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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A-2
(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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
145 BRANDYWINE PARKWAY,
WEST CHESTER,PENNSYLVANIA 19380
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 344-0200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH
EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
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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 $469,248,548. 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 22, 1996. 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 1996 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
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.
CORE TECHNOLOGIES
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
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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
The following table outlines the Company's product development programs.
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INDICATION COMPOUND STATUS(1)(2) COMMERCIAL RIGHTS
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ALS..................... MYOTROPHIN (rhIGF-I) NDA Cephalon/Chiron/Kyowa Hakko(3)
Peripheral MYOTROPHIN (rhIGF-I) Phase II Cephalon/Chiron/Kyowa Hakko(3)
Neuropathies...........
Narcolepsy.............. PROVIGIL (modafinil) NDA(4) Cephalon in United States,
United Kingdom, Republic of Ireland
Mexico, Japan
Alzheimer's Disease..... Signal Transduction Development Cephalon/Kyowa Hakko(5)
Modulators
Regulators of Gene Development Cephalon/Leo(6)
Transcription
AP Inhibitors Research Cephalon/Schering-Plough(7)
Stroke.................. Calpain Inhibitors Research Cephalon/SmithKline Beecham(8)
Prostate Disease........ Signal Transduction Phase I Cephalon/TAP/Kyowa Hakko(9)
Modulators
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(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 plc."
(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."
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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 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
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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 under a collaboration agreement with Schering-Plough Corporation,
which concluded in March 1997. 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 plc ("SB"). See "Corporate Collaborations--SmithKline
Beecham plc."
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
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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. The molecules used by TAP in this study were
licensed from Kyowa Hakko. See "Corporate Collaborations--TAP Holdings Inc."
and "Corporate Collaborations--Kyowa Hakko Kogyo Co., Ltd."
SALES AND MARKETING
The Company has established a 36-person sales organization 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.
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 NS(R) (butorphanol tartrate) to
neurologists in the United States. Stadol NS, which received U.S. marketing
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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.
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
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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 plc
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, 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.
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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."
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
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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 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
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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 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
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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.
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
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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 PROVIGIL (modafinil) and
FDA approval. See "--Government Regulation." 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
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.
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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.
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
16
<PAGE>
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.
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
17
<PAGE>
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.
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
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<PAGE>
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
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 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
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<PAGE>
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 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.
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<PAGE>
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.
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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.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
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
</TABLE>
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.
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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,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
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
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
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)....... 16,974,000 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."
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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, filed an NDA with the FDA in February 1997 requesting that
MYOTROPHIN (rhIGF-I) be approved for the treatment of ALS in the United
States. 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. The FDA has scheduled a
meeting of the Advisory Committee to be held on May 8, 1997 to review the NDA
for MYOTROPHIN (rhIGF-I). 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.
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
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<PAGE>
or other circumstances not attributable to MYOTROPHIN (rhIGF-I). 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. FDA
regulations require the reporting of all patient adverse events (including
deaths) experienced in ongoing trials. There can be no assurance that any such
event previously reported by the Company, or which may occur in the future
will not delay or prevent the approval of MYOTROPHIN (rhIGF-I), or result in
any subsequent FDA action adverse to the interests of 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. The Companies are preparing a marketing
authorization application for filing in Europe. 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 approval for MYOTROPHIN (rhIGF-
I) would materially adversely affect the Company's business and the price of
its common stock.
The MYOTROPHIN (rhIGF-I) currently being used in ongoing clinical trials was
produced at the Company's pilot-scale manufacturing facility in Beltsville,
Maryland (the "Beltsville Facility"). In November 1996, Cephalon sold the
Beltsville Facility. 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 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 have 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, based on the results of a bioequivalency study, the companies
believe 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
25
<PAGE>
of two Phase III studies conducted in the United States. There can be no
assurance that the FDA or other regulatory authorities will determine 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 ("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 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 could 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 product candidates under development by
the Company which are conducted by collaborators of the Company, including
studies of rhIGF-I being conducted by the Company's licensee in Japan and
clinical studies of modafinil being conducted by Lafon and its licensees 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 cannot predict at this time the potential
revenues to be received from sales of MYOTROPHIN
26
<PAGE>
(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.
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.
The market price for shares of the Company's Common Stock has historically
been highly volatile. Future negative 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.
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
28
<PAGE>
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.
--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
29
<PAGE>
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.
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
30
<PAGE>
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 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.
31
<PAGE>
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.
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
32
<PAGE>
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 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
33
<PAGE>
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
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.
34
<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
(rhIGF-I) 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.
35
<PAGE>
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 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.
36
<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
37
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
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
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
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.
38
<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 administra-
tive.............................. 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 1)....................... $(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.
39
<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 TOTAL
-------- ------------ ----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994... $120,000 $ 98,995,000 $ -- $(416,000) $ (35,614,000) $ 20,000 $ 63,105,000
Sales of common stock
and warrants.............. 58,000 82,400,000 -- -- -- -- 82,458,000
Issuance of common stock
upon exercise of stock
options and warrants...... 5,000 1,279,000 -- -- -- -- 1,284,000
Amortization of warrants in
connection with
Partnership transaction--
1994 portion
(Notes 7 and 9).............. -- 1,376,000 -- -- -- -- 1,376,000
Amortization of deferred
compensation (Note 7)........ -- -- -- 416,000 -- -- 416,000
Employee benefit plan (Note
8)........................ -- 260,000 -- -- -- -- 260,000
Treasury stock aquired..... -- -- (69,000) -- -- -- (69,000)
Translation adjustment..... -- -- -- -- -- 2,000 2,000
Loss....................... -- -- -- -- (36,065,000) -- (36,065,000)
-------- ------------ ----------- --------- ------------- -------- ------------
BALANCE, DECEMBER
31, 1994.................. 183,000 184,310,000 (69,000) -- (71,679,000) 22,000 112,767,000
Sales of common stock...... 40,000 84,197,000 -- -- -- -- 84,237,000
Issuance of common stock
upon exercise of stock
options and warrants...... 15,000 16,425,000 -- -- -- -- 16,440,000
Amortization of warrants in
connection with
Partnership transaction--
1995 portion
(Notes 7 and 9).............. -- 815,000 -- -- -- -- 815,000
Amortization of deferred
compensation (Note 7)........ -- -- -- -- -- -- --
Employee benefit plan (Note
8)........................ -- 375,000 -- -- -- -- 375,000
Treasury stock aquired..... -- -- (1,418,000) -- -- -- (1,418,000)
Translation adjustment..... -- -- -- -- -- (8,000) (8,000)
Loss....................... -- -- -- -- (33,003,000) -- (33,003,000)
-------- ------------ ----------- --------- ------------- -------- ------------
BALANCE, DECEMBER 31,
1995...................... 238,000 286,122,000 (1,487,000) -- (104,682,000) 14,000 180,205,000
Issuance of common stock
upon exercise of stock
options and warrants...... 8,000 8,144,000 -- -- -- -- 8,152,000
Restricted stock award
plan...................... -- 2,073,000 -- -- -- -- 2,073,000
Employee benefit plan (Note
8)........................ -- 529,000 -- -- -- -- 529,000
Treasury stock aquired..... -- -- (291,000) -- -- -- (291,000)
Translation adjustment..... -- -- -- -- -- (57,000) (57,000)
Loss....................... -- -- -- -- (53,285,000) -- (53,285,000)
-------- ------------ ----------- --------- ------------- -------- ------------
BALANCE, DECEMBER 31,
1996...................... $246,000 $296,868,000 $(1,778,000) -- $(157,967,000) $(43,000) $137,326,000
======== ============ =========== ========= ============= ======== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<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.
41
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Management continually evaluates whether
events or circumstances have occurred that indicate that the remaining useful
lives of the assets should be revised or that the remaining balance of such
assets may not be recoverable based upon expectations of future undiscounted
cash flows in accordance with SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." As of December
31, 1996, no such revisions were required. 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.
42
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, short-term investments, accounts payable, accrued expenses and
debt instruments. The book values of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued expenses are
considered to approximate their respective fair values. None of the Company's
debt instruments that are outstanding as of December 31, 1996 have readily
ascertainable market values; however, the carrying values are considered to
approximate their respective fair values.
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. Contractual maturities of the Company's
investments in debt securities are $97,948,000 in 1997 and $48,900,000 in
1998.
43
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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).
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>
44
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
45
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
46
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
47
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The value of stock
options granted to all non-employees are charged to expense. Since the Company
has been a public company, 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 for employees 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.
The following table summarizes the aggregate option activity under both
plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
ACTIVITY 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>
48
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
49
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 (rhIGF-I) 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.
50
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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).
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
51
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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.
SmithKline Beecham plc
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.
52
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
53
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
54
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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).
55
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
56
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
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, 71 Director
Ph.D.(2).................
Martyn D. Greenacre(1).... 55 Director
Kevin E. Moley(1)......... 50 Director
Horst Witzel, 69 Director
Dr.-Ing.(2)..............
</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 Pharmacopeia, Inc.
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 Assistant Secretary. Mr.
Peacock holds a B.A. degree from Villanova University and is a Certified
Public Accountant.
57
<PAGE>
Mr. Buchi joined the Company as Controller in March 1991 and held several
financial positions with the Company prior to being appointed Senior Vice
President, Finance and Chief Financial Officer in April 1996. 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
58
<PAGE>
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.
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.
59
<PAGE>
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter.
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.
<TABLE>
<CAPTION>
EXHIBIT
NO.
--------
<C> <S>
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)(21).
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)(21).
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)(21).
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)(21).
10.5(a) Supply Agreement, dated January 20, 1993, between Cephalon, Inc. and
Laboratoire L. Lafon (Exhibit 10.1)(7)(21).
10.5(b) License Agreement, dated January 20, 1993, between Cephalon, Inc.
and Laboratoire L. Lafon (Exhibit 10.2)(7)(21).
10.5(c) Trademark Agreement, dated January 20, 1993, between Cephalon, Inc.
and an affiliate of Laboratoire L. Lafon (Exhibit 10.3)(7)(21).
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)(21).
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)(21).
+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).
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
---------
<C> <S>
+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)(21).
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)(21).
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)(21).
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)(21).
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)(21).
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)(21).
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).
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)(21).
10.12(a) Agreement between Cephalon, Inc. and Chiron Corporation dated as of
January 7, 1994 (Exhibit 10.1)(13)(21).
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)(21).
10.13(a) Agreement between Cephalon, Inc. and TAP Holdings Inc. (formerly
TAP Pharmaceuticals Inc.) dated as of May 17, 1994 (Exhibit
99.2)(14)(21).
*10.13(b) Amendment dated June 28, 1996 amending Agreement between Cephalon,
Inc. and TAP Holdings Inc.(22)
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
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
</TABLE>
- --------
* 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.
(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 granted by the
Securities and Exchange Commission.
(22) 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.
62
<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 AMENDMENT TO THIS
REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED.
Cephalon, Inc.
Date: April 2, 1997
By: /s/ J. Kevin Buchi
---------------------------------
J. Kevin Buchi
Senior Vice President, Finance and
Chief Financial Officer
63
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NO. PAGE NO.
-------- --------
<C> <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>
- --------
* Filed herewith
(1) 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>
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 ninety (90) days' 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;"
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<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.
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<PAGE>
AMENDED SCHEDULE I
------------------
Identified Subject Compounds
----------------------------
[xxxxxxxxxx]
[xxxxxxxxxx]
[xxxxxxxxxx]
[xxxxxxxxxx]
[xxxxxxxxxx]
[xxxxxxxxxx]
[xxxxxxxxxx]
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<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
---------
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<PAGE>
1996 DEVELOPMENT PLAN
---------------------
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<PAGE>
Discovery Flow
[ Charts Deleted
]
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<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>
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<PAGE>
DRUG DEVELOPMENT
FTE ALLOCATION BY QUARTER
[
]
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<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>
[ ]
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K/A-2, 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 No. 333-20321.
Arthur Andersen LLP
Philadelphia, Pa.,
April 2, 1997
