed the purchase through the assumption of an existing $6,900,000
first mortgage and from $11,600,000 in mortgage loans provided by the
Commonwealth of Pennsylvania (the "State Funding"), a portion of which was used
to finance building improvements. $2,700,000 of State Funding was held in escrow
to fund future improvements. In 1996 the Company withdrew $1,679,000 from the
escrow for additional building improvements. At December 31, 1996 the remaining
escrow balance, including earned interest, was $1,261,000. The first mortgage
has a 15-year term with an annual interest rate of 9 5/8%. The State Funding has
a 15-year term with an annual interest rate of 2%. The 2% interest rate is
subject to increase to prime plus 2% if the Company fails to hire a specified
number of new employees in Chester County, Pennsylvania by the end of 1999. The
Company is accruing interest on this loan at the prime rate plus 2% until such
time as it is reasonably assured of meeting the specified employment goals under
the mortgage. The mortgage loans require annual aggregate principal and interest
payments of $1,800,000. The mortgage loans are secured by the buildings and
fixtures therein and a portion of the State Funding is also secured by all
Company equipment located in Pennsylvania that is otherwise unsecured.
6. COMMITMENTS AND CONTINGENCIES
. Leases
The Company leases certain of its offices and automobiles under operating
leases. The Company's future annual minimum payments under these leases are
approximately $483,000 for the period 1997 through 2001.
Rent expense was $3,423,000, $3,518,000, and $1,480,000 in 1996, 1995, and
1994, respectively. The Company incurred maintenance and repairs expense of
$1,197,000, $756,000, and $608,000 in 1996, 1995 and 1994, respectively.
. Other
The Company maintains a number of agreements to fund research by third
parties. These agreements are generally renewable on an annual basis and provide
the Company with the right to obtain royalty-bearing licenses to the results of
the research. The Company has minimum funding commitments under these research
agreements of $746,000 in 1997. The Company has funding commitments under
several other cancelable agreements, including those entered into for the
purpose of conducting clinical trials. Pursuant to the BMS Agreement, the
Company is obligated to fund $1,250,000 in 1997 for promotional and support
activities of Stadol NS targeting neurologists. In addition, the Company has
obligations to make royalty, license and milestone payments under certain of its
licensing and research and development agreements, including milestone payments
of $2,000,000 and $268,000 upon regulatory approval of PROVIGIL (modafinil) in
the United States and the United Kingdom, respectively.
The purchaser of the Beltsville Facility, under the purchase agreement,
has the right to seek indemnification from the Company during the first year
after the sale for certain types of claims.
47
<PAGE>
. Related party
Late in 1995, Cephalon Clinical Partners, L.P. (the "Partnership")
depleted all of its available funding and will not provide further funding of
MYOTROPHIN (rhIGF-I) development costs to the Company. The amount of additional
funding required for further development will be determined by the Partnership's
general partner in advance of each quarter, and each quarter, the Company will
have the right, but not the obligation, to contribute to such funds.
The Partnership granted the Company an exclusive license (the "Interim
License") to manufacture and market MYOTROPHIN (rhIGF-I) within the United
States, Canada and Europe (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 (rhIGF-I) 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"). To exercise
the Purchase Option, Cephalon is 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 (rhIGF-I) 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 payment, 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 MYOTROPHIN sales in Europe will only be
paid to the extent necessary to meet specified sales 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
(rhIGF-I) in the Territory would revert to the Partnership, which may
commercialize MYOTROPHIN (rhIGF-I) itself or license or assign its rights to a
third party. The Company would not receive any benefits from any such
commercialization.
The Company's collaboration with Chiron is subject to the rights of the
Partnership which has licensed the Company the right to develop MYOTROPHIN
(rhIGF-I) in North America and Europe in return for receiving certain payments.
The Company is solely responsible for making any royalty and milestone payments
owed to the Partnership and is responsible for funding the Purchase Option if it
exercises the option (see Note 9).
. 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. Several of the
plaintiffs have been designated by the Court, collectively, as the "lead
plaintiff" for purposes of the Private Securities Litigation Reform Act of 1995.
The consolidated complaint, filed in October 1996 by the lead plaintiffs,
extended and expanded the class period to include purchasers of the Company's
securities as well as options to purchase or sell those securities during the
period between June 12, 1995 and June 7, 1996. Plaintiffs allege, based in part
on statements and opinions expressed at the June 7, 1996 meeting of an FDA
advisory committee, that earlier statements by the Company about the North
American and European trial results were misleading. The plaintiffs seek
unspecified damages and other relief. The Company's motion to dismiss the case
is pending, and discovery related to the merits of the allegation in the
complaint has been postponed until the motion is decided. The Company intends to
vigorously defend the action. However, management believes that it is too early
in the proceedings to predict the outcome of this action with any certainty.
48
<PAGE>
7. STOCKHOLDERS' EQUITY
In August 1995, the Company completed a public offering of 3,450,000
shares of common stock at a price of $22.50 per share that, together with an
additional 538,310 shares placed directly by the Company to Kyowa Hakko at a
price of $21.17 per share, resulted in aggregate net proceeds of approximately
$84,237,000.
. Equity Compensation Plans
The Company established the Stock Option Plan and the Equity Compensation
Plan for its employees, directors and certain other individuals. The Company may
grant either non-qualified or incentive stock options under both plans, and may
also grant restricted stock awards under the Equity Compensation Plan. An
aggregate of 5,500,000 shares of common stock have been reserved for the plans.
A committee of the Board of Directors administers the plans and determines the
terms of option grants and restricted stock awards. For incentive stock options,
the exercise price may not be less than the fair market value of the stock on
the date of grant. Options and restricted stock awards vest over various periods
as established by the committee, which generally do not exceed four years from
the date of grant, and expire no later than 10 years from the date of grant.
Each option entitles the holder to purchase one share of common stock at the
indicated exercise price.
The Company applies APB No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for its plans. All options granted
under the plans to date have been with exercise prices equal to the fair market
value of the stock on the date of grant. Accordingly, no compensation expense
has been recognized for its stock-based compensation plans other than for its
restricted stock awards. Had compensation cost for the Company's stock option
plans been determined consistent with the methodology prescribed under SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's loss and loss per
share would have been increased by approximately $5,600,000 and $4,100,000, or
$0.23 per share and $0.20 per share, for 1996 and 1995, respectively. The pro
forma effect on the loss for 1996 and 1995 is not representative of the pro
forma effect on earnings in future years since it does not take into
consideration the pro forma compensation expense related to grants made prior to
1995. The fair value of each option granted during 1996 and 1995 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0%, expected volatility of 56%, risk-
free interest rate of 6.11% in 1996 and 6.48% in 1995, and an expected life of 6
years. The weighted average fair value at the date of grant for options granted
during 1996 and 1995 was $11.48 and $9.76 per share, respectively. The weighted
average contractual life of the outstanding stock options at December 31, 1996
is six years.
49
<PAGE>
The following table summarizes the aggregate option activity under both
plans:
<TABLE>
<CAPTION>
Weighted Average
Activity Exercise Price Exercise Price
---------- ---------------- Per Share
---------
<S> <C> <C> <C>
Balance outstanding, January 1, 1994............................ 2,268,341 $ .10-$18.00 $9.03
Granted..................................................... 741,900 $ 8.25-$16.75 $11.11
Exercised................................................... (402,756) $ .10-$13.50 $0.74
Canceled.................................................... (132,450) $ 9.63-$16.75 $14.34
---------
Balance outstanding, December 31, 1994.......................... 2,475,035 $ .10-$18.00 $10.72
Granted..................................................... 966,587 $ 7.06-$31.00 $13.23
Exercised................................................... (306,593) $ .10-$16.75 $6.42
Canceled.................................................... (192,332) $ 7.06-$26.75 $12.39
---------
Balance outstanding, December 31, 1995.......................... 2,942,697 $ .15-$31.00 $17.72
Granted..................................................... 583,835 $ 7.31-$30.50 $19.27
Exercised................................................... (140,574) $ .15-$16.75 $7.83
Canceled.................................................... (204,938) $ 7.06-$31.00 $19.83
---------
Balance outstanding, December 31, 1996.......................... 3,181,020 $ .15-$31.00 $14.07
=========
</TABLE>
Options to purchase 1,722,378, 1,273,646, and 1,000,796 shares of common
stock were exercisable at an average exercise price of $11.88, $10.41 and $8.53
per share at December 31, 1996, 1995 and 1994, respectively. At December 31,
1996, 664,073 shares were available for future grants under the plans.
During 1996 and 1995, restricted stock awards for 85,700 and 140,000
shares, respectively, were granted under the Equity Compensation Plan. The
restricted stock awards generally vest in equal annual installments over four
years. At December 31, 1996, 35,000 shares were vested. During 1996, the Company
recognized compensation expense of $2,073,000 for these awards.
During 1996 and 1995, the Company received proceeds of $1,127,000 and
$1,968,000, respectively, from the exercise of stock options.
. Warrants
In February 1994, the Company issued to Chiron, a warrant to purchase
750,000 shares of common stock with an exercise price of $18.50 per share, which
is exercisable until February 2002.
In August 1992, the Company and Cephalon Clinical Partners, L.P. completed
a private placement of 900 units. Each unit consists of a limited partnership
interest in the Partnership and warrants to purchase 4,500 shares of the
Company's common stock, resulting in the aggregate issuance of warrants to
purchase 4,050,000 shares of common stock. In connection with the offering,
including the sale of a Class B limited partnership interest, the Company issued
warrants to purchase an additional 144,000 shares of common stock.
In connection with the issuance of the partnership warrants, the Company
entered into a product development agreement (the "Partnership Development
Agreement") with the Partnership and obtained the option to purchase all of the
limited partnership interests (see Notes 6 and 9). The Company credited the
$4,030,000 value of the warrants to additional paid-in capital. The Company
amortized the value of the warrants against contract revenue in proportion to
the gross revenue earned by the Company over the life of that agreement. The
Company recorded warrant amortization of $815,000 and $1,376,000 in 1995, and
1994, respectively.
50
<PAGE>
At December 31, 1996, warrants to purchase 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>
1,748,927 September 1, 1993--August 31, 1997 $11.32
September 1, 1997--August 31, 1999 $13.82
379,300 September 1, 1994--August 31, 1999 $13.70
19,877 September 1, 1993--August 31, 1999 $11.77
750,000 February 9, 1994--February 8, 2002 $18.50
</TABLE>
During 1996 and 1995, 582,844 and 1,225,366 warrants were exercised, for an
aggregate exercise price of $6,800,000 and $12,419,000, respectively. In 1994,
80,750 warrants were canceled.
. Preferred Share Purchase Rights
In November 1993, the Board of Directors of the Company declared a
dividend distribution of one right ("Right") for each outstanding share of
common stock. In addition, a Right attaches to and trades with each new issue of
the Company's common stock. Each Right entitles each registered holder, upon the
occurrence of certain events, to purchase from the Company a unit consisting of
one one-hundredth of a share (a "Unit") of the Series A Junior Participating
Preferred Stock of the Company (the "Preferred Shares"), or a combination of
securities and assets of equivalent value, at a purchase price of $90.00 per
Unit, subject to adjustment.
8. QUALIFIED SAVINGS AND INVESTMENT PLAN
The Company has a profit sharing plan pursuant to section 401(k) of the
Internal Revenue Code, whereby eligible employees may contribute up to 15% of
their annual salary to the plan, subject to statutory maximums. The plan
provides for discretionary matching contributions by the Company in cash or a
combination of cash and shares of the Company's common stock. For the years
1996, 1995 and 1994, the Company contribution was 100% of the first 6% of
employee salaries contributed in the ratio of 50% cash and 50% Company stock.
The Company contributed $1,106,000, $826,000 and $493,000 in cash and common
stock to the plan for the years 1996, 1995 and 1994, respectively.
9. REVENUES
. Related Party--Cephalon Clinical Partners
In August 1992, Cephalon exclusively licensed to the Partnership rights to
MYOTROPHIN (rhIGF-I) for human therapeutic use within the United States, Canada
and Europe (the "Territory") in return for a non-refundable license fee of
$500,000. Through a concurrent offering of 900 limited partnership interests,
the Partnership raised approximately $38,714,000 in net proceeds (payable to the
Partnership in annual installments, the last of which was paid in August 1995)
which it used to fund the development of MYOTROPHIN (rhIGF-I).
In connection with the offering, the Partnership borrowed $4,435,000 from
the Company in 1992. The loan and annual interest payments at 7 1/2% were
secured by the limited partners' subscription amounts due. In September 1995,
the Partnership paid the Company in full the principal balance outstanding of
$4,435,000. The Company received annual interest payments in the amount of
$333,000 in 1995 and 1994.
The current general partner of the Partnership is a wholly-owned
subsidiary of the Company, which owns 1% of the Partnership. The board of
directors of the Partnership is 50% controlled by a third-party investor. The
general partner cannot adversely modify the economic terms of the Partnership
without a vote of the limited
51
<PAGE>
partners. The general partner may be removed at any time by a vote of the
limited partners. The obligations of the general partner include i) enforcing
agreements (described below) entered into by the Partnership, ii) prosecuting
and defending the intellectual property owned by the Partnership and iii)
entering into loan agreements and other transactions on behalf of the
Partnership. No such borrowings, commitments, or obligations are outstanding.
All interests in the general partner and the Partnership acquired by the
Company have been recorded as in-process research and development expense in
accordance with SFAS No. 2 "Accounting for Research and Development Costs." The
Company believes that this approach is appropriate, because under applicable
accounting rules, neither technological feasability nor alternative future uses
of Myotrophin have yet been established.
The Company is performing the development and clinical testing of
MYOTROPHIN (rhIGF-I) on behalf of the Partnership under a research and
development agreement with the Partnership (the "Partnership Development
Agreement"). Under the Partnership Development Agreement, the Company's costs
incurred to develop MYOTROPHIN (rhIGF-I) in the Territory were reimbursed by the
Partnership to the extent of its available funds and subject each year to the
Partnership Development Agreement budget for that year. The Partnership
exhausted its available funding in 1995. Since that time, the Company has been
funding the continued development of MYOTROPHIN (rhIGF-I) from its own cash
resources. The amount of additional funding required for further development
will be determined by the Partnership's general partner in advance of each
quarter, and each quarter, the Company will have the right, but not the
obligation, to contribute such funds.
For the years ended December 1995 and 1994, the Company recorded revenue
of $5,235,000 and $11,841,000, respectively, and incurred related budgeted
expense of $5,500,000 and $12,015,000 for the same period under the Partnership
Development Agreement, net of warrant amortization. For the years ended December
1995 and 1994, the Company incurred expenses of approximately $26,571,000 and
$16,100,000, respectively, for which it was not reimbursed.
In August 1995, the Company purchased 67 limited partnership interests
(comprising an 8% non-controlling interest) in the Partnership at a cost of
$3,350,000. The purchase did not include the warrants to purchase Cephalon's
common stock included in the investment units initially sold to the limited
partners. Twenty-seven and one-half limited partnership interests were cancelled
following default on the installment payments to the Partnership by the limited
partners. There are currently 805 1/2 limited partnership interests held by
third parties.
The Partnership granted the Company an exclusive license (the "Interim
License") to manufacture and market MYOTROPHIN (rhIGF-I) 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 (rhIGF-I) 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 also entered into an
agreement with each of the Partnership's limited partners under which it
received the Purchase Option (see Note 6). If the Company were to make the
Milestone Payment, exercise the Purchase Option, or purchase additional
interests outside of the Purchase Option, a material charge to earnings could
result, depending upon the development status of the underlying
technology.
The January 1994 collaboration between the Company and Chiron is subject
to the rights of the Partnership (see Note 10).
52
<PAGE>
Revenue--Contract
The Company recorded other revenues under its other collaboration
agreements for the year ended December 31, as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ---------
<S> <C> <C> <C>
Bristol-Myers Squibb..................................................... $4,305,000 $ 3,594,000 $ 533,000
TAP Holdings............................................................. 6,022,000 5,243,000 5,100,000
SmithKline Beecham....................................................... 2,855,000 2,790,000 2,708,000
Kyowa Hakko Kogyo........................................................ 1,775,000 1,711,000 --
Schering-Plough.......................................................... 3,000,000 2,250,000 1,500,000
Chiron (see Note 10)..................................................... $3,409,000 $26,176,000 $ --
</TABLE>
. Bristol-Myers Squibb
In July 1994, the Company and BMS entered into a co-promotion agreement
under which Cephalon markets Stadol NS(R) (butorphanol tartrate) to neurologists
in the United States. Stadol NS, which received U.S. marketing approval from the
FDA in 1992, is indicated for the management of pain when the use of an opioid
analgesic is appropriate. In February 1996, the Company and BMS entered into a
new arrangement to co-promote to neurologists Serzone(R) (nefazodone
hydrochloride), a treatment for depression which received U.S. marketing
approval in 1995.
The co-promotion agreements expire at the end of 1998 unless BMS and the
Company elect to renew the arrangements. Under the agreements, Cephalon receives
compensation based primarily on the percentage of prescriptions written by
neurologists in excess of a predetermined base amount, is required to make a
specified number of sales calls on neurologists and is obligated to fund certain
neurology-focused promotional activities (see Note 6). The Company funded
co-promotion activities in the amount of $1,250,000, $2,250,000 and $750,000 in
1996, 1995 and 1994, respectively. The 1995 revenues include $500,000
representing reimbursement of certain Phase IV clinical trial costs.
. TAP Holdings Inc.
In May 1994, the Company and TAP Holdings Inc. ("TAP") entered into a
licensing and research and development collaboration to develop and
commercialize certain compounds for the treatment of prostate disease in the
United States. The compounds belong to a family of inhibitors from the Company's
signal transduction modulator program. In July 1996, the Company and TAP amended
the research and development agreement to include additional molecules and to
expand the field to include all cancers.
Under the terms of the agreement, the Company is to perform research and
preclinical development of these compounds 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. The research under the agreement may be extended for
one-year periods. TAP may terminate the research under the agreement upon 90
days' prior written notice at the end of any extension period.
TAP is responsible for conducting and funding all U.S. clinical trials and
additional activities for regulatory submissions for U.S. marketing approval.
The agreement provides for TAP to make milestone payments upon the achievement
of specific events and to purchase commercial supplies of product from Cephalon
at a price equal to a fixed percentage of sales plus royalties on product sales.
53
<PAGE>
. SmithKline Beecham p.l.c.
In June 1993, the Company and SmithKline Beecham ("SB") entered into a
collaboration for the research, development and commercialization of compounds
that inhibit calpain, a protease that is believed to be an important mediator of
cell death.
Under the terms of the agreement, the Company is to perform research and
preclinical development of these compounds for which it is compensated by SB,
based on a contract rate per individual assigned to the program, subject to
annual budgetary maximums. SB may terminate the research under the agreement in
which case, in certain circumstances, the licenses granted by each company to
the other also terminate and the technology provided by Cephalon reverts to
Cephalon. In addition, SB may terminate the agreement as to any particular
country covered by the collaboration, under certain circumstances, in which
event the licenses granted by Cephalon to SB in that country terminate. The
agreement is also subject to termination in customary circumstances such as a
breach of contract by the other party.
The Company may elect to co-promote, in the United States and certain
other territories, up to a certain specified percentage of the sales of products
resulting from the collaboration by paying to SB, during the development
program, a share of the development costs equal to the percentage of
co-promotion rights received. If the Company chooses to exercise its option to
co-promote a product, it is required to reimburse SB for a portion of all
research payments made to the Company by SB under the research agreement. Each
party is to receive a percentage of the profits from co-promoted products equal
to its specified percentage of co-promotion sales of such products. The Company
also is to receive royalty payments on the non co-promotion sales. Should a
product resulting from the collaboration receive marketing approval, the Company
also is to receive certain milestone payments. SB is responsible for the
manufacture of any products developed under the collaboration.
. Kyowa Hakko Kogyo Co., Ltd.
In May 1992, the Company licensed from Kyowa Hakko the patent rights to a
class of small molecules which the Company has identified as signal transduction
modulators. The Company is currently evaluating these and other newly
synthesized compounds for their application in a number of neurodegenerative
disorders, including Alzheimer's disease, as well as potential applications
outside neurology.
Under the terms of the license, the Company has exclusive marketing rights
to these compounds in the United States and has an option to acquire
semi-exclusive marketing rights in Japan. Kyowa Hakko and the Company each have
semi-exclusive marketing rights throughout the rest of the world, including
Europe. Pursuant to the arrangement, Kyowa Hakko is to supply the molecules in
bulk form and the Company will pay Kyowa Hakko for commercial supplies as well
as royalties on product sales. The royalty and supply costs, which are to be
negotiated in the future, are subject to a specified maximum amount of the
Company's net sales of the licensed product. Cephalon has obtained an option to
acquire the exclusive rights to develop compounds for prostate cancer in Europe,
Canada, Mexico and the United States, which include the compound now being
developed in the United States in collaboration with TAP. In return for the
exclusive European rights, Kyowa Hakko would receive exclusive rights to develop
the compound for prostate cancer in Asia and would receive a royalty on European
sales of the compound by Cephalon.
The license agreement will automatically terminate if the Company
discontinues the development of licensed molecules because of lack of safety or
efficacy. The agreement also is subject to termination in customary
circumstances, such as a breach of contract by the other party.
In July 1993, the Company entered into a separate agreement with
Kyowa Hakko providing for the development of MYOTROPHIN (rhIGF-I) for the
treatment of neurological disorders, including ALS, in Japan. Kyowa Hakko is
funding product development activities in Japan, is conducting human clinical
trials in Japan and is responsible for seeking authorization to market
MYOTROPHIN (rhIGF-I) in Japan for the treatment of
54
<PAGE>
neurological disorders. The Company will receive certain licensing, milestone
and royalty payments. The Company will supply MYOTROPHIN (rhIGF-I) at its cost
to Kyowa Hakko for use in Japanese clinical trials, and has agreed to supply the
product for Kyowa Hakko's commercial use. Under certain circumstances, the
Company has an option to co-promote MYOTROPHIN (rhIGF-I) in Japan.
The Company may terminate the agreement if (i) Kyowa Hakko fails to file
for marketing approval of MYOTROPHIN (rhIGF-I) in Japan within five years from
the date of the agreement, except where such failure is not within Kyowa Hakko's
control or (ii) if Kyowa Hakko discontinues the development of MYOTROPHIN
(rhIGF-I) because of a lack of its safety or efficacy. The agreement also is
subject to termination in customary circumstances, such as a breach of contract
by the other party.
. Schering-Plough
In May 1990, the Company and Schering-Plough Corporation, through its
subsidiary Schering Corporation ("SP"), entered into an agreement under which
the Company conducted a research program to identify inhibitors of beta-amyloid
as potential therapeutic agents for the treatment of Alzheimer's disease and
other neurodegenerative diseases. SP recently decided to conclude its funding of
the research program with the Company.
SP retains an exclusive, world-wide royalty-bearing license to the
products developed under the research programs. SP has the primary
responsibility for conducting clinical development of any product candidates
emerging from the research program and Cephalon is to receive milestone payments
as well as royalties on product sales. The Company may elect to co-promote in
the United States a specified percentage of the sales of products resulting from
the collaboration by paying to SP, during the development program, a specified
share of the development costs. The Company will receive no royalty in any
territory in which it elects to co-promote.
The provisions of the agreement continue after the research funding ends,
including Cephalon's non-exclusive right to use the technology developed in the
program. The Company intends to continue research in the beta-amyloid field
using its own resources. Under the terms of the agreement with SP, the Company
may not conduct the same research as the funded research program with a third
party until the end of 1997.
10. RESEARCH AND DEVELOPMENT
. Chiron Corporation
Since January 1994, the Company and Chiron have collaborated in the
development of MYOTROPHIN (rhIGF-I) in the neurological field, for
commercialization in all countries of the world other than Japan. Under the
agreement, Chiron contributed its intellectual property rights within the
neurology field related to certain compounds, including rhIGF-I. The Company
contributed certain patent rights related to MYOTROPHIN (rhIGF-I), subject to
the rights of the Partnership (see Note 9).
The Company and Chiron have established joint committees to develop and
oversee the clinical and marketing strategies and budgets for compounds to be
developed under the collaboration. The program selected in 1994 by the joint
committee for development by the collaboration was MYOTROPHIN (rhIGF-I) for the
treatment of ALS in North America. In September 1995, Chiron exercised its
option to include MYOTROPHIN for the treatment of ALS in Europe in the
collaboration program by paying to the Company one-half of the related
development costs incurred by the Company from October 1993 and related
interest. The joint committee also agreed to include MYOTROPHIN (rhIGF-I) for
the treatment of certain peripheral neuropathies into the collaboration. The
collaboration is currently developing MYOTROPHIN (rhIGF-I) for the treatment of
ALS and certain peripheral neuropathies. Under the collaboration, as amended in
January 1995, each party funded its own collaboration-related expenses through
1994. Chiron provided the Company with a revolving credit facility to assist the
Company in funding its portion of costs.
55
<PAGE>
During the year ended December 31, 1995, the Company drew down $5,274,000
against the Note and repaid in full the outstanding balance of $13,882,000 and
related interest of $315,000. 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. As a result of this equalization, the
Company received $22,929,000 from Chiron representing reimbursement of the
Company's prior costs incurred for the peripheral neuropathy and European ALS
programs and payment to equalize the companies' funding of the North American
ALS program costs incurred by the Company through September 1995. The Company
also received interest on the reimbursement payments in the amount of
$2,051,000. At December 31, 1996, $2,465,000 was receivable from Chiron for
unreimbursed estimated fourth quarter 1996 costs.
Profits and losses from the marketing of MYOTROPHIN (rhIGF-I) for the
treatment of ALS and certain peripheral neuropathies in North America, the
countries of the European Community and certain other European countries
("Western Europe") generally will be shared equally by the Company and Chiron.
In addition, the Company will receive a royalty on sales of MYOTROPHIN
(rhIGF-I), if any, in Western Europe to treat ALS. Chiron is to market the
products in the collaboration's territory outside of North America and Western
Europe, in return for royalties to the collaboration, which also will be shared
equally by the Company and Chiron.
The collaboration may be terminated by either party if there is no
reasonable basis for developing any of the collaboration's compounds. If the
Company is the non-terminating party, it may continue to license the technology
or require Chiron to supply product on a "cost plus" basis for a certain period
of time. In addition to customary termination events such as breach by the other
party, the agreement also is subject to termination if Cephalon does not
exercise the Purchase Option (see Note 9).
Under the collaboration, Chiron has an option to obtain the Company's
IGF-I technology outside the neurology field for compensation to be determined
if such option is exercised.
The Company's collaboration with Chiron is subject to the rights of the
Partnership, which has licensed the Company the right to develop MYOTROPHIN
(rhIGF-I) in North America and Europe in return for receiving certain payments.
The Company is solely responsible for making any royalty and milestone payments
owed to the Partnership and is responsible for funding the Purchase Option if it
exercises the option (see Note 9).
The Company, in collaboration with Chiron, recently filed an NDA with the
FDA requesting that MYOTROPHIN (rhIGF-I) be approved for the treatment of ALS in
the United States, and a marketing authorization application is being prepared
for filing in Europe.
. Laboratoire L. Lafon
In January 1993, the Company licensed from Laboratoire L. Lafon ("Lafon"),
a French pharmaceutical company, the exclusive rights in the United States and
Mexico to develop, market and sell PROVIGIL (modafinil). The license was
expanded in July 1993 to add the United Kingdom and the Republic of Ireland and
was further expanded in September 1995 to include Japan. The agreement provides
for annual fees to be paid to Lafon to maintain the license to modafinil in each
of the years 1993 through 1997. Annual maintenance fees in the amount of
$1,633,000, $1,633,000 and $1,133,000 were paid to Lafon in the years 1996, 1995
and 1994, respectively, and recorded as research and development expense.
Under the terms of this arrangement, Lafon is to supply finished product
for the Company's use in conducting clinical trials, and is to supply modafinil
in bulk form for the Company's commercial uses in its territories. Trademark and
license royalties are payable to Lafon upon commercial sales of PROVIGIL
(modafinil) by Cephalon, in addition to compensation based upon product sales
payable under the supply agreement.
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<PAGE>
The Company's rights in Japan are contingent upon entering into an
agreement for commercialization of PROVIGIL (modafinil) with a Japanese partner
by August 1997. The agreement also is subject to termination in customary
circumstances, such as a breach of contract by the other party.
The Company recently submitted an NDA with the FDA requesting that
PROVIGIL (modafinil) be approved for the treatment of the excessive daytime
sleepiness associated with narcolepsy. The Company is to pay Lafon certain
milestone payments upon regulatory approval (see Note 6).
11. INCOME TAXES
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $75,000,000, which will begin to
expire in 2003. The net operating loss carryforwards differ from the accumulated
deficit principally due to differences in the recognition of certain research
and development expenses for financial and federal income tax reporting.
The amount of net operating loss carryforwards which can be utilized in
any one period will be limited by federal income tax regulations since a
cumulative change in ownership of more than 50% has occurred within a three year
period. The Company does not believe that such limitation will have a material
adverse impact on the utilization of its carryforwards.
Significant components of the Company's deferred tax assets for federal
and state income taxes as of December 31, is as follows:
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Net operating loss carryforwards............................................................. $ 25,550,000 $ 21,144,000
Capitalized research and development expenditures............................................ 23,638,000 17,832,000
Other--net.................................................................................... 257,000 (381,000)
------------ -------------
Total deferred tax assets.................................................................... 49,445,000 38,595,000
Valuation allowance for deferred tax assets.................................................. (49,445,000) (38,595,000)
------------ -------------
Net deferred tax assets...................................................................... $ -- $ --
============ =============
</TABLE>
A valuation allowance was established for 100% of the deferred tax assets
as realization of the tax benefits is not assured.
12. SUBSEQUENT EVENTS
In 1997 the Company announced an agreement to issue, in a private
placement, $30,000,000 of senior convertible notes. The convertible notes mature
in January 1998 and bear interest at a rate of seven percent per annum. The
Company will record the notes at their face value and accrue interest at the
seven percent rate on the outstanding amount of the notes. The notes are
convertible into common stock of the Company, subject to certain limitations, at
a six percent discount to a market price formula at the time of conversion. If
not converted into common stock prior to maturity, the securities will be
exchanged for 10 3/4% debentures which mature in 2013. The convertible notes
cannot be converted at a price less than $25 per share until 75 days after the
effectiveness of the registration statement. The Company may redeem the notes,
at a redemption price equal to 110 percent of the outstanding principal amount
plus interest, if the conversion price falls below approximately $21 per share.
The closing of the placement is subject to the effectiveness of a registration
statement filed by the Company with the Securities and Exchange Commission
covering the resale by the investors of up to 1,430,000 shares of common stock
issuable upon conversion of the convertible notes.
57
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
58
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions held by the directors and executive officers
of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Frank Baldino, Jr., Ph.D........................... 43 Director, President and Chief Executive Officer and
founder of the Company
Bruce A. Peacock................................... 45 Director, Executive Vice President and Chief Operating
Officer
J. Kevin Buchi..................................... 41 Senior Vice President, Finance and Chief Financial Officer
Joseph J. Day, Jr.................................. 55 Senior Vice President, Worldwide Business Development
Peter E. Grebow, Ph.D.............................. 50 Senior Vice President, Drug Development
Barbara S. Schilberg............................... 47 Senior Vice President, Secretary and General Counsel
Jeffry L. Vaught, Ph.D............................. 46 Senior Vice President, Research
Kenneth P. Wolski.................................. 54 Senior Vice President, Worldwide Clinical Research and
Regulatory Affairs
William P. Egan(1)................................. 52 Director
Robert J. Feeney, Ph.D.(2)......................... 71 Director
Martyn D. Greenacre(1)............................. 55 Director
Kevin E. Moley(1).................................. 50 Director
Horst Witzel, Dr.-Ing.(2).......................... 69 Director
</TABLE>
- -------------------------------------------------------------------
(1) Members of the Audit Committee of the Board of Directors.
(2) Members of the Stock Option and Compensation Committee of the Board of
Directors.
All directors hold office until the next annual meeting of the stockholders
of the Company and until their successors are elected and qualified or until
their earlier resignation or removal.
All executive officers are elected annually by the Board of Directors to
serve in their respective capacities until their successors are elected and
qualified or until their earlier resignation or removal.
Dr. Baldino, the founder of the Company, has served as President, Chief
Executive Officer and a director since its inception. Dr. Baldino holds several
adjunct academic appointments, including Adjunct Professor of Pharmacology at
Temple University Medical School, Adjunct Professor of Physiology and Biophysics
and Adjunct Professor of Neurology at Hahnemann University. Dr. Baldino received
his Ph.D. degree from Temple University. Dr. Baldino currently serves as a
director of ViroPharma, Inc., Integrated Systems Consulting Group and Adolor
Corporation.
Mr. Peacock has served as a director, Executive Vice President and Chief
Operating Officer since February 1994. For the previous two years, Mr. Peacock
served as Executive Vice President and Chief Financial Officer and Treasurer of
the Company. From 1982 to January 1992, Mr. Peacock was employed by Centocor,
Inc., a biopharmaceutical company, most recently as Senior Vice President and
Chief Financial Officer, Treasurer and
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<PAGE>
Assistant Secretary. Mr. Peacock holds a B.A. degree from Villanova University
and is a Certified Public Accountant.
Mr. Buchi joined the Company as Controller in March 1991 and held several
financial positions with the Company prior to being appointed Vice President,
Finance and Chief Financial Officer in June 1995. Between 1985 and 1991
Mr. Buchi served in a number of financial positions with E.I. duPont de Nemours
and Company. Mr. Buchi received his M.M. degree from the J.L. Kellogg Graduate
School of Management in 1982 and is a certified public accountant.
Mr. Day joined the Company in October 1994 as Senior Vice President,
Worldwide Business Development. Before joining the Company, he served as Vice
President of Business Development with the Wyeth-Ayerst Division of American
Home Products Corp. from May 1990 to September 1994.
Dr. Grebow has headed the Company's drug development operations since
joining the Company in January 1991 and currently serves as Senior Vice
President, Drug Development. From 1988 to 1990, Dr. Grebow served as Vice
President of Drug Development for Rorer Central Research, a division of
Rhone-Poulenc Rorer Pharmaceuticals Inc., a pharmaceutical company. Dr. Grebow
received his Ph.D. degree in Chemistry from the University of California, Santa
Barbara.
Ms. Schilberg joined the Company as Vice President, Secretary and General
Counsel in June 1994. From 1989 to 1994, she was a partner in the Business and
Finance section of the law firm of Morgan, Lewis & Bockius. Ms. Schilberg
received a J.D. degree from the University of Virginia.
Dr. Vaught has headed the Company's research operations since joining the
Company in August 1991 and currently serves as Senior Vice President, Research.
Prior to joining the Company, Dr. Vaught served as Assistant Director, CNS
Research, for the R.W.J. Pharmaceutical Research Institute, a subsidiary of
Johnson & Johnson, a pharmaceutical and consumer products company and CNS
Therapeutic Team Leader for Johnson & Johnson sector management from 1990 to
1991. Dr. Vaught received his Ph.D. degree from the University of Minnesota.
Dr. Wolski joined Cephalon in January 1997 as Senior Vice President,
Worldwide Clinical Research and Regulatory Affairs. Dr. Wolski has 17 years of
clinical research and drug development experience, most recently serving as Vice
President, Medical Operations at Bristol-Myers Squibb Company from 1996 until
January 1997. From 1993 to 1996, Dr. Wolski was Executive Vice President,
Research and Development of Pfizer, Inc., Japan. He served as Vice President,
Strategy and Policy of Merck Research Laboratories from 1991 to 1993. Dr. Wolski
received his doctor of medicine degree from Northwestern University.
Mr. Egan was elected to the Board of Directors in 1988. Since 1979,
Mr. Egan has served as President of Burr, Egan, Deleage & Co., a venture capital
company. He also is a general partner of ALTA Communications VI, L.P., a venture
capital firm founded in 1996. Mr. Egan currently serves as a director of
Broderbund Software, Inc.
Dr. Feeney was elected to the Board of Directors in 1988. Since October
1987, Dr. Feeney has served as a general partner of Hambrecht & Quist Life
Science Technology Fund, a life sciences venture capital fund affiliated with
Hambrecht & Quist Incorporated. For 37 years prior thereto, Dr. Feeney was
employed at Pfizer Inc., a pharmaceutical company, and last served as its Vice
President of Licensing and Development. Dr. Feeney currently serves as a
director of QLT PhotoTherapeutics Inc.
Mr. Greenacre was appointed to the Board of Directors in October 1992.
From 1993 to 1996, Mr. Greenacre served with Zynaxis Inc., a biopharmaceutical
company, as President, Chief Executive Officer and a director. From 1989 to
1992, Mr. Greenacre served as Chairman Europe, SmithKline Beecham
Pharmaceuticals. He joined SmithKline & French, the predecessor to SmithKline
Beecham, in 1973 where he held increasingly responsible positions in commercial
operations and management. Mr. Greenacre currently serves as a director of IBAH,
Inc., Creative Biomolecules, Inc., and Genset s.a.
Mr. Moley was appointed to the Board of Directors in 1994. In January 1996,
Mr. Moley was appointed president and CEO of Integrated Medical Systems, where
he has served as a director since 1994. From February 1993 to December 1995,
Mr. Moley was Senior Vice President of PCS Health Systems, a provider of
prescription management services. From 1984 to 1993 he held positions of
increasing responsibility with the U.S. Department of Health and Human Services.
Dr. Witzel was appointed to the Board of Directors in January 1991. From
1986 until his retirement in 1989, Dr. Witzel served as the Chairman of the
Board of Executive Directors of Schering AG (a German pharmaceutical company)
and, prior to 1986, was a member of the Board of Executive Directors in charge
of Production and Technology. Dr. Witzel currently serves as a director of The
Liposome Company, Inc. and Aastrom Biosciences, Inc.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
information under the caption "Compensation of Executive Officers and Directors"
in the Company's definitive proxy statement for the 1997 annual meeting of
stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" in the Company's definitive proxy statement for the 1997 annual
meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
in the Company's definitive proxy statement for the 1997 annual meeting of
stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
The following is a list of the consolidated financial statements of the
Company and its subsidiaries and supplementary data included in this report
under Item 8.
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Schedules
All schedules are omitted because they are not applicable or are not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter.
61
<PAGE>
Exhibits
The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parenthesis.
Exhibit
-------
No.
---
*3.1 Restated Certificate of Incorporation, as amended.
*3.2 Bylaws of the Registrant, as amended.
4.1 Specimen copy of stock certificate for shares of Common Stock of
the Registrant (Exhibit 4.1)(11).
4.2 Rights Agreement, dated as of November 12, 1993, between
Cephalon, Inc. and Chemical Bank, as Rights Agent (Exhibit
4.1)(10).
10.1 Letter agreement dated March 22, 1995, between Cephalon, Inc. and
the Salk Institute for Biotechnology Industrial Associates, Inc.
(Exhibit 99.1)(17).
10.2(a) An Agreement, dated May 23, 1990, between Cephalon, Inc. and
Schering Corporation, a wholly-owned subsidiary of Schering-
Plough Corporation (Exhibit 10.6)(2)(19).
10.2(b) Amendment dated June 20, 1994 amending Agreement between
Cephalon, Inc. and Schering Corporation (16).
10.2(c) Amendment No. 2 dated November 27, 1995 amending Agreement
between Cephalon, Inc. and Schering Corporation (Exhibit
10.2(c))(19).
10.3 Stock Purchase Agreement dated July 28, 1995, between Cephalon,
Inc. and Kyowa Hakko Kogyo Co., Ltd. (Exhibit 99.3)(18).
10.4(a) License Agreement, dated May 15, 1992, between Cephalon, Inc. and
Kyowa Hakko Kogyo Co., Ltd. (Exhibit 10.6)(4)(19).
10.4(b) Letter agreement dated March 6, 1995 amending License Agreement
between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd. (Exhibit
10.4(6)) (16)(20).
10.5(a) Supply Agreement, dated January 20, 1993, between Cephalon, Inc.
and Laboratoire L. Lafon (Exhibit 10.1)(7)(19).
10.5(b) License Agreement, dated January 20, 1993, between Cephalon, Inc.
and Laboratoire L. Lafon (Exhibit 10.2)(7)(19).
10.5(c) Trademark Agreement, dated January 20, 1993, between Cephalon,
Inc. and an affiliate of Laboratoire L. Lafon (Exhibit
10.3)(7)(19).
10.5(d) Amendment to License Agreement and Supply Agreement, dated July
21, 1993, between Cephalon, Inc. and Laboratoire L. Lafon
(Exhibit 10.1)(11)(12).
10.5(e) Amendment to Trademark Agreement, dated July 21, 1993, between
Cephalon, Inc. and an affiliate of Laboratoire L. Lafon (Exhibit
10.2)(12)(19).
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<PAGE>
10.5(f) Amendment No. 3 to License Agreement dated June 8, 1995,
Cephalon, Inc. and Laboratoire L. Lafon (Exhibit 99.2)(17).
10.5(g) Amendment No. 4 to License Agreement and Supply Agreement dated
August 23, 1995, Cephalon, Inc. and Laboratoire L. Lafon (Exhibit
10.5(g))(19).
+10.6(a) Cephalon, Inc. Amended and Restated 1987 Stock Option Plan
(Exhibit 10.7)(4).
+10.6(b) Cephalon, Inc. Equity Compensation Plan (Exhibit 10.6(6))(19).
+10.6(c) Cephalon, Inc. Non-Qualified Deferred Compensation Plan
(Exhibit 10.6(c))(11).
10.7 Form of Note Purchase Agreement, dated as of January 15, 1997,
between Cephalon, Inc. and the several purchasers of Cephalon's
Senior Convertible Notes, without exhibits (10.1)(20).
10.8(a) Stadol NS Co-promotion Agreement between Cephalon, Inc. and
Bristol-Myers Squibb Company, dated as of July 22, 1994
(Exhibit 99.1)(15).
10.8(b) Amendment No. 1 dated August 29, 1995 amending Agreement
between Cephalon, Inc. and Bristol-Myers Squibb Company
(Exhibit 10.8(b))(19).
10.8(c) Amendment No. 2 dated February 8, 1996 amending Agreement
between Cephalon, Inc. and Bristol-Myers Squibb Company
(Exhibit 10.8(c))(19).
10.8(d) Serzone Co-promotion Agreement between Cephalon, Inc. and
Bristol-Myers Squibb Company, dated as of February 8, 1996
(Exhibit 10.8(d))(19).
10.9 Deliberately omitted.
10.10(a) Amended and Restated Agreement of Limited Partnership, dated as
of June 22, 1992, by and among Cephalon Development
Corporation, as general partner, and each of the limited
partners of Cephalon Clinical Partners, L.P. (Exhibit 10.1)(6).
10.10(b) Amended and Restated Product Development Agreement, dated as of
August 11, 1992, by and between the Registrant and Cephalon
Clinical Partners, L.P. (Exhibit 10.2)(6).
10.10(c) Purchase Agreement, dated as of August 11, 1992, by and between
the Registrant and each of the limited partners of Cephalon
Clinical Partners, L.P. (Exhibit 10.3)(6).
10.10(d) Form of Series A Warrant to purchasers of Units including a
limited partnership interest in Cephalon Clinical Partners,
L.P. (Exhibit 10.4)(6).
10.10(e) Form of Series B Warrant to purchasers of Units including a
limited partnership interest in Cephalon Clinical Partners,
L.P. (Exhibit 10.5)(6).
10.10(f) Incentive Warrant to purchase 115,050 shares of Common Stock of
the Registrant issued to PaineWebber Incorporated (Exhibit
10.6)(6).
10.10(g) Fund Warrant to purchase 19,950 shares of Common Stock of the
Registrant issued to PaineWebber R&D Partners III, L.P.
(Exhibit 10.7)(6).
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<PAGE>
10.10(h) Pledge Agreement, dated as of August 11, 1992, by and between
Cephalon Clinical Partners, L.P. and the R Registrant (Exhibit
10.8)(6).
10.10(i) Promissory Note, dated as of August 11, 1992, issued by
Cephalon Clinical Partners, L.P. to the Registrant (Exhibit
10.9)(6).
10.10(j) Form of Promissory Note, issued by each of the limited partners
of Cephalon Clinical Partners, L.P. to Cephalon Clinical
Partners, L.P. (Exhibit 10.10)(6).
10.11 Supply, Distribution and License Agreement, dated as of July
27, 1993, by and between Kyowa Hakko Kogyo Co., Ltd. and
Cephalon, Inc. (Exhibit 10.3)(12).
10.12(a) Agreement between Cephalon, Inc. and Chiron Corporation dated
as of January 7, 1994 (Exhibit 10.1)(13).
10.12(b) Letter agreement dated January 13, 1995 amending Agreement
between Cephalon, Inc. and Chiron Corporation (Exhibit
10.12(b))(16).
10.12(c) Letter agreement dated May 23, 1995 amending Agreement between
Cephalon, Inc. and Chiron Corporation (19).
*10.13(b) Amendment dated June 28, 1996 amending Agreement between
Cephalon, Inc. and TAP Holdings Inc.(21)
10.13(a) Agreement between Cephalon, Inc. and TAP Holdings Inc.
(formerly TAP Pharmacueticals Inc.) dated as of May 17, 1994
(Exhibit 99.2)(14)(19).
10.14 Collaborative Agreement between Cephalon, Inc. and SmithKline
Beecham plc dated June 8, 1993 (Exhibit 99.2)(9)(16).
*21 Subsidiaries of Cephalon, Inc.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Clark & Elbing LLP.
*24 Power of Attorney (included on the signature page to this Form
10-K Report).
*27 Financial Data Schedule
- ------------------------------
* Filed herewith.
+ Compensatory plan required to be filed as an exhibit to this annual
report on Form 10-K.
(1) Filed as an Exhibit to the Registration Statement on Form S-1 filed
on March 15, 1991.
(2) Filed as an Exhibit to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-1 (Registration No. 33-39413) filed
on April 19, 1991.
(3) Filed as an Exhibit to Pre-Effective Amendment No. 2 to the
Registration Statement on Form S-1 (Registration No. 33-39413) filed
on April 22, 1991.
(4) Filed as an Exhibit to the Transition Report on Form 10-K for
transition period from January 1, 1991 to December 31, 1991, as
amended by Amendment No. 1 filed in September 4, 1992 on Form 8.
(5) Filed as an Exhibit to the Company's Current Report on Form 8-K filed
on December 31, 1992.
(6) Filed as an Exhibit to the Registration Statement on Form S-3
(Registration No. 33-56816) filed on January 7, 1993.
(7) Filed as an Exhibit to the Registration Statement on Form S-3
(Registration No. 33-58006) filed on February 8, 1993.
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<PAGE>
(8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.
(9) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
June 8, 1993.
(10) Filed as an Exhibit to the Company's Current Report on Form 8-K filed
on November 12, 1993.
(11) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.
(12) Filed as an Exhibit to the Registration Statement on Form S-3
(Registration No. 33-73896) filed on January 10, 1994.
(13) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
on January 10, 1994.
(14) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
May 17, 1994.
(15) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
July 22, 1994.
(16) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
(17) Filed as an Exhibit to the Registration Statement on Amendment No. 1
to Form S-3 (Registration No. 33-93964) filed on June 30, 1995.
(18) Filed as an Exhibit to the Registration Statement on Amendment No. 2
to Form S-3 (Registration No. 33-93964) filed on July 31, 1995.
(19) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(20) Filed as an Exhibit to the Registration Statement on Form S-3
(Registration No. 333-20321) filed on January 24, 1997.
(21) Portions of the Exhibit have been omitted and have been filed
separately pursuant to an application for confidential treatment
filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 12, 1997 CEPHALON, INC.
By: /s/ FRANK BALDINO, JR., PH.D.
-------------------------------------
Frank Baldino, Jr., Ph.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Frank
Baldino, Jr. or Bruce A. Peacock, and each of them acting alone, his true and
lawful attorney-in-fact, with full power of substitution, to execute and cause
to be filed with the Securities and Exchange Commission any or all amendments to
this report.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
By: /s/ FRANK BALDINO, JR., PH.D. President, Chief Executive March 12, 1997
- ------------------------------------ Officer and Director
Frank Baldino, Jr., Ph.D. (Principal executive
officer)
By: /s/ BRUCE A. PEACOCK Executive Vice President, March 12, 1997
- ------------------------------------ Chief Operating Officer
Bruce A. Peacock and Director
By: /s/ J. KEVIN BUCHI Senior Vice President, Finance March 12, 1997
- ------------------------------------ and Chief Financial Officer
J. Kevin Buchi (Principal financial and
accounting officer)
By: /s/ WILLIAM P. EGAN Director March 12, 1997
- ------------------------------------
William P. Egan
By: /s/ ROBERT J. FEENEY, PH.D. Director March 12, 1997
- ------------------------------------
Robert J. Feeney, Ph.D.
By: /s/ MARTYN D. GREENACRE Director March 12, 1997
- ------------------------------------
Martyn D. Greenacre
By: /s/ KEVIN E. MOLEY Director March 12, 1997
- ------------------------------------
Kevin E. Moley
By: /s/ HORST WITZEL, DR.-ING. Director March 12, 1997
- ------------------------------------
Horst Witzel, Dr.-Ing.
</TABLE>
66
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
-------
No.
---
<S> <C>
3.1 Restated Certificate of Incorporation, as amended.
3.2 Bylaws of the Registrant, as amended.
*10.13(b) Amendment dated June 28, 1996 amending Agreement between
Cephalon, Inc. and TAP Holdings Inc.
21 Subsidiaries of Cephalon, Inc.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Clark & Elbing LLP.
24 Power of Attorney (included on the signature page to this Form
10-K Report).
27 Financial Data Schedule
</TABLE>
- ------------------------------
* Portions of the Exhibit have been omitted and have been filed separately
pursuant to an application for confidential treatment filed with the
Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
CEPHALON, INC.
FIRST: The name of the corporation is Cephalon, Inc.
SECOND: The address of the registered office of the corporation in
the State of Delaware is Corporation Trust Center, 1209 Orange Street, City of
Wilmington, County of New Castle. The name of the registered agent of the
corporation at such address is The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporation may be
organized under the General Corporation Law of Delaware.
FOURTH: The total number of shares of stock which the corporation
shall have authority to issue is one hundred-five million (105,000,000), of
which one hundred million (100,000,000) shares are Common Stock and five million
(5,000,000) shares are Preferred Stock, and the par value of each of such shares
is one cent ($0.01), amounting in the aggregate to one million fifty thousand
dollars ($1,050,000).
DIVISION ONE--PREFERRED STOCK
Part A - General Terms
The Board of Directors is authorized, subject to limitations
prescribed by law and the provisions of the Article FOURTH, to provide for the
issuance of the shares of Preferred Stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each such series shall
include, but not limited to, determination of the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series;
<PAGE>
(c) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(e) Whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption, including the date
or date upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(f) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(g) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the corporation,
and the relative rights of priority, if any, of payment of shares of that
series;
(h) Any other relative rights, preferences and limitations of that
series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the Common Stock with respect to the same
dividend period.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of the corporation, the assets available for distribution to holders of shares
of Preferred Stock of all series shall be insufficient to pay such holders the
full preferential amount to which they are entitled, then such assets shall be
distributed ratably among the shares of all series of Preferred Stock in
accordance with the respective preferential amounts (including unpaid cumulative
dividends, if any) payable with respect thereto.
Part B - Designation, Preferences, and Rights of
the Series A Junior Participating Preferred Shares
The first series of the Preferred Stock authorized in this Part B consists
of one million (1,000,000) shares designated as Series A Junior Participating
Preferred Shares (the "Series A Preferred Shares").
Section 1. Dividends and Distributions.
---------------------------
(a) The rate of dividends payable per share of Series A Preferred
Shares on the first day of January, April, July and October in each year or
such other quarterly payment date as shall be specified by the Board of
Directors (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly
-2-
<PAGE>
Dividend Payment Date after the first issuance of a share or fraction of a
share of the Series A Preferred Shares, shall be (rounded to the nearest
cent) equal to the greater of (i) $1.00 or (ii) subject to the provision
for adjustment hereinafter set forth, 100 times the aggregate per share
amount of all cash dividends, and 100 times the aggregate per share amount
(payable in cash, based upon the fair market value at the time the non-cash
dividend or other distribution is declared or paid as determined in good
faith by the Board of Directors) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise), declared on the Common Stock, $.01 par value, of the
corporation since the immediately preceding Quarterly Dividend Payment
Date, or, with respect to the first Quarterly Dividend Payment Date, since
the first issuance of any share or fraction of a share of the Series A
Preferred Shares. Dividends on the Series A Preferred Shares shall be paid
out of funds legally available for such purpose. In the event the
corporation shall at any time after November 12, 1993 (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding shares of Common
Stock, or (iii) combine the outstanding shares of Common Stock into a
smaller number of shares, then in each such case the amounts to which
holders of Series A Preferred Shares were entitled immediately prior to
such event under clause (ii) of the preceding sentence shall be adjusted by
multiplying each such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(b) Dividends shall begin to accrue and be cumulative on outstanding
Series A Preferred Shares from the Quarterly Dividend Payment Date next
preceding the date of issue of such Series A Preferred Shares, unless the
date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless the
date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of Series A Preferred Shares
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on
the Series A Preferred Shares in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro-rata on a share-by-share basis among all such shares at the
time outstanding.
Section 2. Voting Rights. In addition to any other voting rights
-------------
required by law, the holders of Series A Preferred Shares shall have the
following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth,
each Series A Preferred Share shall entitle the holder thereof to 100 votes
on all matters submitted to a vote of the stockholders of the corporation.
In the event the corporation shall at any time after the Rights Declaration
Date (i) declare any dividend on Common Stock payable in
-3-
<PAGE>
shares of Common Stock, (ii) subdivide the outstanding shares of Common
Stock, or (iii) combine the outstanding shares of Common Stock into a
smaller number of shares, then in each such case the number of votes per
share to which holders of Series A Preferred Shares were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(b) In the event that dividends upon the Series A Preferred Shares
shall be in arrears to an amount equal to six full quarterly dividends
thereon, the holders of such Series A Preferred Shares shall become
entitled to the extent hereinafter provided to vote noncumulatively at all
elections of directors of the corporation, and to receive notice of all
stockholders' meetings to be held for such purpose. At such meetings, to
the extent that directors are being elected, the holders of such Series A
Preferred Shares voting as a class shall be entitled solely to elect two
members of the Board of Directors of the corporation; and all other
directors of the corporation shall be elected by the other stockholders of
the corporation entitled to vote in the election of directors. Such voting
rights of the holders of such Series A Preferred Shares shall continue
until all accumulated and unpaid dividends thereon shall have been paid or
funds sufficient therefor set aside, whereupon all such voting rights of
the holders of shares of such series shall cease, subject to being again
revived from time to time upon the reoccurrence of the conditions above
described as giving rise thereto.
At any time when such right to elect directors separately as a class
shall have so vested, the corporation may, and upon the written request of
the holders of record of not less than 20% of the then outstanding total
number of shares of all the Series A Preferred Shares having the right to
elect directors in such circumstances shall, call a special meeting of
holders of such Series A Preferred Shares for the election of directors.
In the case of such a written request, such special meeting shall be held
within 90 days after the delivery of such request, and, in either case, at
the place and upon the notice provided by law and in the By-laws of the
corporation; provided, that the corporation shall not be required to call
such a special meeting if such request is received less than 120 days
before the date fixed for the next ensuing annual or special meeting of
stockholders of the corporation. Upon the mailing of the notice of such
special meeting to the holders of such Series A Preferred Shares, or, if no
such meeting be held, then upon the mailing of the notice of the next
annual or special meeting of stockholders for the election of directors,
the number of directors of the corporation shall, ipso facto, be increased
to the extent, but only to the extent, necessary to provide sufficient
vacancies to enable the holders of such Series A Preferred Shares to elect
the two directors hereinabove provided for, and all such vacancies shall be
filled only by vote of the holders of such Series A Preferred Shares as
hereinabove provided. Whenever the number of directors of the corporation
shall have been increased, the number as so increased may thereafter be
further increased or decreased in such manner as may be permitted by the
By-laws and without the vote of the holders of Series A Preferred Shares,
provided that no such action shall impair the right of
-4-
<PAGE>
the holders of Series A Preferred Shares to elect and to be represented by
two directors as herein provided.
So long as the holders of Series A Preferred Shares are entitled
hereunder to voting rights, any vacancy in the Board of Directors caused by
the death or resignation of any director elected by the holders of Series A
Preferred Shares, shall, until the next meeting of shareholders for the
election of directors, in each case be filled by the remaining director
elected by the holders of Series A Preferred Shares having the right to
elect directors in such circumstances.
Upon termination of the voting rights of the holders of any series of
Series A Preferred Shares the terms of office of all persons who shall have
been elected directors of the corporation by vote of the holders of Series
A Preferred Shares or by a director elected by such holders shall forthwith
terminate.
(c) Except as otherwise provided herein, in the articles of the
corporation or by law, the holders of Series A Preferred Shares and the
holders of Common Stock (and the holders of shares of any other series or
class entitled to vote thereon) shall vote together as one class on all
matters submitted to a vote of stockholders of the corporation.
Section 3. Reacquired Shares. Any Series A Preferred Shares
-----------------
purchased or otherwise acquired by the corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
Series Preferred Stock and may be reissued as part of a new series of
Series Preferred Stock to be created by resolution or resolutions of the
Board of Directors.
Section 4. Liquidation, Dissolution or Winding Up. In the event of
--------------------------------------
any voluntary or involuntary liquidation, dissolution or winding up of the
corporation, the holders of Series A Preferred Shares shall be entitled to
receive the greater of (a) $9,000.00 per share, plus accrued dividends to
the date of distribution, whether or not earned or declared, or (b) an
amount per share, subject to the provision for adjustment hereinafter set
forth, equal to 100 times the aggregate amount to be distributed per share
to holders of Common Stock. In the event the corporation shall at any time
after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding shares of
Common Stock, or (iii) combine the outstanding shares of Common Stock into
a smaller number of shares, then in each such case the amount to which
holders of Series A Preferred Shares were entitled immediately prior to
such event pursuant to clause (b) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
-5-
<PAGE>
Section 5. Consolidation, Merger, etc. In case the corporation shall
--------------------------
enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property, then in any such case
the Series A Preferred Shares shall at the same time be similarly exchanged
or changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or
(iii) combine the outstanding shares of Common Stock into a smaller number
of shares, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Series A
Preferred Shares shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
Section 6. No Redemption. The Series A Preferred Shares shall not be
-------------
redeemable.
Section 7. Ranking. The Series A Preferred Shares shall rank junior
-------
to all other series of the corporation's Series Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of
any such series shall provide otherwise.
Section 8. Fractional Shares. Series A Preferred Shares may be
-----------------
issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of
all other rights of holders of Series A Preferred Shares.
FIFTH: The Board of Directors is authorized to make, alter or repeal the
By-laws of the corporation. Election of directors need not be by ballot.
SIXTH: A Director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the Director derived any improper
personal benefit. If the Delaware General Corporation Law is hereafter amended
to authorize, with the approval of a corporation's stockholders, further
reductions in the liability of the corporation's directors for breach of
fiduciary duty, then a Director of the corporation shall not be liable for any
such breach to the fullest extent permitted by the Delaware General Corporation
Law as so amended. Any repeal or modification of the foregoing provisions of
this Article SIXTH by the stockholders of the
-6-
<PAGE>
corporation shall not adversely affect any right or protection of a Director of
the corporation existing at the time of such repeal or modification.
-7-
<PAGE>
B Y L A W S
OF
CEPHALON, INC.
(a Delaware Corporation)
. . .oo0oo. . .
ARTICLE I
Office and Fiscal Year
SECTION 1.01. Registered Office. -- The registered office of the
-----------------
corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware until otherwise established by resolution of the board of directors,
and a certificate certifying the change is filed in the manner provided by
statute.
SECTION 1.02. Other Offices. -- The corporation may also have offices
-------------
at such other places within or without the State of Delaware as the board of
directors may from time to time determine or the business of the corporation
requires.
SECTION 1.03. Fiscal Year. -- The fiscal year of the corporation
-----------
shall end on the 30th of June in each year.
ARTICLE II
Meetings of Stockholders
SECTION 2.01. Place of Meeting. -- All meetings of the stockholders
----------------
of the corporation shall be held at the registered office of the corporation, or
at such other place within or without the State of Delaware as shall be
designated by the board of directors in the notice of such meeting.
SECTION 2.02. Annual Meeting. -- The board of directors shall fix the
--------------
date and time of the annual meeting of the stockholders, but if no such date and
time is fixed by the board, the meeting for any calendar year shall be held on
the third Tuesday of October in such year, if not a legal holiday under the laws
of Delaware, and, if a legal holiday, then on the next succeeding business day,
not a Saturday, at 10:00 o'clock A.M., and at said meeting the stockholders then
entitled to vote shall elect directors and shall transact such other business as
may properly be brought before the meeting.
<PAGE>
SECTION 2.03. Special Meetings. -- Special meetings of the
----------------
stockholders of the corporation may be called at any time by the chairman of the
board, a majority of the board of directors, the president, or at the request,
in writing, of stockholders entitled to cast at least a majority of the votes
that all stockholders are entitled to cast at the particular meeting. At any
time, upon the written request of any person or persons who have duly called a
special meeting, which written request shall state the purpose or purposes of
the meeting, it shall be the duty of the secretary to fix the date of the
meeting which shall be held at such date and time as the secretary may fix, not
less than ten nor more than 60 days after the receipt of the request, and to
give due notice thereof. If the secretary shall neglect or refuse to fix the
time and date of such meeting and give notice thereof, the person or persons
calling the meeting may do so.
SECTION 2.04. Notice of Meetings. -- Written notice of the place,
------------------
date and hour of every meeting of the stockholders, whether annual or special,
shall be given to each stockholder of record entitled to vote at the meeting not
less than ten nor more than 60 days before the date of the meeting. Every
notice of a special meeting shall state the purpose or purposes thereof. If the
notice is sent by mail, it shall be deemed to have been given when deposited in
the United States mail, postage prepaid, directed to the stockholder at the
address of the stockholder as it appears on the records of the corporation.
SECTION 2.05. Quorum, Manner of Acting and Adjournment.
----------------------------------------
(a) Quorum. -- The holders of a majority of the shares entitled to
------
vote, present in person or represented by proxy, shall constitute a quorum at
all meetings of the stockholders except as otherwise provided by the Delaware
General Corporation Law ("DGCL"), by the certificate of incorporation or by
these bylaws. If a quorum is not present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum is present
or represented. At any such adjourned meeting at which a quorum is present or
represented, the corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than 30
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
(b) Manner of Acting. -- Directors shall be elected by a plurality of
----------------
the votes of the shares present in person or represented by proxy at the meeting
and entitled to vote on the election of directors. In all matters other than
the election of directors, the affirmative vote of the majority of shares
present in person or represented by proxy at the meeting and entitled to vote
thereon shall be the act of the stockholders, unless the question is one upon
which, by express provision of the applicable statute, the certificate of
incorporation or these bylaws, a different vote is required in which case such
express provision shall govern and control the decision of the question. The
stockholders present in person or by
-2-
<PAGE>
proxy at a duly organized meeting can continue to do business until adjournment,
notwithstanding withdrawal of enough stockholders to leave less than a quorum.
SECTION 2.06. Organization. -- At every meeting of the stockholders,
------------
the chairman of the board, if there be one, or in the case of a vacancy in the
office or absence of the chairman of the board, one of the following persons
present in the order stated: the vice chairman, if one has been appointed, the
president, the vice presidents in their order of rank or seniority, a chairman
designated by the board of directors or a chairman chosen by the stockholders
entitled to cast a majority of the votes which all stockholders present in
person or by proxy are entitled to cast, shall act as chairman, and the
secretary, or, in the absence of the secretary, an assistant secretary, or in
the absence of the secretary and the assistant secretaries, a person appointed
by the chairman, shall act as secretary.
SECTION 2.07. Voting.
------
(a) General Rule. -- Unless otherwise provided in the certificate of
------------
incorporation, each stockholder shall be entitled to one vote, in person or by
proxy, for each share of capital stock having voting power held by such
stockholder.
(b) Voting and Other Action by Proxy. --
--------------------------------
(1) A stockholder may execute a writing authorizing another person or
persons to act for the stockholder as proxy. Such execution may be
accomplished by the stockholder or the authorized officer, director,
employee or agent of the stockholder signing such writing or causing his or
her signature to be affixed to such writing by any reasonable means
including, but not limited to, by facsimile signature. A stockholder may
authorize another person or persons to act for the stockholder as proxy by
transmitting or authorizing the transmission of a telegram, cablegram, or
other means of electronic transmission to the person who will be the holder
of the proxy or to a proxy solicitation firm, proxy support service
organization or like agent duly authorized by the person who will be the
holder of the proxy to receive such transmission if such telegram,
cablegram or other means of electronic transmission sets forth or is
submitted with information from which it can be determined that the
telegram, cablegram or other electronic transmission was authorized by the
stockholder.
(2) No proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period.
(3) A duly executed proxy shall be irrevocable if it states that it is
irrevocable and if, and only so long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is
an interest in the stock itself or an interest in the corporation
generally.
-3-
<PAGE>
SECTION 2.08. Consent of Stockholders in Lieu of Meeting. -- Any action
------------------------------------------
required to be taken at any annual or special meeting of stockholders of the
corporation, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize to take such
action at a meeting at which all shares entitled to vote thereon were present
and voted and shall be delivered to the corporation by delivery to its
registered office in Delaware, its principal place of business, or an officer or
agent of the corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Every written consent shall bear the
date of signature of each stockholder who signs the consent and no written
consent shall be effective to take the corporate action referred to therein
unless, within 60 days of the earliest dated consent delivered in the manner
required in this section to the corporation, written consents signed by a
sufficient number of holders to take action are delivered to the corporation by
delivery to its registered office in Delaware, its principal place of business,
or an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
SECTION 2.09. Voting Lists. -- The officer who has charge of the stock
------------
ledger of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting. The list shall be arranged in alphabetical order, showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 2.10. Inspectors of Election.
----------------------
(a) Appointment. -- All elections of directors shall be by written ballot,
-----------
unless otherwise provided in the certificate of incorporation; the vote upon any
other matter need not be by ballot. In advance of any meeting of stockholders
the board of directors may appoint one or more inspectors, who need not be
stockholders, to act at the meeting and to make a written report thereof. The
board of directors may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate is able to
act at a meeting of stockholders, the person presiding at the meeting shall
appoint one or more inspectors to act at the meeting. Each inspector, before
entering
<PAGE>
upon the discharge of his or her duties, shall take and sign an oath faithfully
to execute the duties of inspector with strict impartiality and according to the
person's best ability.
(b) Duties. -- The inspectors shall ascertain the number of shares
------
outstanding and the voting power of each, shall determine the shares represented
at the meeting and the validity of proxies and ballots, shall count all votes
and ballots, shall determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors, and
shall certify their determination of the number of shares represented at the
meeting and their count of all votes and ballots. The inspectors may appoint or
retain other persons or entities to assist the inspectors in the performance of
the duties of the inspectors.
(c) Polls. -- The date and time of the opening and the closing of the polls
-----
for each matter upon which the stockholders will vote at a meeting shall be
announced at the meeting. No ballot, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the inspectors after the
closing of the polls unless the Court of Chancery upon application by a
stockholder shall determine otherwise.
(d) Reconciliation of Proxies and Ballots. -- In determining the validity
-------------------------------------
and counting of proxies and ballots, the inspectors shall be limited to an
examination of the proxies, any envelopes submitted with those proxies, any
information transmitted in accordance with Section 2.07, ballots and the regular
books and records of the corporation, except that the inspectors may consider
other reliable information for the limited purpose of reconciling proxies and
ballots submitted by or on behalf of banks, brokers, their nominees or similar
persons which represent more votes than the holder of a proxy is authorized by
the record owner to cast or more votes than the stockholder holds of record. If
the inspectors consider other reliable information for the limited purpose
permitted in this subsection, the inspectors at the time they make their
certification pursuant to subsection (b) shall specify the precise information
considered by them including the person or persons from whom they obtained the
information, when the information was obtained, the means by which the
information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
ARTICLE III
Board of Directors
SECTION 3.01. Powers. -- All powers vested by law in the corporation shall
------
be exercised by or under the authority of, and the business and affairs of the
corporation shall be managed under the direction of, the board of directors.
SECTION 3.02. Number of Term of Office. -- The board of directors shall
------------------------
consist of such number of directors, not less than three nor more than seven, as
may be determined from time to time by resolution of the board of directors.
Each director shall hold office until the annual meeting of the stockholders
held next after his or her election
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<PAGE>
and until a successor shall have been elected and qualified or until his or her
earlier death, resignation or removal.
SECTION 3.03. Vacancies. -- Vacancies and newly created directorships
---------
resulting from any increase in the authorized number of directors elected by all
of the stockholders having a right to vote as a single class may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until
their successors are elected and qualified or until their earlier death,
resignation or removal. If there are no directors in office, then an election
of directors may be held in the manner provided by statute. Whenever the
holders of any class or classes of stock or series thereof are entitled to elect
one or more directors by the provisions of the certificate of incorporation,
vacancies and newly created directorships of such class or classes or series may
be filled by a majority of the directors elected by such class of classes or
series thereof then in office, or by a sole remaining director so elected. If,
at the time of filling any vacancy or any newly created directorship, the
directors then in office shall constitute less than a majority of the whole
board (as constituted immediately prior to any such increase), the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office.
SECTION 3.04. Resignations. -- Any director may resign at any time by
------------
giving written notice to the corporation. The resignation shall be effective
upon receipt thereof by the corporation or at such subsequent time as shall be
specified in the notice of resignation and, unless otherwise specified therein,
the acceptance of the resignation shall not be necessary to make it effective.
SECTION 3.05. Organization. -- At every meeting of the board of directors,
------------
the chairman of the board, if there be one, or, in the case of a vacancy in the
office or absence of the chairman of the board, one of the following officers
present in the order stated: the vice chairman of the board, if there be one,
the president, the vice presidents in their order of rank and seniority, or a
chairman chosen by a majority of the directors present, shall preside, and the
secretary, or, in the absence of the secretary, an assistant secretary, or in
the absence of the secretary and the assistant secretaries, any person appointed
by the chairman of the meeting, shall act as secretary.
SECTION 3.06. Place of Meeting. -- Meetings of the board of directors may
----------------
be held at such place within or without the State of Delaware as the board of
directors may from time to time determine, or as may be designated in the notice
of the meeting.
SECTION 3.07. Regular Meetings. -- Regular meetings of the board of
----------------
directors shall be held without notice at such time and place as shall be
designated from time to time by resolution of the board of directors.
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<PAGE>
SECTION 3.08. Special Meetings. -- Special meetings of the board of
----------------
directors shall be held whenever called by the president or by two or more of
the directors. Notice of every special meeting of the board of directors shall
given to each director by telephone or in writing at least 24 hours (in the case
of notice by telephone, telex, TWX or facsimile transmission) or 48 hours (in
the case of notice by telegraph, courier service or express mail) or five days
(in the case of notice by first class mail) before the time at which the meeting
is to be held. Every such notice shall state the time and place of the meeting.
Neither the business to be transacted at, nor the purpose of, any meeting of the
board need be specified in a notice of the meeting.
SECTION 3.09. Quorum, Manner of Acting and Adjournment.
----------------------------------------
(a) General Rule. -- At all meetings of the board one-third of the total
------------
number of directors shall constitute a quorum for the transaction of business.
The vote of a majority of the directors present at any meeting at which a quorum
is present shall be the act of the board of directors, except as may be
otherwise specifically provided by the DGCL or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present.
(b) Unanimous Written Consent. -- Unless otherwise restricted by the
-------------------------
certificate of incorporation, any action required or permitted to be taken at
any meeting of the board of directors may be taken without a meeting, if all
members of the board, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the board.
SECTION 3.10. Executive and Other Committees.
------------------------------
(a) Establishment. -- The board of directors may, by resolution adopted by
-------------
a majority of the whole board, establish an Executive Committee and one or more
other committees, each committee to consist of one or more directors. The board
may designate one or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the committee.
In the absence or disqualification of a member of a committee and the alternate
or alternates, if any, designated for such member, the member or members of the
committee present at any meeting and not disqualified from voting, whether or
not they constitute a quorum, may unanimously appoint another director to act at
the meeting in the place of any such absent or disqualified member.
(b) Powers. -- The Executive Committee, if established, and any such other
------
committee to the extent provided in the resolution establishing such committee
shall have and may exercise all the power and authority of the board of
directors in the management of the business and affairs of the corporation and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no committee shall have the power or authority in reference to
amending the certificate of incorporation (except that a
-7-
<PAGE>
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of directors
as provided in Section 151(a) of the DGCL, fix the designation and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of shares of any series), adopting an agreement of merger
or consolidation under Section 251 or 252 of the DGCL, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
bylaws of the corporation. The Executive Committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock and to adopt
a certificate of ownership and merger pursuant to Section 253 of the DGCL. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the board of directors. Each committee so
formed shall keep regular minutes of its meetings and report the same to the
board of directors when required.
(c) Committee Procedures. -- The term "board of directors" or "board," when
--------------------
used in any provision of these bylaws relating to the organization or procedures
of or the manner of taking action by the board of directors, shall be construed
to include and refer to the Executive Committee or other committee of the board.
SECTION 3.11. Compensation of Directors. -- Unless otherwise restricted by
-------------------------
the certificate of incorporation, the board of directors shall have the
authority to fix the compensation of directors.
ARTICLE IV
Notice - Waivers - Meetings
SECTION 4.01. Notice, What Constitutes. -- Whenever, under the provisions
------------------------
of the DGCL or the certificate of incorporation or of these bylaws, notice is
required to be given to any director or stockholder, it shall not be construed
to mean personal notice, but such notice may be given in writing, by mail or by
telegram (with messenger service specified), telex or TWX (with answerback
received) or courier service, charges prepaid, or by facsimile transmission to
the address (or to be telex, TWX, facsimile or telephone number) of the person
appearing on the books of the corporation, or in the case of directors, supplied
to the corporation for the purpose of notice. If the notice is sent by mail,
telegraph or courier service, it shall be deemed to be given when deposited in
the United States mail or with a telegraph office or courier service for
delivery to that person or, in the case of telex or TWX, when dispatched, or in
the case of facsimile transmission, when received.
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<PAGE>
SECTION 4.02. Waivers of Notice.
-----------------
(a) Written Waiver. -- Whenever notice is required to be given under any
--------------
provisions of the DGCL or the certificate of incorporation or these bylaws, a
written waiver, signed by the person or persons entitled to the notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the stockholders, directors, or members of a committee of
directors need be specified in any written waiver of notice of such meeting.
(b) Waiver by Attendance. -- Attendance of a person at a meeting, either in
--------------------
person or by proxy, shall constitute a waiver of notice of such meeting, except
where a person attends a meeting for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the meeting
was not lawfully called or convened.
SECTION 4.03. Exception to Requirements of Notice.
-----------------------------------
(a) General Rule. -- Whenever notice is required to be given, under any
------------
provision of the DGCL or of the certificate of incorporation or these bylaws, to
any person with whom communication is unlawful, the giving of such notice of
such person shall not be required and there shall be no duty to apply to any
governmental authority or agency for a license or permit to give such notice to
such person. Any action or meeting which shall be taken or held without notice
to any such person with whom communication is unlawful shall have the same force
and effect as if such notice had been duly given.
(b) Stockholders Without Forwarding Addresses. -- Whenever notice is
-----------------------------------------
required to be given, under any provision of the DGCL or the certificate of
incorporation or these bylaws, to any stockholder to whom (i) notice of two
consecutive annual meetings, and all notices of meetings or of the taking of
action by written consent without a meeting to such person during the period
between such two consecutive annual meetings, or (ii) all, and at least two,
payments (if sent by first class mail) of dividends or interest on securities
during a 12-month period, have been mailed addressed to such person at his or
her address as shown on the records of the corporation and have been returned
undeliverable, the giving of such notice to such person shall not be required.
Any action or meeting which shall be taken or held without notice of such person
shall have the same force and effect as if such notice had been duly given. If
any such person shall deliver to the corporation a written notice setting forth
the person's then current address, the requirement that notice be given to such
person shall be reinstated.
SECTION 4.04. Conference Telephone Meetings. -- One or more directors may
-----------------------------
participate in a meeting of the board, or of a committee of the board, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other. Participation in
a meeting pursuant to this section shall constitute presence in person at such
meeting.
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<PAGE>
ARTICLE V
Officers
SECTION 5.01. Number, Qualifications and Designation. -- The officers of
--------------------------------------
the corporation shall be chosen by the board of directors and shall be a
president, one or more vice presidents, a secretary, a treasurer, and such other
officers as may be elected in accordance with the provisions of Section 5.03 of
this Article. Any number of offices may be held by the same person. Officers
may, but need not, be directors or stockholders of the corporation. The board
of directors may elect from among the members of the board a chairman of the
board and a vice chairman of the board who shall be officers of the corporation.
The president shall be the chief executive officer of the corporation unless the
chairman of the board is so designated by the board of directors.
SECTION 5.02. Election and Term of Office. -- The officers of the
---------------------------
corporation, except those elected by delegated authority pursuant to Section
5.03 of this Article, shall be elected annually by the board of directors, and
each such officer shall hold his office until a successor is elected and
qualified, or until his or her earlier resignation or removal. Any officer may
resign at any time upon written notice to the corporation.
SECTION 5.03. Subordinate Officers, Committee and Agents. -- The board of
------------------------------------------
directors may from time to time elect such other officers and appoint such
committees, employees or other agents as it deems necessary, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as are provided in these bylaws, or as the board of directors may from
time to time determine. The board of directors may delegate to any officer or
committee the power to elect subordinate officers and to retain or appoint
employees or other agents, or committees thereof, and to prescribe the authority
and duties of such subordinate officers, committees, employees or other agents.
SECTION 5.04. The Chairman and Vice Chairman of the Board. -- The chairman
-------------------------------------------
of the board, if there be one, or in the absence of the chairman, the vice
chairman of the board, if there be one, shall preside at all meetings of the
stockholders and of the board of directors, and shall perform such other duties
as may from time to time be assigned to them by the board of directors.
SECTION 5.05. The President. -- The president shall have general
-------------
supervision over the business and operations of the corporation, subject,
however, to the control of the board of directors. The president shall, in
general, perform all duties incident to the office of president, and such other
duties as from time to time may be assigned by the board of directors and, if
the chairman of the board is the chief executive officer, the chairman of the
board.
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<PAGE>
SECTION 5.06. The Vice Presidents. -- The vice presidents shall perform
-------------------
the duties of the president in the absence of the president and such other
duties as may from time to time be assigned to them by the board of directors or
by the president.
SECTION 5.07. The Secretary. -- The secretary, or an assistant secretary,
-------------
shall attend all meetings of the stockholders and of the board of directors and
shall record the proceedings of the stockholders and of the directors and of
committees of the board in a book or books to be kept for that purpose; shall
see that notices are given and records and reports properly kept and filed by
the corporation as required by law; shall be the custodian of the seal of the
corporation and see that it is affixed to all documents to be executed on behalf
of the corporation under its seal; and, in general, shall perform all duties
incident to the office of secretary, and such other duties as may from time to
time be assigned by the board of directors or the president.
SECTION 5.08. The Treasurer. -- The treasurer, or an assistant treasurer,
-------------
shall have or provide for the custody of the funds or other property of the
corporation and shall keep a separate book account of the same to his credit as
treasurer; shall collect and receive or provide for the collection and receipt
of moneys earned by or in any manner due to or received by the corporation;
shall deposit all funds in his or her custody as treasurer in such banks or
other places of deposit as the board of directors may from time to time
designate; whenever so required by the board of directors, shall render an
account showing his or her transactions as treasurer and the financial condition
of the corporation; and, in general, shall discharge such other duties as may
from time to time be assigned by the board of directors or the president.
SECTION 5.09. Officers' Bonds. -- No officer of the corporation need
---------------
provide a bond to guarantee the faithful discharge of the officer's duties
unless the board of directors shall by resolution so require a bond in which
event such officer shall give the corporation a bond (which shall be renewed if
and as required) in such sum and with such surety or sureties as shall be
satisfactory to the board of directors for the faithful performance of the
duties of office.
SECTION 5.10. Salaries. -- The salaries of the officers and agents of the
--------
corporation elected by the board of directors shall be fixed from time to time
by the board of directors.
ARTICLE VI
Certificates of Stock, Transfer, Etc.
SECTION 6.01. Form and Issuance.
-----------------
(a) Issuance. -- The shares of the corporation shall be represented by
--------
certificates unless the board of directors shall by resolution provide that some
or all of any class or series of stock shall be uncertificated shares. Any such
resolution shall not apply
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<PAGE>
to shares represented by a certificate until the certificate is surrendered to
the corporation. Notwithstanding the adoption of any resolution providing for
uncertificated shares, every holder of stock represented by certificates and
upon request every holder of uncertificated shares shall be entitled to have a
certificate signed by, or in the name of the corporation by, the chairman or
vice chairman of the board of directors, or the president or vice president, and
by the treasurer or an assistant treasurer, or the secretary or an assistant
secretary, representing the number of shares registered in certificate form.
(b) Form and Records. -- Stock certificates of the corporation shall be in
----------------
such form as approved by the board of directors. The stock record books and the
blank stock certificate books shall be kept by the secretary or by any agency
designated by the board of directors for that purpose. The stock certificates
of the corporation shall be numbered and registered in the stock ledger and
transfer books of the corporation as they are issued.
(c) Signatures. -- Any of or all the signatures upon the stock certificates
----------
of the corporation may be a facsimile. In case any officer, transfer agent or
registrar who has signed, or whose facsimile signature has been placed upon, any
share certificate shall have ceased to be such officer, transfer agent or
registrar, before the certificate is issued, it may be issued with the same
effect as if the signatory were such officer, transfer agent or registrar at the
date of its issue.
SECTION 6.02. Transfer. -- Transfers of shares shall be made on the share
--------
registrar or transfer books of the corporation upon surrender of the certificate
therefor, endorsed by the person named in the certificate or by an attorney
lawfully constituted in writing. No transfer shall be made which would be
inconsistent with the provisions of Article 8, Title 6 of the Delaware Uniform
Commercial Code-Investment Securities.
SECTION 6.03. Lost, Stolen, Destroyed or Mutilated Certificates. -- The
-------------------------------------------------
board of directors may direct a new certificate of stock or uncertificated
shares to be issued in place of any certificate theretofore issued by the
corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the board of directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or the legal representative of the owner,
to give the corporation a bond sufficient to indemnify against any claim that
may be made against the corporation on account of the alleged loss, theft or
destruction of such certificate or the issuance of such new certificate or
uncertificated shares.
SECTION 6.04. Record Holder of Shares. -- The corporation shall be
-----------------------
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on
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<PAGE>
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Delaware.
SECTION 6.05. Determination of Stockholders of Record.
---------------------------------------
(a) Meetings of Stockholders. -- In order that the corporation may
------------------------
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the board of directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the board of directors, and which record
date shall not be more than 60 nor less than ten days before the date of such
meeting. If no record date is fixed by the board of directors , the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
stockholders or record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting unless the board of
directors fixes a new record date for the adjourned meeting.
(b) Consent of Stockholders. -- In order that the corporation may determine
-----------------------
the stockholders entitled to consent to corporate action in writing without a
meeting, the board of directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the board of directors, and which date shall not be more than ten days after
the date upon which the resolution fixing the record date is adopted by the
board of directors. If no record date has been fixed by the board of directors,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the board of
directors is required by the DGCL, shall be the first date on which a signed
written consent setting forth the action taken or proposed to be taken is
delivered to the corporation by delivery to its registered office in Delaware,
its principal place of business, or an officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to a corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the board of directors and prior action by the board of
directors is required by the DGCL, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be at
the close of business on the day on which the board of directors adopts the
resolution taking such prior action.
(c) Dividends. -- In order that the corporation may determine the
---------
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights of the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the board of directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than 60 days
prior to such action. If no record date is fixed, the record date for
determining
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<PAGE>
stockholders for any such purpose shall be at the close of business on the day
on which the board of directors adopts the resolution relating thereto.
ARTICLE VII
Indemnification of Directors, Officers and
Other Authorized Representatives
SECTION 7.01. Indemnification of Authorized Representatives in Third Party
------------------------------------------------------------
Proceedings. -- The corporation shall indemnify any person who was or is an
- -----------
authorized representative of the corporation, and who was or is a party, or is
threatened to be made a party to any third party proceeding, by reason of the
fact that such person was or is an authorized representative of the corporation,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such third party
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal third party proceeding, had no
reasonable cause to believe such conduct was unlawful. The termination of any
third party proceeding by judgment, order, settlement, conviction or upon a plea
of nolo contendere or its equivalent, shall not of itself create a presumption
that the authorized representative did not act in good faith and in a manner
which such person reasonably believed to be in or not opposed to, the best
interests of the corporation, and, with respect to any criminal third party
proceeding, had reasonable cause to believe that such conduct was unlawful.
SECTION 7.02. Indemnification of Authorized Representatives in Corporate
----------------------------------------------------------
Proceedings. -- The corporation shall indemnify any person who was or is an
- -----------
authorized representative of the corporation and who was or is a party or is
threatened to be made a party to any corporate proceeding, by reason of the fact
that such person was or is an authorized representative of the corporation,
against expenses actually and reasonably incurred by such person in connection
with the defense or settlement of such corporate proceeding if such person acted
in good faith and in a manner reasonably believed to be in, or not opposed to,
the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the Court of Chancery or the court in which such corporate proceeding was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such authorized
representative is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
SECTION 7.03. Mandatory Indemnification of Authorized Representatives. --
-------------------------------------------------------
To the extent that an authorized representative or other employee or agent of
the corporation has been successful on the merits or otherwise in defense of any
third party or corporate proceeding or in defense of any claim, issue or matter
therein, such person shall
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<PAGE>
be indemnified against expenses actually and reasonably incurred by such person
in connection therewith.
SECTION 7.04. Determination of Entitlement to Indemnification. -- Any
-----------------------------------------------
indemnification under Section 7.01, 7.02 or 7.03 of this Article (unless ordered
by a court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the authorized representative
or other employee or agent is proper in the circumstances because such person
has either met the applicable standard of conduct set forth in Section 7.01 or
7.02 or has been successful on the merits or otherwise as set forth in Section
7.03 and that the amount requested has been actually and reasonably incurred.
Such determination shall be made:
(1) by the board of directors by a majority vote of a quorum
consisting of directors who were not parties to such third party or
corporate proceeding; or
(2) if such a quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel
in a written opinion; or
(3) by the stockholders.
SECTION 7.05. Advancing Expenses. -- Expenses actually and reasonably
------------------
incurred in defending a third party or corporate proceeding shall be paid on
behalf of an authorized representative by the corporation in advance of the
final disposition of such third party or corporate proceeding upon receipt of an
undertaking by or on behalf of the authorized representative to repay such
amount if it shall ultimately be determined that the authorized representative
is not entitled to be indemnified by the corporation as authorized in this
Article. The financial ability of any authorized representative to make a
repayment contemplated by this Section shall not be a prerequisite to the making
of an advance. Expenses incurred by other employees and agents may be so paid
upon such terms and conditions, if any, as the board of directors deems
appropriate.
SECTION 7.06. Definitions. -- For purposes of this Article:
-----------
(1) "authorized representative" shall mean any and all directors and
officers of the corporation and any person designated as an authorized
representative by the board of directors of the corporation (which may, but
need not, include any person serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise);
(2) "corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation of merger which, if its separate
existence had continued, would have had power and authority to indemnify
its directors, officers, employees or
-15-
<PAGE>
agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request
of such constituent corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Article with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its
separate existence had continued;
(3) "corporate proceeding" shall mean any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor or investigative proceeding by the corporation;
(4) "criminal third party proceeding" shall include any action or
investigation which could or does lead to a criminal third party
proceeding;
(5) "expenses" shall include attorneys' fees and disbursements;
(6) "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan;
(7) "not opposed to the best interests of the corporation" shall
include actions taken in good faith and in a manner the authorized
representative reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan;
(8) "other enterprises" shall include employee benefit plans;
(9) "party" shall include the giving of testimony or similar
involvement;
(10) "serving at the request of the corporation" shall include any
service as a director, officer or employee of the corporation which imposes
duties on, or involves services by, such director, officer or employee with
respect to an employee benefit plan, its participants, or beneficiaries;
and
(11) "third party proceeding" shall mean any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right
of the corporation.
SECTION 7.07. Insurance. -- The corporation may purchase and maintain
---------
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or person and incurred by the person in any such capacity,
or arising out of his or her status as such, whether or not the corporation
would have the power or the obligation to indemnify such person against such
liability under the provisions of this Article.
-16-
<PAGE>
SECTION 7.08. Scope of Article. -- The indemnification of authorized
----------------
representatives and advancement of expenses, as authorized by the preceding
provisions of this Article, shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in an official capacity and as to action in another
capacity while holding such office. The indemnification and advancement of
expenses provided by or granted pursuant to this Article shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be an authorized representative and shall inure to the benefit of the heirs,
executors and administrators of such a person.
SECTION 7.09. Reliance on Provisions. -- Each person who shall act as an
----------------------
authorized representative of the corporation shall be deemed to be doing so in
reliance upon rights of indemnification provided by this Article.
ARTICLE VIII
General Provisions
SECTION 8.01. Dividends. -- Subject to the restrictions contained in the
---------
DGCL and any restrictions contained in the certificate of incorporation, the
board of directors may declare and pay dividends upon the shares of capital
stock of the corporation.
SECTION 8.02. Contracts. -- Except as otherwise provided in these bylaws,
---------
the board of directors may authorize any officer or officers including the
chairman and vice chairman of the board of directors, or any agent or agents, to
enter into any contract or to execute or deliver any instrument on behalf of the
corporation and such authority may be general or confined to specific instances.
SECTION 8.03. Checks. -- All checks, notes, bills of exchange or other
------
orders in writing shall be signed by such person or persons as the board of
directors may from time to time designate.
SECTION 8.04. Corporate Seal. -- The corporation may have a corporate
--------------
seal, which shall have inscribed thereon the name of the corporation, the year
of its organization and the words "Corporate Seal, Delaware." The seal may be
used by causing it or a facsimile thereof to be impressed or affixed or in any
other manner reproduced.
SECTION 8.05. Deposits. -- All funds of the corporation shall be deposited
--------
from time to time to the credit of the corporation in such banks, trust
companies, or other depositories as the board of directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees as the board of directors shall from time to
time determine.
-17-
<PAGE>
SECTION 8.06. Corporate Records.
-----------------
(a) Examination by Stockholders. -- Every stockholder shall, upon written
---------------------------
demand under oath stating the purpose thereof, have a right to examine, in
person or by agent or attorney, during the usual hours for business, for any
proper purpose, the stock ledger, list of stockholders, books or records of
account, and records of the proceedings of the stockholders and directors of the
corporation, and to make copies or extracts therefrom. A proper purpose shall
mean a purpose reasonably related to such person's interest as a stockholder.
In every instance where an attorney or other agent shall be the person who seeks
the right to inspection, the demand under oath shall be accompanied by a power
of attorney or such other writing which authorizes the attorney or other agent
to so act on behalf of the stockholder. The demand under oath shall be directed
to the corporation at its registered office in Delaware or at its principal
place of business. Where the stockholder seeks to inspect the books and records
of the corporation, other than its stock ledger or list of stockholders, the
stockholder shall first establish (1) that the stockholder has complied with the
provisions of this section respecting the form and manner of making demand for
inspection of such documents; and (2) that the inspection sought is for a proper
purpose. Where the stockholder seeks to inspect the stock ledger or list of
stockholders of the corporation and has complied with the provisions of this
section respecting the form and manner of making demand for inspection of such
documents, the burden of proof shall be upon the corporation to establish that
the inspection sought is for an improper purpose.
(b) Examination by Directors. -- Any director shall have the right to
------------------------
examine the corporation's stock ledger, a list of its stockholders and its other
books and records for a purpose reasonably related to the person's position as a
director.
SECTION 8.07. Amendment of Bylaws. -- These bylaws may be altered, amended
-------------------
or repealed or new bylaws may be adopted either (1) by vote of the stockholders
at a duly organized annual or special meeting of stockholders, or (2) by vote of
a majority of the board of directors at any regular or special meeting of
directors if such power is conferred upon the board of directors by the
certificate of incorporation.
-18-
<PAGE>
EXHIBIT 3.2(cont.)
B Y L A W S
OF
CEPHALON, INC.
----------------------------------------
AMENDMENT DATED MAY 20, 1992
----------------------------------------
The Board of Directors of Cephalon, Inc. (the "Company") adopted
resolutions at the meeting of the Board of Directors on May 20, 1992 amending
the Bylaws of the Company to restate Section 1.03 and 2.02 as follows:
SECTION 1.03. Fiscal Year. -- The fiscal year of the corporation shall end
-----------
on the 31st of December in each year, beginning with December 31, 1991, and,
prior to such date, the fiscal year of the corporation shall end on the 30th of
June in each year.
SECTION 2.02. Annual Meeting. -- The board of directors shall fix the date
--------------
and time of the annual meeting of the stockholders, but if no such date and time
is fixed by the board, the meeting for any calendar year shall be held on the
third Tuesday in April in such year, if not a legal holiday under the law of
Delaware, and, if a legal holiday, then on the next succeeding business day, not
a Saturday, at 10:00 A.M., and at said meeting the stockholders then entitled to
vote shall elect directors and shall transact such other business as may
properly be brought before the meeting.
<PAGE>
EXHIBIT 3.2(cont.)
B Y L A W S
OF
CEPHALON, INC.
________________________________________
AMENDMENT DATED NOVEMBER 12, 1993
________________________________________
The Board of Directors of Cephalon, Inc. (the "Company") adopted
resolutions at the meeting of the Board of Directors on November 12, 1993
amending the Bylaws of the Company as follows:
SECTION 6.06. Transfer of Rights by Acquiring Person. Rights issued
--------------------------------------
pursuant to the Rights Agreement, dated as of November 12, 1993, between the
Company and Chemical Bank (the "Rights Agreement") may be transferred by an
Acquiring Person or an Associate of Affiliate of an Acquiring Person (as such
terms are defined in the Rights Agreement) only in accordance with the terms of,
and subject to the restrictions contained in, the Rights Agreement.
SECTION 8.07. Amendment of Bylaws. These bylaws may be altered, amended
-------------------
or repealed or new bylaws may be adopted either (1) by vote of the stockholders
at a duly organized annual or special meeting of stockholders, or (2) by vote of
a majority of the board of directors at any regular or special meeting of
directors if such power is conferred upon the board of directors by the
certificate of incorporation. The provisions of this Section 8.07 shall be
subject to the provisions of Article IX hereof.
ARTICLE IX
Shareholder Rights Plan
SECTION 9.01. General; Term. This Article IX has been adopted in
-------------
connection with the execution by the Company of the Rights Agreement, dated
November 12, 1993, between the Company and Chemical Bank, as Rights Agent (the
"Rights Agreement"), as such Rights Agreement may be amended from time to time
in accordance with the terms thereof. Notwithstanding any other provision of
these Bylaws to the contrary, this Article IX shall be applicable to those
situations involving the implementation of the Rights Agreement. The provisions
of this Article IX shall automatically terminate and be of no further force or
effect upon the expiration of the Rights Agreement by its terms or the earlier
redemption of the Rights (as defined in the Rights Agreement) in accordance with
the terms of the Rights Agreement.
<PAGE>
SECTION 9.02. Continuing Directors Committee.
------------------------------
(a) There is hereby designated and established a Continuing Directors
Committee consisting of those members of the board of directors, whether one or
more persons, having the qualifications set forth in this Section 9.02, which
Continuing Directors Committee shall have and may exercise the powers granted to
the Continuing Directors in the management of the business and affairs of the
corporation to the extent set forth in the Rights Agreement.
(b) The member or members of the Continuing Directors Committee shall
consist of (i) any member of the board of directors of the Company, while such
person is a member of the board, who is not an Acquiring Person, or an Affiliate
or Associate of an Acquiring Person (as such terms are defined in the Rights
Agreement), or a representative of an Acquiring Person or of any such Affiliate
or Associate, and was a member of the board prior to the date of the Rights
Agreement, or (ii) any Person who subsequently becomes a member of the board,
while such Person is a member of the board, who is not an Acquiring Person, or
an Affiliate or Associate of an Acquiring Person, or a representative or an
Acquiring Person or of any such Affiliate or Associate, if such person's
nomination for election or election to the board is recommended or approved by a
majority of the members of the Continuing Directors Committee.
SECTION 9.03. Amendments to Article IX. This Article IX may be altered,
------------------------
amended, modified, added to or repealed only by a resolution duly adopted by the
board of directors of the corporation (provided that no such resolution will be
effective without the concurrence of at least a majority of the Continuing
Directors).
<PAGE>
Exhibit 3.2(cont.)
CEPHALON, INC.
_________________________
RESOLUTIONS OF THE BOARD OF DIRECTORS
__________________________
February 13, 1996
RESOLVED, that Article VI of the By-laws of the Company is hereby
amended by adding a new section to read as follows:
SECTION 6.06. Transfer of Rights by Acquiring Person. Rights issued
--------------------------------------
pursuant to the Rights Agreement, dated as of November 12, 1993, between the
corporation and Chemical Bank (the "Rights Agreement") may be transferred by an
Acquiring Person or an Associate or Affiliate of an Acquiring Person (as such
terms are defined in the Rights Agreement) only in accordance with the terms of,
and subject to the restrictions contained in, the Rights Agreement.
FURTHER RESOLVED, that Article VIII of the By-laws of the Company is
hereby amended by adding the following sentence to Section 8.07 thereof to read
as follows:
The provisions of this section 8.07 shall be subject to the provisions
of Article IX hereof.
FURTHER RESOLVED, that the By-laws of the Company are hereby amended
by adding a new Article IX to read as follows:
<PAGE>
Cephalon, Inc.
145 Brandywine Parkway
West Chester, PA 19380-4245
(610) 344-0200 Ext. 480
Fax (610) 344-0065
June 28, 1996
TAP Holdings Inc.
Bannockburn Lake Office Plaza
2355 Waukegan Road
Deerfield, IL 60015
Attention: President
Re: Amendment of Agreement dated May 17, 1994
-----------------------------------------
Ladies and Gentlemen:
This is to confirm our understanding concerning certain modifications and
clarifications to be made with respect to the Agreement between TAP Holdings
Inc. (formerly TAP Pharmaceuticals Inc.)("TAP") and Cephalon, Inc. ("Cephalon"),
dated May 17, 1994 (the "Agreement"). All terms not otherwise defined herein
are used as defined in the Agreement.
This letter will document our agreement as to certain principles which,
effective upon your acceptance, will supersede any conflicting terms of the
Agreement and govern our collaboration going forward. In all other respects the
terms of the Agreement will remain in force.
Our governing principles are set forth below:
1. Access to and Selection of Molecules for Development. TAP shall be
----------------------------------------------------
entitled to have access, through the Development Committee, to the
following molecules (collectively, the "Subject Compounds") which may
be selected for development during the Research Term:
(a) [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxx] (metabolites inclusive), and salts and esters
of any of the foregoing (the "[xxxxxxxxxxxxxx]"); and
(b) all [xxxxxxxxxxxxxxxxxxxxx] discovered and/or synthesized by
Cephalon under the Development Plan, during the Research Term,
which meet the criteria for activity set forth on Attachment A
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings Inc.
June 28, 1996
Page 2
hereto, as amended from time to time by the Development Committee
(collectively, the "Required Criteria"); and for which, in each
case, the composition, manufacture and/or use of such compound is
covered by one or more claims contained in any of the following
patent and patent applications (the "[xxxxxxxxxxxxxxxxxxxxxx]"):
<TABLE>
<CAPTION>
U.S. Patent No. Issue Date Description
-------------- ---------- -----------
<S> <C> <C>
[xxxxxxxxx] [xxxxxxxxxxxxxxx] [xxxxxxxxxxxxxxxxxxxxxxxx]
U.S. Serial No. Filing Date Description
[xxxxxxxxx] [xxxxxxxxxxxx] [xxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xx]
[xxxxxxxxx] [xxxxxxxxxxxx] [xxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xx]
[xxxxxxxxx] [xxxxxxxxxxxx] [xxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xx]
- --------------------------------------------------------------------
</TABLE>
; and
(c) all other compounds discovered and/or synthesized by Cephalon under the
Development Plan, during the Research Term, which meet the Required
Criteria, subject in all respects to Cephalon's then-existing obligations
to third parties and excluding any compounds then being developed by
Cephalon for any indications outside the Field (the "Other Subject
Compounds").
* * *
Exhibit A to the Agreement is hereby amended to include the above-listed patent
and patent applications for the [xxxxxxxxxxxxxxxxxxxxx] and will continue to be
amended as needed during the term of the Agreement. Schedule I to the Agreement
is hereby amended, as attached hereto ("First Amended Schedule I"). First
Amended Schedule I sets forth the Subject Compounds identified to date. The
specific [xxxxxxxxxxxxxxxxxxx] and the Other Subject Compounds, as determined
from time to time in
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings Inc.
June 28, 1996
Page 3
accordance with subparagraphs (b) and (c) above, shall be added to Schedule I by
the Development Committee in accordance with paragraph 7 below.
Subject Compounds means only the [xxxxxxxxxxxxxx], as identified in subparagraph
(a) above, and the [xxxxxxxxxxxxxxxxxxxxx] and the Other Subject Compounds
hereafter set forth on Schedule I in accordance with this paragraph 1.
"Development Compounds" means all of the Subject Compounds selected for
development by the Development Committee during the Research Term. As of the
date of this amendment, [xxxxxxxxxxxxxxxxxx] are the only Development Compounds.
"Excluded Compounds" means all of the Subject Compounds that are rejected for
development, and all of the Development Compounds that are rejected for further
development, by the Development Committee. Except as otherwise provided
hereinafter in this paragraph 1, TAP shall not have any rights in or to the
Excluded Compounds.
(i) At any time during the Research Term, if the Development Committee
identifies a new screen or assay from which the Development Committee
derives additional criteria for activity to include in the Required
Criteria and which screen or assay was not available at the time when
a specified Excluded Compound was rejected for development or further
development by the Development Committee, the Development Committee
may request Cephalon to test such Excluded Compound in such new screen
or assay. Cephalon shall test such Excluded Compound in such screen or
assay unless Cephalon has a then-existing enforceable, contractual
obligation to any third party(ies) with respect to such Excluded
Compound and/or Cephalon is then itself developing such Excluded
Compound for one or more indications outside the Field. If the results
of such test, together with the results ofthe other screens or assays
then included in the Required Criteria indicate that the Excluded
Compound would be a Subject Compound under the provisions of
subparagraph (b) or (c), such Excluded Compound may, again, be
selected by the
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings Inc.
June 28, 1996
Page 4
Development Committee for development in the Field.
(ii) At any time during the Research Term, TAP may request the
Development Committee to reconsider an Excluded Compound for
development in the Field based on existing data, subject in all
respects to Cephalon's then-existing obligations to third
parties and provided that Cephalon is not developing such
Excluded Compound for any indications outside the Field.
(iii) Any Excluded Compound that is permitted to be selected for
development pursuant to clause (i) or (ii) above, and that is
so selected by the Development Committee during the Research
Term, shall, upon such selection, be deemed a Development
Compound and not an Excluded Compound.
The rights and obligations of the parties under Section 3.2(d) (relating to
first negotiation and first offer) are hereby terminated.
2. Field. The Field is expanded to mean the prophylactic and/or therapeutic
-----
treatment of any type of cancer in humans and/or of any noncancerous
prostate disorders (including, without limitation, benign prostatic
hypertrophy), subject to the provisions of subparagraph 11(c)(ii)(C) below.
3. Section 2.1. The last sentence of Section 2.1 is amended and restated as
-----------
follows: During the Research Term, the parties will collaborate
exclusively with each other, in the Territory, in the Field, with respect
to the discovery and development of compounds that meet the Required
Criteria.
4. Section 3.2. Cephalon's obligations to provide information under Section
-----------
3.2(a) of the Agreement shall expire at the end of the Research Term,
except with respect to Development Compounds. TAP's rights to new
indications for Development Compounds outside the Field (excluding
Neurology) under Section 3.2(b) of the Agreement shall continue, subject in
all respects to Cephalon's then-existing obligations to third parties. TAP
shall not have any rights to new indications for the Excluded Compounds,
except for the rights provided in clauses (i) and (ii) of paragraph 1
above. Cephalon shall not have any right to develop, or license any third
party to develop, the Excluded Compounds in the Field
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings Inc.
June 28, 1996
Page 5
in the Territory during the Research Term and the nine (9) months
immediately following the termination of the Research Term. Upon the
expiration of such nine (9)-month period, the Development Committee shall
identify, and Cephalon shall not thereafter develop, or license any third
party to develop, any Excluded Compound in the Territory for any
indications specified in [xxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxx] (collectively, the "TAP Indications").
5. Milestone Payments. In recognition of the expansion of the Field provided
------------------
in paragraph 2 above, TAP shall pay to Cephalon the milestone payments set
forth in Section 3.1(g) of the Agreement in respect of each Product in the
Field. Such milestone payments will be required for the original NDA for
each Product, with no additional milestone payments for supplemental-NDA
submissions ("s-NDAs") for any additional indications, salt, ester, amide,
complex, chelate, hydrate, isomer, stereoisomer, crystalline or amorphous
form, prodrug, metabolite, metabolic precursor, and/or formulation changes
in such Product.
If for any reason, a Product is withdrawn during the period commencing
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxx],
with respect to such Product, TAP shall receive
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxx]
with respect to such Product, which credit may be applied toward TAP's
obligations to Cephalon with respect to a replacement Product for which TAP
files an NDA with the FDA
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx].
6. Licenses; Certain Defined Terms. The licenses granted by Cephalon in
-------------------------------
Article 5 of the Agreement apply to the Development Compounds and Products,
as the case may be, and are subject to the provisions of subparagraph 11(c)
below. All references in the Agreement to [xxx xxxxxxxxxx] shall be deemed
references to Subject Compounds. All references in the Agreement to a
Product or Products shall mean any
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings Inc.
June 28, 1996
Page 6
product or products containing a Development Compound, whether alone or
with any other therapeutically- or prophylactically-active ingredients,
which product(s) is/are in finished form, packaged and labelled in the
final commercial package for sale by TAP for use in the Field. All
references in the Agreement to a [xx] Product or [xx] Products shall mean
any product or products manufactured by or for Cephalon that contain a
Development Compound, whether alone or with any other therapeutically-or
prophylactically-active ingredients, which product(s) is/are in finished
form for sale for use in the Field, including the Products supplied by or
for Cephalon pursuant to the Agreement for sale by TAP.
7. Development Committee. The Development Committee shall consist of three
---------------------
members designated by each of TAP and Cephalon, initially:
<TABLE>
<CAPTION>
TAP Cephalon
--- --------
<S> <C>
[xxxxxxxxxxxxxxxxxxx] [xxxxxxxxxxxxxxxxxx]
- ----------------------- ----------------------
[xxxxxxxxxxxxxxxxxxx] [xxxxxxxxxxxxxxxxxx]
- ----------------------- ----------------------
[xxxxxxxxxxxxxxxxxxx] [xxxxxxxxxxxxxxxxxx]
- ----------------------- ----------------------
</TABLE>
Each party may change its designated members of the Development Committee,
effective upon reasonable notice to the other party, provided, however, that the
consent of the other party shall be required to effect any designation of a
member who is not an employee of the designating party, such consent not to be
unreasonably withheld. Regular meetings of the Development Committee will be
held quarterly. An agenda for each of these meetings will be agreed upon within
an appropriate time prior to the meeting. Issues for discussion at the meetings
may include, but may not necessarily be limited to, the following
responsibilities of the Development Committee:
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings Inc.
June 28, 1996
Page 7
. With respect to each Subject Compound, prior to the Development
Committee's determination whether to select such Subject Compound as
a Development Compound or to identify it as an Excluded Compound,
reviewing all data available to either party (subject to its then-
existing obligations to third parties) which profiles such Subject
Compound
. With respect to each Development Compound, reviewing all data
available to either party (subject to its then-existing obligations
to third parties), and all data which either party is then required
to disclose to the FDA, in each case which profiles the Development
Compound
. Preparing, reviewing and recommending changes to the Development
Plan, including the selection of compounds that will be tested under
the Development Plan
. Identifying the [xxxxxxxxxxxxxxxxxxxxx] and the Other Subject
Compounds during the Research Term, in accordance with subparagraphs
1(b) and (c) above
. Reviewing and revising Attachment A hereto, as amended from time to
time, to reflect the selection and development of additional criteria
for activity that become available from new screens and assays, such
that the Required Criteria, as so amended, reasonably identify, from
among the compounds that are otherwise eligible to be Subject
Compounds, those compounds which demonstrate a principal preclinical
activity against cancer and/or any noncancerous prostate disorder
(including, without limitation, benign prostatic hypertrophy)
. Generating and revising, as appropriate, the criteria for the
selection of Development Compounds
. Reviewing all data available to either party which profiles the
Excluded Compounds that are permitted to be selected for development
in the Field pursuant to clauses (i) and (ii) of paragraph 1, above
. Selecting Development Compounds and identifying Excluded Compounds
. Critiquing the activities under the Development Plan to date and
identifying and resolving outstanding issues
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings Inc.
June 28, 1996
Page 8
. Reviewing and approving (prior to implementation) all preclinical
and clinical protocols involving the Development Compounds
. Monitoring the implementation of the clinical trials involving any of
the Development Compounds and reviewing the generated data from such
clinical trials
. Reviewing and amending the Timetable (Exhibit B)
. Reviewing status of Development Compounds
* * *
The agenda shall include specific questions and recommendations
that need to be resolved by the Development Committee, as it is
the charter of the Development Committee not only to review the
joint development program but also to resolve issues. Data
scheduled for discussion at the meeting will be distributed to
all members at an appropriate time before the scheduled meeting
date. The decision making process will be agreed to by the
Development Committee, subject to the requirements of Section 2.4
of the Agreement. Teleconferences shall be conducted on those
occasions where it is imperative to address an action item prior
to the next scheduled meeting.
The Development Committee will appoint one member who will be
responsible for taking minutes of the meetings, distributing to
each party copies of the minutes and of any written reports
presented at the meetings, obtaining approval of the minutes by
each party and distributing to each party copies of the approved
minutes. Approval of the minutes shall be indicated by the
signatures thereon of at least two members designated by Cephalon
and at least two members designated by TAP.
The minutes shall include action items assigned at the meeting
with specific dates for addressing the issues involved. The
minutes also shall include two schedules:
Schedule I, setting forth all of the Subject Compounds
identified through the date of such meeting; and
Schedule II, setting forth all of the Development
Compounds and
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings
June 28, 1996
Page 9
all of the Excluded Compounds as of the date of such meeting.
The person to whom such minutes and reports should be sent shall be:
<TABLE>
<CAPTION>
TAP Cephalon
--- --------
<S> <C>
[xxxxxxxxxxxxxxxxxx] [xxxxxxxxxxxxxxxxx]
---------------------- -------------------
</TABLE>
Copies of Schedules I and II to all minutes shall be sent to each
party, marked Attention: General Counsel; upon receipt of duly approved
copies Schedules I and II to the minutes by both General Counsel, such
schedules shall constitute amendments to the Agreement. Each party may
change the person or persons to whom minutes and reports, and copies of
schedules, are to be sent, effective upon reasonable notice to the
other party.
8. Technical Information. Promptly after the development of any
---------------------
Technical Information (as defined in Section 3.1(h)(i) of the
Agreement) relating to the Subject Compounds and Products in the Field
developed by or for either party under the Agreement, such party shall
provide to the other party copies of such Technical Information, in
such form (e.g., hard copy, disk, tape) as the other party may
reasonably request.
9. Budget and Billing. The budget included in each Development Plan shall
cover the amounts projected to be paid by TAP for the Cephalon FTE's
assigned by Cephalon to conduct Cephalon's activities under the
Development Plan, at the FTE Rates determined in accordance with
Section 3.1(e)(ii) of the Agreement. In addition, TAP shall reimburse
Cephalon for all amounts payable to [xxxxxxxxxx], as approved in
writing by the Development Committee. Cephalon shall use all
commercially-reasonable efforts to submit to the Development Committee
for pre-approval all such [xxxxxxx] arrangements. All expenses incurred
by TAP for any development activities undertaken by TAP sh all be borne
solely by TAP, and there shall be no adjustment of any amounts due to
Cephalon as a result thereof. Cephalon will bill TAP at the end of each
month during the Research Term for the time spent during such month by
the Cephalon FTE's on the Development Plan, together with all amounts
paid during such month by Cephalon to [xxxxxxx]. Cephalon's bill for
each month or
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings Inc.
June 28, 1996
Page 6
part thereof during the Research Term shall be accompanied by a
breakdown of the time spent by Cephalon FTE's on the Development
Plan during such month, and shall be paid by TAP within twenty-
one (21) days after TAP receives Cephalon's invoice therefor. TAP
shall have reasonable access, at its own expense and upon
reasonable prior notice, [xxxxxxxxxxxxxxxxxxxxxxxxxxx] to verify
the billing by Cephalon pursuant to this paragraph 9. Such access
shall be limited to [xxxxxxx] in each calendar year and may be
conducted during normal business hours by TAP's outside auditors,
subject to the confidentiality obligations of Section 7.1 of the
Agreement.
10. Clinical and Commercial Supplies of the Development Compounds.
-------------------------------------------------------------
Cephalon shall be responsible for supplying TAP's requirements of
the Development Compounds for clinical trials and other
premarketing development activities and for the Products for
sale. It is anticipated that the [xxxxxxxxxxxxx] will be
manufactured by Kyowa Hakko and the [xxxxxxxxxxxxx] will be
manufactured by Cephalon or a designated third party. If any
Development Compound is to be manufactured by a third party other
than Kyowa Hakko, TAP shall be entitled to participate with
Cephalon in the evaluation of potential third-party
manufacturers, but Cephalon shall have the right to select the
third-party manufacturer, with due consideration of TAP's
recommendations and subject to Cephalon continuing to be
responsible for all supply obligations under the Agreement. If a
third party other than Kyowa Hakko has been selected to
manufacture a Development Compound or Product, inspection and
audit rights shall be included in such third-party contract and
TAP shall be entitled to participate with Cephalon, in accordance
with the terms of the third-party contract, in all inspections
and audits of such third party that are conducted by Cephalon
with respect to the manufacture of the Subject Compound or
Product; in addition, if Cephalon shall not initiate any such
inspections or audits, with reasonable frequency, in accordance
with its rights under any such third-party contract, TAP shall be
entitled to request, in writing, that Cephalon initiate a
specified inspection or audit which is permitted under the terms
of the third-party contract, and Cephalon shall comply with any
such reasonable request. All of the pricing terms with respect to
all Subject Compounds and Products shall continue to apply, with
respect to the Development Compounds and Products, as set forth
in the Agreement.
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings
June 28, 1996
Page 11
11. Termination of Research Term.
----------------------------
(a) The Research Term may be terminated by TAP at the end of
any extension of the Initial Research Term by providing at
least [xxxxxxxxxxxxxxxxx] prior written notice of such
termination to Cephalon.
(b) The Research Term may be terminated by Cephalon at the end
of any extension of the Initial Research Term if, by
[xxxxxxxxx] during such extension, the parties have not
approved the Development Plan (including budget) prepared
by the Development Committee for the next succeeding year.
Cephalon shall effect a termination of the Research Term
under this paragraph 11(b) by providing at least thirty
(30) days' prior written notice thereof to TAP.
(c) A termination of the Research Term under this paragraph 11
shall have the following consequences:
(i) If the Research Term is terminated at a time when no
Development Compound is being developed for
commercialization in the Field, and no Product is
being manufactured, used or sold by or for TAP under
the Agreement, the Agreement shall terminate in
accordance with Section 12.2 of the Agreement.
(ii) If the Research Term is terminated at a time when at
least one Development Compound is being developed for
commercialization in the Field in accordance with
Section 3.4(c) of the Agreement or one Product is
being manufactured, used or sold by or for TAP under
the Agreement:
(A) The responsibilities of Cephalon to conduct
research and preclinical activities under Section
3.1(b) of the Agreement shall terminate.
(B) The responsibilities of TAP to fund such
activities under Section 3.1(c) and (f) shall
terminate.
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings Inc,
June 28, 1996
Page 12
(C) The licenses granted to TAP in Sections 5.1 and 5.2 of the
Agreement shall not apply to the entire Field, and
thereafter, shall be restricted to the TAP Indications and
any indications for which TAP has obtained or is in the
process of obtaining a license from Cephalon under Section
3.2(b) of the Agreement.
(D) Cephalon shall be permitted to develop the Excluded
Compounds in accordance with paragraph 4 above.
(E) The other rights and obligations of the parties under the
Agreement, as amended hereby, shall remain in full force
and effect.
12. 1996 Development Plan. Attached to this letter is the Development Plan
---------------------
for 1996, as approved by the parties.
13. Third Party Requests for Subject Compounds. Each party shall deliver to
------------------------------------------
the Development Committee for consideration all requests received by such
party from third parties relating to the transfer of a Subject Compound.
Any such transfers that are approved by the Development Committee shall
be made by Cephalon under a form of materials transfer agreement approved
by the Development Committee and executed by Cephalon.
14. Reimbursement of Audit Costs. In each case under the Agreement where
----------------------------
the outside auditors of one party have access to the books and records of
the other party to verify the bills or reports of such other party, if
such audit establishes that the party subject to the audit has overbilled
or underpaid the auditing party, in either case by [xxxxxxxxxxxxxx] or
more, the party subject to the audit shall reimburse the auditing party
for the reasonable costs payable to its outside auditors for such audit.
15. Timetable; Exhibit B. The Timetable shall apply in respect of each
--------------------
Development Compound. The Timetable is hereby amended in respect of the
timing for the beginning of Phase III, so that the second row of the
first column of Exhibit B to the Agreement shall read in its entirety as
follows:
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings Inc,
June 28, 1996
Page 13
Within [xxxx] after filing the initial IND; provided, however, that
[xxxxx] after filing the initial IND shall be permitted in a case where,
after filing the initial IND for a Development Compound, an alternative
formulation of the Development Compound is developed under the
Development Plan to permit delivery of the Development Compound by a
delivery method that was not specified in the initial IND
16. Miscellaneous. Certain technical corrections to the Agreement have been
-------------
agreed to by TAP and Cephalon, as set forth below:
(a) On page 9, line 6 of Section 2.5(b) (Notice), delete: "member or"
(b) On page 15, amend and restate Section 3.2(c)(ii) as follows:
(ii) With respect to any Excluded Compound which Cephalon
desires to develop in accordance with the Agreement, as amended, TAP
shall be deemed to have granted to Cephalon a royalty-free,
exclusive license in and to that portion of the TAP Technology, if
any, that shall be made available to the Development Committee for
use during the Research Term in connection with a Subject Compound
and/or Development Compound, to develop, use, market and sell such
Excluded Compound (and products containing such Excluded Compound)
in accordance with the Agreement, as amended.
(c) On page 26, line 12 of Section 4.3(a), insert: "If Cephalon uses as
Trademark with a [xx] Product, TAP shall have the right require that
such [xx] Product complies with the Specifications for the
corresponding Product sold by TAP, and to monitor such compliance by
Cephalon."
(d) On page 37, amend and restate Section 7.1(ii) as follows:
"information that was rightfully known by the Receiving Party (as
evidenced by its written records) prior to the date of disclosure by
the Furnishing Party to the Receiving Party in connection with this
Agreement, or information that is independently developed by or for
the Receiving Party without benefit of the Furnishing Party's
Confidential Information, and such use or disclosure is expressly
permitted by this Agreement;"
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings Inc,
June 28, 1996
Page 14
(e) On page 37, delete Section 7.2 (Injunctive Relief) in its entirety,
without impairing, in any respect, the rights of each party to seek
injunctive or other equitable relief in addition to any and all
remedies available at law or in equity, including, the recovery of
damages and reasonable attorneys fees.
If the foregoing accurately reflects your understanding as to these matters,
please indicate your agreement in the space provided below and return a signed
copy of this letter to me.
Very truly yours,
/s/ Joseph J. Day, Jr.
Joseph J. Day, Jr.
Senior Vice President
Worldwide Business Development
Acknowledged and agreed to by:
TAP Holdings, Inc.
By: /s/ Yasu Hasegawa
-------------------------
Name: Yasu Hasegawa
Title: President
Date: 07/08/96
--------------
WLN/sm
Attachments
cc: Barbara S. Schilberg, Esq.
Wendy L. Nagy, Esq.
[Confidential Treatment requested for redacted portions of document]
<PAGE>
AMENDED SCHEDULE I
------------------
Identified Subject Compounds
----------------------------
[xxxxxxxxxx]
[xxxxxxxxxx]
[xxxxxxxxxx]
[xxxxxxxxxx]
[xxxxxxxxxx]
[xxxxxxxxxx]
[xxxxxxxxxx]
[Confidential Treatment requested for redacted portions of document]
<PAGE>
TAP Holdings Inc,
June 28, 1996
Page 16
ATTACHMENT A
Required Criteria
-----------------
For establishing Subject Compounds under subparagraphs 1(b) and (c)
[Charts Deleted]
ATTACHMENT A IS SUBJECT TO AMENDMENT BY THE DEVELOPMENT
--------------------------------------------------------
COMMITTEE
---------
[Confidential Treatment requested for redacted portions of document]
<PAGE>
1996 DEVELOPMENT PLAN
---------------------
[Confidential Treatment requested for redacted portions of document]
<PAGE>
Discovery Flow
[ Charts Deleted
]
[Confidential Treatment requested for redacted portions of document]
<PAGE>
RESOURCE ALLOCATION BY MONTH
<TABLE>
<CAPTION>
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
[
]
</TABLE>
[Confidential Treatment requested for redacted portions of document]
<PAGE>
DRUG DEVELOPMENT
FTE ALLOCATION BY QUARTER
[
]
[Confidential Treatment requested for redacted portions of document]
<PAGE>
Attachment 1:96
<TABLE>
<CAPTION>
Total
------
Cephalon, Inc. Costs Vendor 1stQ 2ndQ 3rdQ 4thQ Budget
---- ---- ---- ---- ------
Drug Development [
- ----------------
<S> <C> <C> <C> <C> <C> <C>
Personnel Costs:
Analytical Development
Drug Safety and Disposition
Operations and Technical
Services
VP Pharmaceutical
Development
Chemical Process
Development
Total Drug Development**
Research
- --------
Research Personnel*
Total Research
Total Spending ]
</TABLE>
[ ]
[Confidential Treatment requested for redacted portions of document]
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF CEPHALON, INC.
<TABLE>
<CAPTION>
Jurisdiction Percentage
Name Incorporation Ownership
---- ------------- ---------
<S> <C> <C>
Cephalon Development Corporation.............. Delaware 100%
Cephalon Investments, Inc..................... Delaware 100%
Cephalon Technology, Inc...................... Delaware 100%
Cephalon International Holdings, Inc.......... Delaware 100%
Cephalon Property Management, Inc............. Delaware 100%
</TABLE>
68
<PAGE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No.33-43716, No. 33-71920, 33-85776, No. 33-67244,
No. 33-69096, No. 33-74320, No. 333-02888 and 333-20321.
ARTHUR ANDERSEN LLP
Philadelphia, Pa
March 12, 1997
<PAGE>
CONSENT OF COUNSEL
Clark & Elbing LLP hereby consents to the use of its name under the caption
"Patents and Proprietary Technologies" in the Annual Report of Cephalon, Inc.
(the "Company") on Form 10-K for the fiscal year ended December 31, 1996 to be
filed with the Securities and Exchange Commission.
In giving such consent, Clark & Elbing LLP does not thereby admit that it
is acting within the category of persons whose consent is required under the
Securities and Exchange Act of 1934, as amended, or the rules and regulations of
the Securities and Exchange Commission thereunder.
Very truly yours,
Clark & Elbing LLP
By: Paul T. Clark
Dated:___________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CEPHALON
INC.'S 1996 FORM 10K FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000873364
<NAME> CEPHALON, INC.
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 5,671,000 6,565,000
<SECURITIES> 141,177,000 171,502,000
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 7,696,000 10,415,000
<PP&E> 0 0
<DEPRECIATION> 8,852,000 9,652,000
<TOTAL-ASSETS> 177,891,000 221,330,000
<CURRENT-LIABILITIES> 21,588,000 18,402,000
<BONDS> 0 0
0 0
0 0
<COMMON> 246,000 238,000
<OTHER-SE> 137,080,000 179,967,000
<TOTAL-LIABILITY-AND-EQUITY> 177,891,000 221,330,000
<SALES> 0 0
<TOTAL-REVENUES> 31,211,000 46,999,000
<CGS> 0 0
<TOTAL-COSTS> 90,701,000 89,756,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,286,000 3,112,000
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (53,285,000) (33,003,000)
<EPS-PRIMARY> (2.19) (1.63)
<EPS-DILUTED> 0 0
</TABLE>
