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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19119
CEPHALON, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2484489
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
145 Brandywine Parkway, 19380
West Chester, Pennsylvania (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 344-0200
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. YES [X]. No [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $388,683,864. 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 20, 1998. 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
20, 1998 was 28,413,475.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 1998 annual
meeting of stockholders are incorporated by reference into Part III.
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TABLE OF CONTENTS
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Page
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PART I
ITEM 1. Business....................................................................................... 3
ITEM 2. Properties..................................................................................... 21
ITEM 3. Legal Proceedings.............................................................................. 22
ITEM 4. Submission of Matters to a Vote of Security Holders............................................ 22
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 23
ITEM 6. Selected Consolidated Financial Data........................................................... 24
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 25
ITEM 8. Financial Statements and Supplementary Data.................................................... 37
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure........... 56
PART III
ITEM 10. Directors and Executive Officers of the Registrant............................................. 56
ITEM 11. Executive Compensation......................................................................... 58
ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................. 58
ITEM 13. Certain Relationships and Related Transactions................................................. 58
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 59
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PART I
ITEM 1. BUSINESS
The statements in this Report that are not historical fact, such as statements
which describe the potential markets for the Company's product candidates and
the Company's scientific and business objectives, are based on management's
current opinions and beliefs. Those types of statements are intended to be
"forward-looking statements" for purposes of the Private Securities Litigation
Reform Act of 1995, and should be read in conjunction with the cautionary
statements set forth under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Risks Related to
Cephalon's Business."
Cephalon, Inc. ("Cephalon" or the "Company") seeks to discover, develop and
market pharmaceutical products to treat 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 gene
transcription regulators. Cephalon believes that its multidisciplinary
technology approach facilitates the development of a portfolio of potential
products for the treatment of neurological disorders such as narcolepsy,
amyotrophic lateral sclerosis ("ALS"), multiple sclerosis, peripheral
neuropathies, Alzheimer's disease and stroke. Certain aspects of this
technology have also allowed Cephalon to diversify its therapeutic objectives to
include novel approaches for the treatment of cancer, especially prostate
cancer. The Company's internal research and development efforts are
supplemented by efforts to in-license product candidates.
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 has established sales organizations in the United States, the
United Kingdom and France focused on neurologists and certain other specialists.
In the United States, the Company is co-promoting two Bristol-Myers Squibb
Company ("BMS") proprietary products, Stadol NS(R) (butorphanol tartrate), and
Serzone(R) (nefazodone hydrochloride), as well as Intrathecal Baclofen Therapy
(ITB(TM)), a product of Medtronic, Inc. ("Medtronic"). In the United Kingdom,
the Company is marketing PROVIGIL(R) (modafinil) Tablets for use in treating
narcolepsy. Under an exclusive sales and marketing agreement with Laboratoire
Aguettant S.A. ("Aguettant"), the Company is selling Apokinon(R) (apomorphine
hydrocloride) in France, which is used in the treatment of Parkinson's disease.
A new drug application ("NDA") has been filed with the U. S. Food and Drug
Administration ("FDA") for the use of PROVIGIL in treating the excessive daytime
sleepiness associated with narcolepsy, and a marketing authorization application
for PROVIGIL also has been filed in the Republic of Ireland. See "Narcolepsy."
The Company and Chiron Corporation ("Chiron") have filed an NDA with the FDA for
the use of MYOTROPHIN(R) (rhIGF-I) in the treatment of ALS, and a marketing
authorization application for MYOTROPHIN also has been filed in Europe. See
"Amyotrophic Lateral Sclerosis." There can be no assurance that these
applications will be approved or that the Company will successfully
commercialize any of its product candidates. 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
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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 the
treatment of appropriate neurologic disorders and on understanding the mechanism
of trophic factor-induced neuronal survival. This understanding may allow
medicinal chemical approaches toward creating novel small synthetic molecules
which would cross the blood-brain barrier and would mimic the action of proteins
by intervening in the progression of neurodegenerative disorders. The Company's
broad-based research program currently consists of four core technology areas:
neurotrophic factors, protease inhibitors, signal transduction modulators and
gene transcription regulators.
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's development efforts in this area focus on
using the neurotrophic factor, MYOTROPHIN, in 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, or in disorders such as multiple sclerosis, where the blood-brain
barrier is compromised allowing trophic factors to cross into the CNS.
Protease Inhibitors. 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 this core technology can be applied to any
number of proteases and disorders, the Company focuses on developing small
molecule therapeutics that inhibit the actions of the protease calpain, which is
thought to play a role in causing the neuronal damage associated with stroke.
Signal Transduction Modulators. Neuronal survival is regulated and influenced
by factors which promote cell survival or induce cell death. These factors
exert differential effects on the neuron (promotion of survival versus induction
of death) through activation of distinct intracellular signaling pathways. Once
activated, these pathways result in the phosphorylation of distinct
intracellular kinases that regulate molecular pathways of survival or death. In
neurodegenerative disease, activation of death-promoting processes leads to
neuronal death. Thus, inhibition of the signaling events in death-promoting
pathways provides novel therapeutic targets for small molecules. The Company has
focused its efforts on identifying small molecules that modulate these signal
transduction processes.
The Company has developed an extensive proprietary library of small molecule
modulators of the signal transduction processes which block the death process in
isolated neurons in vitro and in vivo, where damage has been induced by a
variety of harmful stimuli. The Company is pursuing the development of these
small molecules for the treatment of Alzheimer's disease and other
neurodegenerative disorders.
Further, the Company believes that uncontrolled activation of the survival
pathway by growth factors can lead to tumor development and growth. The Company
has identified a number of antagonists that inhibit this growth factor signal
transduction, which may be useful in the treatment of certain types of cancer,
such as prostate cancer.
Gene Transcription Regulators. 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
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blood brain barrier must be overcome. The Company is developing a proprietary
series of molecules that have demonstrated the ability to enhance the endogenous
expression in the CNS of nerve growth factor and other neurologically important
factors. These molecules are believed to influence gene transcription by binding
to a neuron-specific receptor which is widely distributed in the brain. These
orally active small molecules 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 U.S. STATUS(1)(2) COMMERCIAL RIGHTS
<S> <C> <C> <C>
Narcolepsy.................... PROVIGIL NDA(3) Cephalon in Italy, Japan, Mexico,
Republic of Ireland, United Kingdom,
United States
ALS........................... MYOTROPHIN NDA Cephalon/Chiron/Kyowa Hakko(4)
Multiple Sclerosis............ MYOTROPHIN Phase I Cephalon/Chiron/Kyowa Hakko(4)
Peripheral Neuropathies....... MYOTROPHIN Phase II Cephalon/Chiron/Kyowa Hakko(4)
Alzheimer's Disease........... Signal Transduction Development Cephalon/Kyowa Hakko(5)
Modulators
Gene Transcription Development Cephalon/Leo(6)
Regulators
Stroke........................ Calpain Inhibitors Research Cephalon
Prostate Cancer............... Signal Transduction Phase I Cephalon/TAP/Kyowa Hakko(7)
Modulators
Other Cancers................. Signal Transduction Research Cephalon
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. See "Government
Regulation."
(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) An NDA has been filed with the FDA for the use of PROVIGIL in treating the
excessive daytime sleepiness associated with narcolepsy. Approval to market
has been granted in the United Kingdom and a marketing authorization
application has been filed in the Republic of Ireland. See "Corporate
Collaborations--Laboratoire L. Lafon."
(4) Cephalon and Kyowa Hakko are developing MYOTROPHIN in Japan. Cephalon and
Chiron are jointly developing MYOTROPHIN for ALS and other neurological
disorders outside of Japan. Cephalon is developing MYOTROPHIN in the United
States and Europe for the Partnership. An NDA has been filed with the FDA
and a marketing authorization application has been filed in Europe for the
use of MYOTROPHIN in the treatment of ALS. See "Corporate Collaborations--
Kyowa Hakko Kogyo Co., Ltd.," "Corporate Collaborations--Chiron" and
"Cephalon Clinical Partners, L.P."
(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) TAP is to develop and market certain of these compounds for the treatment
of prostate disorders and other cancers 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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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, of which 30,000-40,000 are
believed to currently seek treatment from a physician. The Company believes that
there is a proportionate incidence of narcolepsy in the other territories to
which it has obtained a license. Current therapies that treat symptoms of the
disorder, such as amphetamine-like stimulants, may have undesirable side effects
and a high potential for abuse, 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 in Italy, Japan, Mexico, the Republic of
Ireland, the United Kingdom and the United States. See "Corporate
Collaborations--Laboratoire L. Lafon."
In December 1997, the Company was notified by the FDA that its NDA to market
PROVIGIL in the United States for the treatment of the excessive daytime
sleepiness associated with narcolepsy is approvable upon the satisfactory
response to the FDA's comments and completion of product labeling. In Europe,
the Company is marketing PROVIGIL in the United Kingdom and its application
filed in the Republic of Ireland is pending. There can be no assurance that any
of the pending applications will be approved. The Company has not yet filed a
marketing application in Italy, Japan or Mexico. See "Management's Discussion
and Analysis--Certain Risks Related to Cephalon's Business."
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 15,000-20,000 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.
An NDA has been pending at the FDA since February 1997. At a May 1997 meeting,
a majority of members of the FDA's Peripheral and Central Nervous System Drugs
Advisory Committee (the "PCNS Committee") concluded that the data presented to
it for review did not meet the FDA's standard of "substantial" evidence of
effectiveness. The Company and the FDA are performing additional analyses of
data which the agency is reviewing, but there is no assurance that these
analyses will produce evidence sufficient to satisfy the FDA's standards for
product approval. The FDA has scheduled another public hearing of the PCNS
Committee for April 9, 1998, for further consideration of the efficacy of
MYOTROPHIN in ALS patients. A marketing authorization application has been filed
in Europe for the use of MYOTROPHIN in the treatment of ALS. There can be no
assurance that any of the pending applications will be approved. MYOTROPHIN is
being supplied to approximately 400 patients in the United States under a
treatment program for investigational new drugs. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Certain Risks
Related to Cephalon's Business."
The Company is developing MYOTROPHIN in collaboration with Chiron Corporation
("Chiron") for use in the treatment of ALS, peripheral neuropathies, multiple
sclerosis and other neurological disorders. See "Corporate Collaborations--
Chiron Corporation." The Company is performing the development and clinical
testing of MYOTROPHIN on behalf of Cephalon Clinical Partners, L.P. (the
"Partnership"). Cephalon's rights to MYOTROPHIN are subject to the terms of the
license granted by the Partnership, and the rights of the Partnership to receive
payments from Cephalon. See "Cephalon Clinical Partners, L.P."
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Multiple Sclerosis
Multiple sclerosis is a neurological disease caused by a breakdown in the
myelin sheathing that surrounds and protects nerve fibers. The breakdown
results in inflammation of random patches (plaques) in the central nervous
system and causes the disruption of normal nerve cell impulses. Even when the
inflammation subsides, nerve impulses are carried at reduced speed.
Multiple sclerosis affects approximately 300,000 people in the United States.
While the disease is most common in those of northern European ancestry it
appears in members of all races. Prevalence in women is approximately twice
that in men. Although the cause of the disease is unknown, it is speculated
that an autoimmune response to a viral illness may be involved. Treatments are
currently available to reduce the frequency of exacerbation in certain forms of
the disease as well as to treat some of the symptoms of the disease.
The Company is conducting a Phase I study of MYOTROPHIN in the treatment of
multiple sclerosis.
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.
The Company is evaluating MYOTROPHIN for potential use in treating peripheral
neuropathies. A dose-ranging Phase I study has been completed in diabetic
patients, which would be needed if the Company pursues diabetic neuropathy in
Phase II studies. In addition, a preliminary clinical study has been completed
in patients with post-polio syndrome and a clinical study is currently underway
in patients with small fiber neuropathy. The results of these studies and
studies conducted by others will be considered in determining whether MYOTROPHIN
should be further evaluated in any of these indications. A study intended to
evaluate the use of MYOTROPHIN in chemotherapy-induced neuropathy has been
terminated because of difficulties in enrolling patients.
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 are 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 suggests that an increasing
percentage of the population may be affected as the population ages.
Cephalon uses two distinct approaches to the discovery of therapeutics which
retard or halt the neuronal death that is associated with Alzheimer's disease:
signal transduction modulators and gene transcription regulators.
Cephalon has synthesized and identified a class of novel small molecules which
are orally active and cell- and blood-brain barrier permeable modulators of
signal transduction. One of these molecules, CEP-1347, has been shown to prevent
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. See "Corporate Collaborations--
Kyowa Hakko Kogyo Co., Ltd."
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Cephalon is pursuing a class of regulators of gene transcription which, in
preclinical studies, have demonstrated the ability to enhance the endogenous
expression of nerve growth factor 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."
The Company has reduced its resources allocated to a third research program,
which focused on identifying inhibitors of beta-amyloid as potential therapeutic
agents for the treatment of Alzheimer's disease. This program was previously
funded under a collaboration agreement with 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.
This program was funded under a collaborative agreement with SmithKline
Beecham plc ("SB") which concluded on December 1, 1997. The Company is
continuing to develop certain calpain inhibitors, pending evaluation of progress
in the program.
Prostate Cancer
Prostate cancer is the most common form of cancer in men, affecting
approximately one million men in the United States, and is the second leading
cause of cancer death in men. Current therapy includes surgery to remove the
cancer and treatment with anti-androgen agents such as leuprolide. If these
treatments fail and the tumor becomes androgen-refractory, there are no
effective treatments and death usually results.
The Company believes that its small molecule technology has potential
application in disorders outside the neurology area. The Company has identified
certain molecules which modulate signal transduction by blocking (antagonizing)
the action of certain growth factors. The Company believes these inhibitors may
be useful in treating certain diseases such as prostate cancer, where tumor
growth and development may be mediated by an uncontrolled activation of the
endogenous growth factor. This approach has been demonstrated by the Company to
be active against androgen-refractory prostate cancer tumors in preclinical
models.
Cephalon and TAP Holdings Inc. ("TAP") are parties to a licensing and research
and development collaboration to develop signal transduction modulators for the
treatment of human cancers and prostate disorders in the United States. In 1996,
TAP initiated a Phase I clinical study of an intravenously administered compound
and, in March 1998, TAP initiated a Phase I study of an orally administered
compound. The objective of these multi-center studies is to examine the drugs'
pharmacokinetic and safety profiles in patients with advanced cancer. The
molecules used by TAP in these studies were developed under the Company's
agreement with Kyowa Hakko. See "Corporate Collaborations--TAP Holdings Inc."
and "Corporate Collaborations--Kyowa Hakko Kogyo Co., Ltd."
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SALES AND MARKETING
The Company has established sales organizations in the United States, the
United Kingdom and France focused on neurologists and certain other specialists.
In the United States, the Company is co-promoting two BMS proprietary products,
STADOL NS, and SERZONE, as well as ITB, a product of Medtronic. In the United
Kingdom, the Company is marketing PROVIGIL Tablets for use in treating
narcolepsy. Under an exclusive sales and marketing agreement with Aguettant, the
Company is selling APOKINON in France, which is used in the treatment of
Parkinson's disease.
CORPORATE COLLABORATIONS
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's internal research and development efforts are
supplemented by efforts to in-license product candidates. To date, the Company
has entered into the following corporate arrangements:
Laboratoire Aguettant S.A.
In December 1997, the Company entered into a ten-year agreement with Aguettant
to promote and market APOKINON to neurologists in France. APOKINON, which is
injected subcutaneously by a unique metered dose injection, is indicated for the
treatment of levadopa therapy fluctuations common in late-stage Parkinson's
disease.
In return for its marketing rights, the Company is responsible for annual
payments to Aguettant during the first five years of the agreement. The Company
has commenced sales and marketing activities, and is to receive quarterly
compensation from Aguettant based primarily on a rate per unit of APOKINON sold.
The agreement automatically renews for successive one-year periods unless
terminated by either party upon 90 days notice prior to the expiration of the
initial term or subsequent term.
Medtronic, Inc.
In April 1997, the Company and Medtronic entered into a one-year, renewable
co-promotion agreement under which Cephalon markets ITB to neurologists and
physiatrists in the United States. ITB is indicated for the treatment of
intractable spasticity which can be associated with multiple sclerosis, cerebral
palsy, traumatic brain injury, stroke, and spinal cord injury and disease.
The Company receives quarterly compensation primarily based upon sales
activity and attainment of performance targets. The agreement automatically
renews for successive one-year periods unless terminated by either party upon 60
days notice prior to the expiration of the initial term or subsequent term.
Leo Pharmaceutical Products, Ltd.
In November 1996, the Company and Leo entered into a two-year, renewable
agreement to collaborate in the development of gene transcription regulators for
potential use in the treatment of neurological disorders.
Under this agreement Cephalon will use its 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
percentage of net sales as a royalty and for the 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.
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Bristol-Myers Squibb Company
In July 1994, the Company and BMS entered into a co-promotion agreement under
which Cephalon markets STADOL NS to neurologists in the United States. STADOL NS
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, a treatment for
depression.
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. The co-promotion agreements expire at
the end of 1998 unless BMS and Cephalon agree to renew the arrangements.
TAP Holdings Inc.
The Company and TAP are parties to a licensing and research and development
collaboration to develop and commercialize certain compounds for the treatment
of human cancers and prostate disorders in the United States. The compounds
belong to a family of inhibitors from the Company's signal transduction
modulator program.
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 to Cephalon upon the
submission and approval of NDAs, if any, that may emanate from the
collaboration and to purchase commercial supplies of product from Cephalon at a
price equal to a fixed percentage of sales plus royalties on product sales.
Chiron Corporation
Since January 1994, the Company and Chiron have collaborated in the
development of MYOTROPHIN in the neurological field, for commercialization in
all countries of the world other than Japan. Currently, the collaboration is
developing MYOTROPHIN for the treatment of ALS and other neurological disorders.
The costs of the program are shared equally by the two companies with the
exception of the ongoing study of MYOTROPHIN in the treatment of multiple
sclerosis, which is currently being funded solely by the Company.
Profits, if any, and losses from the marketing of MYOTROPHIN for the treatment
of ALS and other neurological disorders 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, if any, in Western Europe
to treat ALS. Chiron is to market the products in the collaboration's territory
outside of North America and Western Europe, in return for royalties to the
collaboration, which also will be shared equally by the Company and Chiron.
The collaboration may be terminated by either party if there is no reasonable
basis for developing any of the collaboration's compounds. If the Company is the
non-terminating party, it may continue to license the technology or require
Chiron to supply product on a "cost plus" basis for a certain period of time.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Risks Related to Cephalon's Business." In addition to
customary termination events such as breach by the other party, the agreement
also is subject to termination if Cephalon does not exercise the Purchase
Option. See "Cephalon Clinical Partners, L.P."
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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 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."
Laboratoire L. Lafon
In January 1993, the Company entered into an agreement with Lafon, a French
pharmaceutical company, under which Cephalon obtained an exclusive license to
develop, market and sell PROVIGIL in the United States and Mexico. The license
was subsequently expanded to include the United Kingdom, the Republic of
Ireland, Japan and Italy.
Under the terms of the agreement, Lafon is to supply finished product for the
Company's use in conducting clinical trials, and is to supply bulk modafinil
compound for the Company's commercial uses at a purchase price equal to a
percentage of net product sales achieved. In addition, the Company is to pay
trademark and license royalties, which also are based on a percentage of net
product sales.
The Company's rights in Japan are contingent upon entering into an agreement
for commercialization of PROVIGIL with a Japanese partner by the end of June
1998.
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 Cancer."
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 finished product at its cost for the
Company's use in conducting clinical trials. The Company will pay Kyowa Hakko
for bulk compound to be used for commercial supplies at a price equal to Kyowa
Hakko's cost of manufacture, and also will pay Kyowa Hakko a royalty on product
sales. The aggregate amount to be paid to Kyowa Hakko for commercial supplies
and royalties on sales is 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 in Europe,
Canada and Mexico to develop and market compounds arising out of its prostate
cancer program, which includes the compounds now being developed in the United
States in collaboration with TAP. If Cephalon exercises its option, Kyowa Hakko
will receive exclusive rights in Asia to the same compounds, and will receive a
royalty from Cephalon on European sales of the compounds.
The license agreement will automatically terminate if the Company discontinues
the development of licensed molecules because of lack of safety or efficacy.
In July 1993, the Company entered into a separate agreement with Kyowa Hakko
providing for the development of MYOTROPHIN in Japan. Kyowa Hakko is responsible
for funding product development activities in Japan, for conducting clinical
trials in Japan for ALS and for seeking authorization to market MYOTROPHIN in
Japan. The Company is to supply MYOTROPHIN at its cost to Kyowa Hakko for use in
Japanese clinical trials,
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and is to supply MYOTROPHIN at a percentage of net selling price for commercial
use. The Company is to receive certain licensing, milestone and royalty
payments. See "Manufacturing and Product Supply." Under certain circumstances,
the Company has an option to co-promote MYOTROPHIN in Japan.
The Company may terminate the agreement if (i) Kyowa Hakko fails to file for
marketing approval of MYOTROPHIN in Japan within eight 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 because of a lack
of its safety or efficacy.
Cephalon Clinical Partners, L.P.
In August 1992, Cephalon exclusively licensed to Cephalon Clinical Partners,
L.P., rights to MYOTROPHIN 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. 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
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 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 from
its own cash resources.
The Partnership has granted an exclusive license to the Company (the "Interim
License") to manufacture and market MYOTROPHIN for human therapeutic use within
the Territory in return for certain royalty payments and a payment of
approximately $16,000,000 (the "Milestone Payment") that is to be made if
MYOTROPHIN receives regulatory approval in the United States or certain other
countries within the Territory.
The Company has 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 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 in the Territory will revert to the Partnership, which may
then commercialize MYOTROPHIN 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
enforcing agreements (described above) entered into by the Partnership,
prosecuting and defending the intellectual property owned by the Partnership and
entering into loan agreements and other transactions on behalf of the
Partnership. No such borrowings, commitments, or obligations are outstanding.
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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 products 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
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., European 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. The Company also owns U.S. patents claiming the use of IGF-
I in treating certain types of peripheral neuropathies, and the Company has
filed similar applications for treating such peripheral neuropathies in Canada,
Europe and Japan. Cephalon also has filed patent applications in the United
States, Canada, Europe and Japan covering the use of IGF-I in enhancing the
survival of neuronal cells. 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 in the neurology field. In
1996, the Company exercised its option to obtain SIBIA's rights outside the
field of neurodegenerative diseases.
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. The
Company believes these secondary effects 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, thereby potentially reducing sales of
MYOTROPHIN. 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. 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 Genentech, Inc. ("Genentech"). It is not known when or how the USPTO
will ultimately conclude the interference proceeding. Another related
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patent application of Chiron, which may cover the current process for
manufacturing rhIGF-I, was the subject of another interference proceeding with a
Genentech patent. Chiron prevailed in the interference proceeding and thereafter
prevailed in a district court appeal brought by Genentech. That decision was
appealed to the Court of Appeals for the Federal Circuit ("CAFC") by Genentech.
In April, 1997, the CAFC reversed the district court determination and remanded
the case back to the district court, which has scheduled the matter for trial
later this year. It is not known how the district court will reconsider the
proceeding on remand. It is not possible to predict which party will obtain an
issued patent or whether the issued claims will cover any portion of the current
manufacturing process. The Company is aware of other patents and patent
applications owned by third parties, which 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 in the United States. In such event,
the Company could be materially adversely, based on a preliminary review,
affected.
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. The Company is aware of a United States patent recently issued to
Genentech and a granted European patent that claim the use of IGF-I in treating
neural damage suffered after a CNS insult affecting glia and/or other non-
cholinergic cells, by increasing the active concentration(s) of IGF-I or its
analogues in the CNS. The Company has filed an opposition against the granted
European patent. It is not known when or how the European Patent Office will
consider the opposition. If the claims of the issued U.S. patent and the
granted European patent are not otherwise invalid or unenforceable, or if the
grant is not revoked by the European Patent Office, the Company could be
prevented from selling MYOTROPHIN in the United States and Europe for uses of
IGF-I claimed in the patents, unless it obtained a license to the patents. There
can be no assurance that a license is available at all or on acceptable terms to
the Company. The Company believes, based on a preliminary review, that the
claims of the issued United States patent and the granted European patent would
not be infringed by the use or sale of MYOTROPHIN for the treatment of ALS or
peripheral neuropathies, and is reviewing the issued claims with respect to the
treatment of other neurological disorders, including multiple sclerosis. 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
effecting a change in the CNS. The Company believes that even if the subject
matter were deemed to overlap the subject matter of issued patents and pending
patent applications 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 patents or applications. Further, the Company believes that a
third party has filed a U.S. patent application which may contain a claim which,
if issued, might broadly cover the use of rhIGF-I to treat many neurological
conditions, including ALS and peripheral neuropathies. Clark & Elbing LLP,
patent counsel to the Company, has advised the Company that, in its opinion,
such a claim would not be patentable. If such a claim should issue, the Company
could be prevented from selling MYOTROPHIN 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 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 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 at all or on acceptable terms from any third parties holding a patent
which covers any of the Company's commercial activities. Furthermore, one or
more claims of the Company's existing patents could be declared invalid.
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PROVIGIL
The particle size of the composition of PROVIGIL is included in claims of a
U.S. patent of the Company which issued in 1997. Foreign patents claiming the
particle size composition of PROVIGIL are pending in Cephalon's other
territories. The composition-of-matter patent claiming PROVIGIL expired in 1998
in the United States, the United Kingdom, the Republic of Ireland, Japan, Italy
and Mexico. See "Corporate Collaborations--Laboratoire L. Lafon." The Company
has applied for an extension of the patent in the United Kingdom and has sought
an interim extension of the patent in the United States under the Drug Price
Competition and Patent Term Restoration Act of 1984 (the "DPC Act"). The interim
extension, if granted, would be equal to one year, and the Company may seek a
further extension if PROVIGIL is approved by the FDA, which cannot exceed
(together with the interim extension) one-half the period of time elapsed
between the filing of an investigational new drug application ("IND") for
PROVIGIL and the filing of the corresponding NDA plus the period of time between
the filing of the NDA for PROVIGIL and FDA approval. See "Government
Regulation." There can be no assurance that the Company will be able to take
advantage of the patent extension benefits of the DPC Act. The Company believes
that an extension of the modafinil composition patent is not possible in any
other of its licensed territories. Also included in the license from Lafon are
rights to a U.S. patent that issued in January 1993 for the use of PROVIGIL in
treating Parkinson's disease and a U.S. patent issued in 1990 which claims the
composition of isomers of PROVIGIL. The Company believes that PROVIGIL, if
approved in the United States, will receive orphan drug status for its use in
the treatment of excessive daytime sleepiness associated with narcolepsy. See
"Orphan Drug Designation."
Orphan Drug Designation
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 as an orphan drug for use in treating ALS and PROVIGIL 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. Orphan drug
designation does not confer any special or preferential treatment in the
regulatory review process. 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.
Other
Cephalon also owns issued U.S. patents claiming compositions of inhibitors of
certain proteases, 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." Counterparts of these patents have been filed in other
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, including compositions and uses of
certain indolocarbazoles in the treatment of pathological conditions of the
prostate (including prostate cancer) and for the treatment of neurological
disorders. See "Corporate Collaborations--Kyowa Hakko Kogyo Co., Ltd."
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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. The Company's employees enter
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 current Good Manufacturing Practice ("cGMP")
regulations.
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. Cephalon currently relies on third parties for all
of its manufacturing requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Risks Related to
Cephalon's Business."
The Company relies on Lafon for all its requirements of bulk modafinil
compound and upon third party manufacturers to provide final formulation,
tabletting and packaging.
Cephalon relies on Chiron for all of its manufacturing requirements for
MYOTROPHIN (including for clinical and commercial supplies of MYOTROPHIN for use
by Kyowa Hakko in Japan). 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. See "Patents and Proprietary
Technologies."
Kyowa Hakko is to supply bulk compounds licensed to the Company under the May
1992 agreement. See "Corporate Collaborations--Kyowa Hakko Kogyo Co., Ltd."
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. See "Corporate Collaborations--TAP Holdings Inc."
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COMPETITION
With respect to PROVIGIL, there are presently several products used in the
United States and the Company's other licensed territories to treat narcolepsy.
Although the Company believes that PROVIGIL 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 potential
advantages of PROVIGIL to prescribing physicians and their patients. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Risks Related to Cephalon's Business."
With respect to MYOTROPHIN, Rilutek(R) (riluzole) has been approved and is
being marketed by Rhone-Poulenc Rorer in the United States and certain countries
in Europe for the treatment of ALS. In addition, the Company believes that other
companies are developing other therapeutic agents for the treatment of ALS.
Because the potential patient population for ALS is limited, competition from
other products may adversely affect potential sales of MYOTROPHIN. Other
companies are developing rhIGF-I as a therapeutic product for diseases other
than ALS or peripheral neuropathy, including Chiron and Genentech. If
another company markets rhIGF-I for other uses at a price lower than the price
of MYOTROPHIN, potential sales of MYOTROPHIN, if any, may be reduced. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Risks Related to Cephalon's Business."
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 neurological disorders
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. Competition and innovation from these or
other sources potentially could 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.
Cephalon is marketing proprietary products of others including STADOL NS,
SERZONE and ITB in the United States and APOKINON in France. All of these
therapies compete directly or indirectly with other products on the market. In
addition, in all cases, new products are under development by third parties
which could compete, if approved for marketing, with the products currently
being marketed by the Company.
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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. The
results of the preclinical studies are submitted to regulatory authorities as a
part of an investigational new drug application ("IND"), which is filed with
regulatory agencies prior to beginning studies in humans. For several of the
Company's drug candidates, no animal model exists which is potentially
predictive of results in humans. As a result, no in vivo indication of efficacy
would be available until these candidates progress to human clinical trials.
Clinical trials are typically conducted in three sequential phases, although
the phases may overlap. In Phase I, which frequently begins with the initial
introduction of the drug into healthy human subjects prior to introduction into
patients, the compound is tested for safety (adverse effects), dosage tolerance,
absorption, biodistribution, metabolism, excretion, clinical pharmacology and,
if possible, to gain early information on effectiveness. Phase II typically
involves studies in a small sample of the intended patient population to assess
the efficacy of the drug for a specific indication, to determine dose tolerance
and the optimal dose range as well as to gather additional information relating
to safety and potential adverse effects. Phase III trials are undertaken to
further evaluate clinical safety and efficacy in an expanded patient population,
often at multiple study sites, in order to determine the overall risk-benefit
ratio of the drug, and to provide an adequate basis for physician labeling. Each
trial is conducted in accordance with certain standards under protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. In the United States, each protocol
must be submitted to the FDA as part of the IND. Further, each clinical study
must be evaluated by an independent Institutional Review Board ("IRB") at the
institution at which the study will be conducted. The IRB considers, among other
things, ethical factors, the safety of human subjects and the possible liability
of the institution. Similar procedures and requirements must be fulfilled to
conduct studies in other countries.
Data from preclinical and clinical trials are submitted to the FDA in an NDA
for marketing approval and to foreign health authorities in Europe 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 cGMP 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.
19
<PAGE>
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. 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 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 equivalent or identical to
PROVIGIL for the treatment of excessive daytime sleepiness associated with
narcolepsy. An ANDA is the application form typically used by manufacturers
seeking approval of a generic version of an approved drug. Subsequent approved
indications for the new chemical entity are entitled, under this statute, to
three years of partial marketing exclusivity; during this three year period, a
third party may file an ANDA, but would be prohibited from marketing a generic
version of the new chemical entity for the subsequent approved indication until
the expiration of three years from marketing authorization for such subsequent
approved indication. The Company intends to seek the benefits of this statute as
applicable, but there can be no assurance that the Company will be able to
obtain any such benefits.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals vary
widely from country to country, and the time required for approval may be longer
or shorter than that required for FDA approval. Although there are procedures
for unified filings for most European countries, in general, each country at
this time also 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, in some circumstances, 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. A principal factor in
determining the particular CSA requirements, if any, applicable to a product is
its actual or potential abuse profile. The Company expects that PROVIGIL will be
scheduled under the CSA as a Schedule IV substance, although the actual
scheduling under the CSA could be more restrictive. Additionally, PROVIGIL may
be subject to various state statutes regulating controlled substances which, in
some cases, may be more restrictive than the CSA. In 1997, STADOL NS was
classified as a Schedule IV controlled substance at the request of BMS. In
addition, a number of state regulatory agencies in the United States have
independently controlled the distribution of STADOL NS under their local
authority.
In addition to the statutes and regulations described above, the Company also
is 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.
20
<PAGE>
SCIENTIFIC AND MEDICAL ADVISORY BOARDS
The Company maintains a Scientific Advisory Board consisting of individuals
with expertise in neuroscience and related fields. Members of the Scientific
Advisory Board advise the Company concerning long-term scientific planning,
research and development, and also periodically evaluate the Company's research
programs. The members are compensated by the Company for their services. The
current members of the Company's Scientific Advisory Board are as follows:
Stanley H. Appel, M.D.,
Baylor College of Medicine
Stanley Cohen, Ph.D.,
Vanderbilt University School of Medicine
Gordon Guroff, Ph.D.,
National Institute of Child Health and Human Development, NIH
Robert Y. Moore, M.D., Ph.D.,
University of Pittsburgh
Robert H. Roth, Ph.D.
Yale University School of Medicine
Shirley M. Tilghman, Ph.D.,
Princeton University
The Company also maintains a Medical Advisory Board consisting of individuals
with expertise in clinical development matters in the neurology field. Members
of the Medical Advisory Board periodically review and evaluate the Company's
clinical development plans and clinical trials. The members are compensated by
the Company for their services. The current members of the Company's Medical
Advisory Board are as follows:
Arthur K. Asbury, M.D.,
University of Pennsylvania Medical Center
Robert L. Barchi, M.D., Ph.D.,
University of Pennsylvania Medical Center
Dennis Choi, M.D., Ph.D.,
Washington University School of Medicine
Steven T. DeKosky, M.D.,
Western Psychiatric Institute and Clinic
Robert Y. Moore, M.D., Ph.D.,
University of Pittsburgh
EMPLOYEES
As of December 31, 1997, the Company had a total of 282 full-time employees,
of which 229 were employed at the Company's main facility in West Chester,
Pennsylvania, 18 were located at the Company's facilities in Europe, and 35 were
U.S. sales specialists located in major metropolitan areas throughout the United
States. The Company believes that it has been 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 156,000 square feet of space in a facility in
West Chester, Pennsylvania. This facility was 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 25, 1998 at an annual cost of
21
<PAGE>
approximately $155,000. The Company also leases offices in France, the
Netherlands, Germany and Spain at an aggregate annual cost of approximately
$74,000.
The Company believes that its current facilities are adequate for its present
purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its officers have been named as defendants in a
number of civil actions filed in the U.S. District Court for the Eastern
District of Pennsylvania, which have been consolidated. Several of the
plaintiffs have been designated by the Court, collectively, as the "lead
plaintiff" for purposes of the Private Securities Litigation Reform Act of 1995.
The consolidated complaint, filed in October 1996 by the lead plaintiffs,
extended and expanded the class period to include purchasers of the Company's
securities as well as options to purchase or sell those securities during the
period between June 12, 1995 and June 7, 1996. The plaintiffs allege, based in
part on statements and opinions expressed at a June 1996 meeting of an FDA
advisory committee, that earlier statements by the Company about the results of
North American and European clinical studies of MYOTROPHIN were misleading. The
plaintiffs seek unspecified damages and other relief. A judgment adverse to the
Company could, under some theories of damages, result in an assessment which
materially exceeds the coverage obtained under the Company's directors' and
officers' liability insurance policy. The Company's motion to dismiss the case
was denied, and discovery has commenced and is expected to continue through
1998. Based on presently available information, management believes that it has
meritorious defenses to the claims and intends to vigorously defend the action.
Management believes that it is too early in the proceedings to determine with
any certainty the outcome of this action or the potential liability of the
Company, if any.
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 1997.
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of Cephalon, Inc. is quoted on the NASDAQ National Market
under the symbol "CEPH." The following table sets forth the range of high and
low sale prices for the Common Stock as reported on the NASDAQ National Market
for the periods indicated below.
<TABLE>
<CAPTION>
High LOW
------- -------
<S> <C> <C>
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..................................... 28.50 17.38
Second Quarter.................................... 21.88 11.00
Third Quarter..................................... 12.63 9.50
Fourth Quarter.................................... 13.88 9.75
1998
First Quarter (through March 20, 1998)............ 14.63 9.81
</TABLE>
As of March 20, 1998 there were 709 holders of record and approximately 15,000
beneficial holders of the Company's Common Stock. On March 20, 1998, the last
reported sale price of the Common Stock as reported on the NASDAQ National
Market was $14.19 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.
23
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data have been derived from the
consolidated financial statements of Cephalon, Inc. as of and for each of the
five years in the period ended December 31, 1997 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,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................... $ 23,140,000 $ 21,366,000 $ 46,999,000 $ 21,681,000 $ 16,922,000
Operating Expenses:
Research and development.............. 51,587,000 62,096,000 73,994,000 51,613,000 33,158,000
Selling, general and administrative... 36,744,000 28,605,000 15,762,000 9,180,000 4,794,000
------------- ------------- ------------- ------------ ------------
Total operating expenses............... 88,331,000 90,701,000 89,756,000 60,793,000 37,952,000
Interest income, net................... 4,772,000 6,205,000 9,754,000 3,047,000 1,794,000
Gain on sale of assets................. -- 9,845,000 -- -- --
------------- ------------- ------------- ------------ ------------
Loss................................... $ (60,419,000) $ (53,285,000) $ (33,003,000) $(36,065,000) $(19,236,000)
------------- ------------- ------------- ------------ ------------
Basic and diluted loss per share....... $(2.36) $(2.19) $(1.63) $(2.13) $(1.77)
Weighted average number of shares
outstanding.......................... 25,637,508 24,319,163 20,262,071 16,928,516 10,885,057
<CAPTION>
As of December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
investments(1)........... $ 119,471,000 $ 146,848,000 $ 178,067,000 $114,458,000 $ 49,438,000
Total assets........................... 151,208,000 177,891,000 221,330,000 140,173,000 78,108,000
Long-term debt......................... 27,587,000 16,974,000 21,668,000 16,088,000 11,570,000
Accumulated deficit(2)................. (218,386,000) (157,967,000) (104,682,000) (71,679,000) (35,614,000)
Stockholders' equity(2)................ 100,338,000 137,326,000 180,205,000 112,767,000 63,105,000
</TABLE>
(1) Maintenance of certain cash and investment balances is required by specific
lease agreements.
(2) No cash dividends have been declared on the capital stock since the
inception of the Company.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN RISKS RELATED TO CEPHALON'S BUSINESS
The statements under this caption are intended to serve as cautionary
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and should be read in conjunction with the forward-looking statements in
this Report as well as statements presented elsewhere by management of the
Company. The following information is not intended to limit in any way the
characterization of other statements or information in this Report as cautionary
statements for such purpose.
Need for Product Approvals
The success of the Company depends upon obtaining U.S. Food and Drug
Administration ("FDA") and foreign regulatory approval to market products under
development, including MYOTROPHIN(R) (rhIGF-I) and PROVIGIL(R) (modafinil).
There can be no assurance that regulatory authorities will review the Company's
marketing applications in a timely manner or that the applications will be
approved. An adverse decision by a regulatory authority could adversely
influence the decision of another regulatory authority.
Regulatory Uncertainties Related to MYOTROPHIN
The New Drug Application ("NDA") for use of MYOTROPHIN in treating the signs
and symptoms of amyotrophic lateral sclerosis ("ALS") has been pending at the
FDA since February 1997, and there is no assurance that the agency will approve
the NDA on the basis of the data submitted to date. At a May 1997 meeting, a
majority of members of the FDA's Peripheral and Central Nervous System Drugs
Advisory Committee (the "PCNS Committee") concluded that the data presented to
it for review did not meet the FDA's standard of "substantial" evidence of
effectiveness. Certain representatives of the FDA reviewing division also have
expressed their opinion that the data fails to meet that standard although no
formal decision has been made by the FDA. The Company and Chiron Corporation
("Chiron") re-filed the NDA in November 1997, which had the effect of extending
the agency's review period until May 1998. The Company and the agency are
performing additional analyses of data which the agency is reviewing, but there
is no assurance that these analyses will produce evidence sufficient to satisfy
the FDA's standards for product approval. The FDA has scheduled a public hearing
of the PCNS committee for April 9, 1998, for further consideration of the
efficacy of MYOTROPHIN in ALS patients.
A marketing authorization application ("MAA") also is pending before the
European Medicines Evaluation Agency ("EMEA") for approval to market MYOTROPHIN
in Europe for the treatment of ALS. Cephalon and Chiron have filed a response
to questions from member states, some of which were similar to questions about
efficacy and safety previously raised by the FDA. There can be no assurance that
the EMEA will approve the application on the basis of the data contained in the
MAA. An EMEA decision is binding on all 15 member states of the European Union.
If the FDA or EMEA were to require additional efficacy data prior to approval
of the pending marketing applications for MYOTROPHIN, the Company believes that
a new study would be necessary, which would be expensive and would take several
years to complete. Even if the Company and Chiron would be willing to conduct an
additional study as a pre-approval activity, there can be no assurance that the
results of a new study would be sufficient to obtain regulatory approval.
Regulatory Uncertainties Related to PROVIGIL
The FDA has indicated that the Company's NDA seeking approval to market
PROVIGIL for the treatment of excessive daytime sleepiness associated with
narcolepsy, is approvable. In the "approvable letter," the FDA requested
clarification and/or confirmation of certain information. The Company is
preparing to submit a response to this request. The FDA is not under any
obligation to review the information in a response in a timely manner, and there
is no assurance that the information to be provided will result in approval of
the NDA.
25
<PAGE>
The FDA and Drug Enforcement Administration ("DEA") are reviewing data related
to the actual or potential abuse profile of PROVIGIL, for classification of
PROVIGIL by the DEA as a controlled substance under the Controlled Substances
Act (the "CSA"). The Company expects that PROVIGIL will be classified as a
controlled substance under the CSA. Even if the FDA grants marketing
authorization, the Company can not launch PROVIGIL until the DEA's
classification of modafinil is completed. Status as a controlled substance and
the restrictions imposed by the CSA may limit physicians' willingness to
prescribe the drug. The commercial impact, if any, resulting from marketing
PROVIGIL as a controlled substance can not be predicted. Classification of
PROVIGIL as a controlled substance in the United States may cause other
regulatory authorities to impose similar controls in other territories licensed
by the Company from Lafon.
Volatility of Stock Price
The market price and trading volume of shares of the Company's common stock is
highly volatile, and is expected to continue to be volatile for the foreseeable
future. Any future negative announcements (such as adverse regulatory decisions
or delays related to the MYOTROPHIN or PROVIGIL marketing applications, disputes
concerning patent or proprietary rights or operating results which fall below
the market's expectations) could produce significant declines in the price of
the Company's common stock. External events, such as favorable news about the
Company's competitors, also could negatively affect the price of the Company's
common stock.
No Assurance of Profitability from any Product
Even if MYOTROPHIN and PROVIGIL are approved for commercialization, there
can be no assurance that profitable operations can be achieved solely on sales
of those products, if at all.
The Company's profits on sales of MYOTROPHIN, if any, will be limited by the
relatively small size of the ALS market (approximately 15,000-20,000 people in
the United States) and the Company's royalty and profit-sharing arrangements,
respectively, with Cephalon Clinical Partners, L.P. (the "Partnership") and
Chiron, which reduce the Company's share of profits. Competition from
Rilutek(R) (riluzole), which is being marketed in the United States and Europe
by Rhone-Poulenc Rorer, Inc. for use in treating ALS, also could reduce the
market for MYOTROPHIN. Patients with ALS, given the constraints of drug
reimbursement programs, may not be able to support both Rilutek and MYOTROPHIN
(as well as any other drugs which may be approved in the future for use in
treating ALS), especially if MYOTROPHIN has a higher price than competitive
drugs.
Similarly, the market for use of PROVIGIL in narcolepsy patients is relatively
small (approximately 125,000 people in the United States, of which 30,000-40,000
are believed to currently seek treatment from a physician). Competition for
PROVIGIL is expected in all of the Company's licensed territories, because
narcolepsy is currently treated with several drugs, all of which have been
available for a number of years and are available in inexpensive generic forms.
Manufacturing Uncertainties
Cephalon relies on Chiron's U.S. manufacturing facility (the "Chiron
Facility") as the sole source of supply for MYOTROPHIN. Chiron has only limited
experience in producing rhIGF-I on a commercial scale, and there can be no
assurance that the transition to ongoing commercial production would be
successful. The Company and Chiron will be required to demonstrate that the
material produced at the Chiron Facility is equivalent to the material used in
the ALS clinical trials, which was manufactured at the Company's former pilot-
scale manufacturing facility in Beltsville, Maryland. 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 could be delayed.
Lafon is the sole supplier of bulk modafinil compound for the Company.
Furthermore, the Company has only one supplier who is qualified to make finished
PROVIGIL for commercial or clinical use, and one of the raw
26
<PAGE>
materials used as an excipient in the finished product is obtained through a
company which is believed to be the only available source of the material.
There can be no assurance that Cephalon would be able to establish or locate
alternative, cost-effective sources of supply for materials if any of the sole
suppliers could not produce sufficient quantities of materials. Failure to
locate alternative supplies of materials could result in significant costs and
delays to the program, damage the commercial prospects for products under
development, including MYOTROPHIN and PROVIGIL, and have a material adverse
effect on the Company.
Cephalon and its various suppliers must comply with all applicable regulatory
requirements of the FDA and foreign authorities, including current Good
Manufacturing Practice ("cGMP") regulations. The manufacturing facilities used
by the Company's suppliers are subject to inspection by the FDA and other
regulatory authorities at any time during the conduct of clinical studies or
commercial operations, to determine compliance with cGMP requirements. The cGMP
regulations are complex, and failure to be in compliance could lead to remedial
action, civil and criminal penalties and delays in production of material.
Need for Additional Funds
The majority of the Company's current revenue is derived from collaborative
research and development agreements and co-promotion agreements that are subject
to termination by the respective third parties. There can be no assurance that
any of the Company's collaborations will continue in the future.
To meet its capital requirements, the Company will need to obtain additional
funding through a combination of new collaborative agreements, revenue from
product sales or debt and equity financings. The Company also may seek
additional funding through financing vehicles, such as "off-balance sheet"
financing with limited partnerships or corporations. There can be no assurance
that such additional funds can be obtained through these sources on terms
acceptable to the Company, if at all.
Any financings using either common stock or securities convertible into common
stock would result in the issuance of additional shares and therefore would be
dilutive to existing shareholders (i.e., the percentage ownership of the Company
by existing shareholders would be reduced). At December 31, 1997, the
conversion or exercise of the outstanding options, warrants and convertible
notes into shares of Cephalon common stock in accordance with their terms would
increase the outstanding number of shares of common stock by approximately 28%.
Conversions or exercises at or below $11.38, the closing market price of the
Company's common stock at December 31, 1997, would increase the outstanding
number of shares of common stock by approximately 11%, or approximately
2,960,000 shares.
Shareholder Litigation
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. The plaintiffs allege, based in
part on statements and opinions expressed at a June 1996 meeting of an FDA
advisory committee, that earlier statements by the Company about the results of
North American and European clinical studies of MYOTROPHIN were misleading. The
plaintiffs seek unspecified damages and other relief. A judgment adverse to the
Company could, under some theories of damages, result in an assessment which
materially exceeds the coverage obtained under the Company's directors' and
officers' liability insurance policy. The Company's motion to dismiss the case
was denied, and discovery has commenced and is expected to continue through
1998. Based on presently available information, management believes that it has
meritorious defenses to the claims and intends to vigorously defend the action.
Management believes that it is too early in the proceedings to determine with
any certainty the outcome of this action or the potential liability of the
Company, if any.
27
<PAGE>
Product Liability Risks
The administration of drugs to humans, whether in clinical trials or after
marketing clearance is obtained, can result in product liability claims even if
the Company's drugs are not actually at fault for causing an injury. Product
liability claims can be expensive to defend and may result in large judgments or
settlements against the Company, which could have a material adverse effect on
the Company. Although the Company maintains product liability insurance, claims
could exceed the coverage obtained. Even if a claim is not successful, the time
and expense of defending such a claim may adversely interfere with the Company's
business.
No Assurance of Other Indications
The Company is evaluating the use of MYOTROPHIN and PROVIGIL for indications
other than ALS and narcolepsy, respectively. There can be no assurance that the
results of any studies in other indications will be positive or sufficient to
receive regulatory approval for that indication.
The Company is evaluating MYOTROPHIN for potential use in treating peripheral
neuropathies. A dose-ranging Phase I study has been completed in diabetic
patients, which would be needed if the Company pursues diabetic neuropathy in
Phase II studies. In addition, a preliminary clinical study has been completed
in patients with post-polio syndrome, and a clinical study is currently underway
in patients with small fiber neuropathy. A Phase I study of MYOTROPHIN in the
treatment of multiple sclerosis is also ongoing. The results of these studies
and studies conducted by others will be considered in determining whether
MYOTROPHIN should be further evaluated in any of these indications. A study
intended to evaluate the use of MYOTROPHIN in chemotherapy-induced neuropathy
has been terminated because of difficulties in enrolling patients.
The initiation of clinical studies in other indications for MYOTROPHIN and
PROVIGIL could be delayed if additional preclinical studies are needed.
Impact of Other Studies
The results of clinical studies by third parties related to product candidates
under development by 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 marketing applications for the
same product candidates. Negative results from trials by third parties or
negative assessments from regulatory authorities would materially adversely
affect the Company's business and the price of its common stock.
Limited Distribution Capabilities
The Company has established a small staff to oversee marketing support
service, customer service, order entry, shipping and billing, reimbursement
assistance, managed care sales support, medical information and sales tracking
related to potential commercial activities. Most of these activities are being
performed by third parties under contract with the Company. The Company has
only limited experience in managing and coordinating the performance of these
activities by the third parties.
Other Risks
The Company's business is subject to additional significant risks including,
but not limited to, 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, 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, and reliance by the Company on key personnel.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, reverse repurchase agreements and investments at
December 31, 1997 and 1996 were $119,471,000 and $146,848,000, respectively,
representing 79% and 83%, respectively, of total assets. Cash equivalents,
reverse repurchase agreements 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 lease agreements contain covenants that obligate the Company to
maintain certain minimum cash and investment balances.
The following is a summary of selected cash flow information for each of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------- --------------------
<S> <C> <C> <C>
Net cash used for operating activities................ $(54,677,000) $(53,215,000) $(25,781,000)
Net cash provided by (used for) investing activities.. 31,154,000 45,886,000 (80,988,000)
Net cash provided by financing activities............. 28,123,000 6,435,000 102,271,000
</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>
1997 1996 1995
--------------- ---------------- ----------------
<S> <C> <C> <C>
TAP Holdings...................................... $6,957,000 $5,889,000 $ 4,748,000
Chiron............................................ 5,242,000 4,100,000 22,929,000
Bristol-Myers Squibb.............................. 4,682,000 4,879,000 2,891,000
SmithKline Beecham................................ 3,083,000 2,856,000 2,781,000
Kyowa Hakko....................................... 2,210,000 1,700,000 1,358,000
Medtronic......................................... 553,000 -- --
Schering-Plough................................... 88,000 3,000,000 2,750,000
Cephalon Clinical Partners........................ -- -- 6,167,000
Interest.......................................... 8,260,000 8,489,000 10,454,000
</TABLE>
The Company and TAP are parties to a licensing and research and development
collaboration (the "TAP Agreement") to develop and commercialize certain
compounds for the treatment of human cancers and prostate disorders in the
United States. Under the terms of the TAP Agreement, the Company performs
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. At December 31, 1997, $2,465,000 was
receivable from TAP.
The Company and Chiron are jointly developing MYOTROPHIN for the treatment of
ALS and other neurological disorders. Under the collaboration, the costs of the
program are shared equally by the two companies with the exception of the
ongoing study of MYOTROPHIN in the treatment of multiple sclerosis, which is
currently being funded solely by the Company. The amounts received by the
Company generally represent reimbursement from Chiron for MYOTROPHIN costs
incurred by the Company in excess of the fifty percent share of program costs.
In 1995, the Company received $22,929,000 from Chiron representing reimbursement
of the Company's prior unreimbursed 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
29
<PAGE>
from October 1993 through September 1995. The Company also received interest on
the reimbursement payments in the amount of $2,051,000. At December 31, 1997,
$1,523,000 was receivable from Chiron.
Under the agreements with Bristol Myers Squibb Company ("BMS"), Cephalon
markets two proprietary products, Stadol NS(R) (butorphanol tartrate) Nasal
Spray and Serzone(R) (nefazodone hydrochoride) to neurologists in the United
States. Pursuant to the agreements, 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,
1997, there was no receivable from BMS.
In November 1997, the Company announced that SmithKline Beecham ("SB") had
decided to conclude its funding of the research program related to calpain
inhibitors with the Company. The last payment was received in October 1997.
In July 1993, the Company entered into an agreement with Kyowa Hakko Kogyo
Co., Ltd. ("Kyowa Hakko") to develop and market MYOTROPHIN in Japan. The
payments received from Kyowa Hakko primarily represent reimbursement of
MYOTROPHIN supplies for the clinical trials conducted in Japan by Kyowa Hakko.
Also included in the payments received from Kyowa Hakko in 1997 is a non-
recurring $900,000 milestone payment that was paid upon the Company's filing of
the MYOTROPHIN NDA in the United States. At December 31, 1997, $604,000 was
receivable from Kyowa Hakko.
Under an April 1997 agreement with Medtronic, Inc. ("Medtronic"), the Company
is co-promoting Intrathecal Baclofen Therapy (ITB(TM)) to neurologists and
physiatrists in the United States for the treatment of intractable spasticity.
The Company is to receive quarterly compensation based primarily upon sales
activity and the attainment of performance targets. At December 31, 1997,
$446,000 was receivable from Medtronic.
In January 1997, the Company announced that Schering-Plough Corporation ("SP")
had decided to conclude its funding of the research program related to beta-
amyloid inhibitors with the Company. The last payment of $88,000 was received
in March 1997.
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 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 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 received in 1997 compared to 1996 was primarily due
to lower investment balances. 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.
--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>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C>
$(85,790,000) $(83,098,000) $(84,668,000)
</TABLE>
Cash used for selling, general and administrative activities increased in 1997
as compared to 1996 due to increased funding of the Company's sales and
marketing activities, including increases in pre-marketing efforts to support
products in development. The funding of research and development decreased in
1997 as compared to 1996 primarily due to the reduction in clinical trial
expenses, including cost reductions due to the November 1996
30
<PAGE>
sale of the Company's Beltsville, Maryland pilot-scale manufacturing facility
and the completion of certain clinical studies. The decrease was partially
offset by the cost in 1997 of purchasing bulk modafinil compound.
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 and PROVIGIL, and the
completion of a Phase IV clinical trial of STADOL NS. Additionally, 1995
includes $3,350,000 in payments to acquire 67 limited partnership interests in
the Partnership, and a $1,500,000 payment to SIBIA Neurosciences, Inc. ("SIBIA")
to exercise an option to reduce future royalties payable on sales of MYOTROPHIN.
--Operating Cash Outlook
The Company expects its cash flow from operating activities to continue to be
negative until such time as product approvals, if any, are obtained and revenue
received from product sales exceeds funding of operating costs. The Company does
not expect sales of PROVIGIL in the United Kingdom to provide a significant
source of cash in 1998.
The major source of the Company's cash inflows is derived from collaborative
research and development agreements and co-promotion agreements. The funding
under the research agreements with SB and SP has been terminated, and the
continuation of the research funding under the agreement with TAP is subject to
the achievement of certain development milestones and periodic review by TAP and
may be terminated without cause with prior notice. The Company's co-promotion
agreements with BMS and Medtronic expire in 1998 and there can be no assurance
that the agreements will be renewed. Additionally, the level of payments to be
received under the Company's co-promotion agreements is subject to a number of
uncertainties related to product sales, including competition from new and
existing products and the introduction of controlled substance classification of
one of the products being co-promoted by the Company. 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. Future
receipts from Kyowa Hakko are dependent upon shipment of MYOTROPHIN to supply
Kyowa Hakko's clinical trials in Japan.
The Company expects to continue to expend significant funds on both MYOTROPHIN
and PROVIGIL to prepare for possible commercialization of those products,
including to build inventories, and to investigate the utility of those products
in other indications. The level of expenditures will depend, in part, upon the
Company's assessment of the likelihood of obtaining approval to market those
products in the United States and other significant markets. The Company
intends to continue to provide funding for its other research and development
programs.
The amount of capital needed to fund operations will depend upon many factors,
including the success of the Company's research and development programs, the
availability of funding, the extent of any collaborative research arrangements,
the cost and timing of seeking regulatory approvals of its products,
technological changes, competition and the success of the Company's sales and
marketing activities.
31
<PAGE>
Net Cash Provided by 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Repayments from related party................................... $ -- $ -- $ 4,337,000
Purchases of property and equipment............................. (823,000) (2,058,000) (17,455,000)
Sale leaseback of property and equipment........................ -- 427,000 237,000
Proceeds from sale of assets.................................... -- 17,192,000 --
Sales and maturities (purchases) of investments, net............ 31,977,000 30,325,000 (68,107,000)
----------- ----------- ------------
Net cash provided by (used for) investing activities.......... $31,154,000 $45,886,000 $(80,988,000)
=========== =========== ============
</TABLE>
In September 1995, the Company received the outstanding balance due on its
loan to the Partnership.
Purchases of property and equipment decreased in 1997 and 1996 as compared to
1995. The 1995 expenditures include the purchase of the buildings housing the
Company's administrative offices and research facilities in West Chester,
Pennsylvania, for a total purchase price of $11,000,000.
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.
Sales and maturities (purchases) of investments, net, represent the
liquidation or accumulation of investments, which when combined with proceeds
from financing activities are used primarily to fund operations.
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>
1997 1996 1995
------------------ ------------------ ----------------
<S> <C> <C> <C>
Proceeds from sales of common stock and warrants................ $ -- $ -- $ 84,237,000
Proceeds from exercises of common stock options and warrants.... 3,458,000 8,516,000 14,387,000
Proceeds from the issuance of long-term debt.................... 30,000,000 1,838,000 21,073,000
Principal payments on long-term debt............................ (5,335,000) (3,919,000) (17,246,000)
----------- ----------- ------------
Net cash provided by financing activities..................... $28,123,000 $ 6,435,000 $102,271,000
=========== =========== ============
</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 the issuance of 538,310 shares of common stock to Kyowa Hakko in
August 1995.
During 1997, the Company received cash from the exercise of 107,954 warrants
and 205,788 stock options in the amount of $1,253,000 and $2,205,000,
respectively. 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 April 1997, the Company completed a $30,000,000 private placement of senior
convertible notes (the "Notes"), which mature in October 1998, and bear
interest, payable quarterly in cash or common stock, at a rate of seven percent
per annum. The Notes were recorded at their face value and are convertible into
registered common shares of the Company, subject to certain limitations, at a
six percent discount to a market price formula at the time
32
<PAGE>
of conversion. As of December 31, 1997, $18,674,000 in principal of the Notes
had been converted into 1,938,000 shares of common stock. Subsequent to December
31, 1997, $9,575,000 in principal of the Notes was converted into 1,005,000
shares of common stock resulting in 97,000 shares authorized for conversion at
March 14, 1998. If based upon the market price from time to time, a greater
number of shares is required to enable full conversion, the Company either must
authorize a greater number of shares or must redeem the inconvertible portion of
the Notes for cash.
Proceeds from the issuance of long-term debt in 1996 represent additional
borrowings provided by the Commonwealth of Pennsylvania in connection with the
1995 West Chester building purchase, described below.
Proceeds from the issuance of 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 95/8% 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. Proceeds from the issuance of long-term debt in 1995 also include
$5,274,000 which the Company drew against a revolving credit facility provided
by Chiron to assist the Company in funding its costs incurred in the MYOTROPHIN
program.
For all periods presented, principal payments on long-term debt include
payments on mortgage loans from the 1995 building purchase. Additionally, in
March 1997, the Company repaid in full the $3,750,000 balance due on an
unsecured bank loan and, in September 1995, the Company repaid in full the then-
outstanding balance of $13,822,000 on the Note from Chiron.
Commitments and Contingencies
--Related Party
Cephalon Clinical Partners, L.P. (the "Partnership") granted the Company an
exclusive license (the "Interim License") to manufacture and market MYOTROPHIN
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 receives regulatory
approval in the United States or certain other countries within the Territory.
The Company has the option to pay the Milestone Payment in cash, common stock,
or a combination thereof.
The Company has a contractual option to purchase all of the limited
partnership interests in the Partnership (the "Purchase Option") in specified
circumstances following the initiation of commercial sales, if any, of
MYOTROPHIN. 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. In addition to the advance payment, the
exercise of the Purchase Option requires the Company to make royalty payments to
the former limited partners for a period of eleven years after exercise at a
royalty rate of 10.1% (subject to reduction under certain circumstances) of
MYOTROPHIN sales in the Territory. If the Company does not exercise the Purchase
Option prior to its expiration date the Interim License will terminate and all
development and marketing rights to MYOTROPHIN in the Territory would revert to
the Partnership, which may commercialize MYOTROPHIN itself or license or assign
its rights to a third party. The Company would not receive any benefits from any
such commercialization.
The January 1994 collaboration between the Company and Chiron is subject to
the rights of the Partnership. The Company is solely responsible for making any
royalty and milestone payments owed to the Partnership and for funding the
Purchase Option, if it elects to exercise the option.
33
<PAGE>
--Shareholder Litigation
The Company and certain of its officers have been named as defendants in a
number of civil actions, which have been consolidated, alleging that various
statements by the Company about the North American and European trial results of
MYOTROPHIN were misleading. See "Certain Risks Related to the Company's
Business."
Funding Requirements Outlook
As described above, the Company expects to continue to use cash to fund
operations. Although the Company has the option to pay the Milestone Payment
and the Purchase Option in common stock, a significant use of funds would be
required if the Company were to decide to fund these payments in cash. The
Company may seek to acquire the assets or additional partnership interests in
the Partnership other than through exercise of the Purchase Option. If the
Company were to elect to purchase the assets or partnership interests in cash,
significant funds could be required. The Company also requires cash for the
funding of purchases of property and equipment and to service its long-term
debt. The Company expects to continue to fund operations using its current cash
balance and through the sale of investments. The Company believes that its cash
and investment balance is adequate to fund its present level of operations for a
period in excess of one year.
To finance its continuing operations and other potential significant cash
outflows, the Company will need to obtain additional funding through a
combination of new collaborative agreements, revenue from product sales or debt
or equity financings. The Company also may seek additional funding through
other financing vehicles, such as "off-balance sheet" financing with limited
partnerships or corporations. There can be no assurance that such additional
funds can be obtained through these sources on terms acceptable to the Company,
if at all.
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
1997 vs. 1996 vs.
1997 1996 1995 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues....................................... $23,140,000 $21,366,000 $46,999,000 8% (55)%
Research and development expenses.............. 51,587,000 62,096,000 73,994,000 (17) (16)
Selling, general and administrative expenses... 36,744,000 28,605,000 15,762,000 29 81
Interest income, net........................... 4,772,000 6,205,000 9,754,000 (23) (36)
Gain on sale of assets......................... -- 9,845,000 -- (100) --
</TABLE>
The increase in revenues for 1997 as compared to 1996 resulted primarily from
increases in revenue recognized under the Chiron collaboration, the Kyowa Hakko
Myotrophin Agreement and the TAP Agreement, and revenue recognized from the
initiation of a co-promotion agreement with Medtronic. The increases in revenues
were partially offset by a decrease in revenue in 1997 from SP due to the
conclusion of its funding of the research program with the Company.
Revenues decreased in 1996 from 1995 primarily because 1995 includes
$22,929,000 of revenue recognized under the Chiron collaboration for the
Company's prior unreimbursed MYOTROPHIN costs and $5,235,000 of revenue
recognized under the Partnership Development Agreement. The decrease was
partially offset by increases in revenue recognized in 1996 under the agreements
with BMS, TAP and SP.
34
<PAGE>
Research and development expenses decreased in 1997 as compared to 1996
primarily due to the reduction in clinical trial expenses, including cost
reductions due to the November 1996 sale of the Company's Beltsville, Maryland
pilot-scale manufacturing facility and the completion of certain clinical
studies. The decrease was partially offset by an increase in expenditures due
to the purchase in 1997 of bulk modafinil compound, an increase in expenditures
in the Company's research programs and certain license fees payable in
accordance with the Company's third-party agreements.
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 and PROVIGIL, and the
completion of a Phase IV clinical trial of STADOL NS. Additionally, 1995
includes $3,350,000 in payments to acquire 67 limited partnership interests in
the Partnership and a $1,500,000 payment to SIBIA to exercise an option to
reduce future royalties payable on sales of MYOTROPHIN.
The increase in selling, general and administrative expenses in 1997 as
compared to 1996 was primarily due to increases in expenses associated with the
Company's U.S. and European sales and marketing activities including increases
in pre-marketing efforts in support of the products in development and expenses
associated with the Company's co-promotion agreement with Aguettant.
The increase in the selling, general and administrative area in 1996 as
compared to 1995 was primarily due to increases in expenses 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.
In 1996, the Company realized a $9,845,000 gain in connection with the sale of
assets at the Company's Beltsville, Maryland pilot-scale manufacturing facility.
The decrease in net interest income in 1997 as compared to 1996 was primarily
due to an increase in interest expense associated with the Notes.
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.
Results of Operations Outlook
The Company expects to continue to incur operating losses unless and until
such time as product approvals, if any, are obtained and product sales exceed
operating expenses. The Company does not expect sales of PROVIGIL in the United
Kingdom to provide a significant source of revenue in 1998.
The major source of the Company's revenue is derived from collaborative
research and development agreements and co-promotion agreements. The funding
under the research and development agreements with SB and SP has been
terminated, and the continuation of the research funding under the agreement
with TAP is subject to the achievement of certain development milestones and
periodic review by TAP and may be terminated without cause with prior notice.
The Company's co-promotion agreements with BMS and Medtronic expire in 1998 and
there can be no assurance that the agreements will be renewed. Additionally, the
level of revenue to be recognized under the Company's co-promotion agreements is
subject to a number of uncertainties related to product sales, including
competition from new and existing products and the introduction of controlled
substance classification of one of the products being co-promoted by the
Company. In future periods, revenue or expense to be recognized by the Company
under the collaboration with Chiron will depend on the relative costs incurred
in the MYOTROPHIN program by the two companies. Revenues recognized under the
supply agreement with Kyowa Hakko are dependent upon shipment of MYOTROPHIN to
supply Kyowa Hakko's clinical trials in Japan.
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
35
<PAGE>
and PROVIGIL. The Company may also continue to incur substantial expenses to
purchase supplies of MYOTROPHIN and PROVIGIL.
If the Company were to make the Milestone Payment, exercise the Purchase
Option, or purchase the assets or additional interests in the Partnership
outside of the Partnership 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.
YEAR 2000 COMPLIANCE
Cephalon has conducted a review of its computer systems to identify the
systems that could be affected by the year 2000 issue and is currently
implementing a plan, which includes a review of all hardware/software vendors,
as well as other Cephalon suppliers, vendors and partners. Cephalon believes
that, with minor hardware modifications, the year 2000 issue will not pose
significant operational problems for Cephalon's internal computer systems as so
modified. The Company is still assessing the possible effects on the Company's
operation of the year 2000 readiness of third party vendors; however, the
potential impact and related costs, if any, are not known at this time.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 130, Reporting Comprehensive
Income, and SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, both of which are effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 states that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income is the total of
net income and all other nonowner changes in equity. SFAS No. 131 establishes
standards for reporting information about operating segments in annual financial
statements and selected information about operating segments in interim
financial reports issued to stockholders. The Company does not expect the
adoption of SFAS No. 130 and SFAS No. 131 to have a material effect on the
Company's financial position or results of operations or to result in any
substantive changes in its financial statement disclosures.
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, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pennsylvania
February 11, 1998
37
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---------------- -------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 10,271,000 $ 5,671,000
Reverse repurchase agreements (Note 2) 27,414,000 5,207,000
Short-term investments (Note 2) 81,786,000 135,970,000
Other 7,680,000 7,696,000
------------- -------------
Total current assets 127,151,000 154,544,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $11,099,000
and $8,852,000 (Note 3) 21,853,000 22,086,000
OTHER 2,204,000 1,261,000
------------- -------------
$ 151,208,000 $ 177,891,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,724,000 $ 1,638,000
Accrued expenses (Note 4) 16,075,000 14,786,000
Current portion of long-term debt (Note 5) 1,734,000 5,164,000
------------- -------------
Total current liabilities 20,533,000 21,588,000
LONG-TERM DEBT (Note 5) 27,587,000 16,974,000
OTHER 2,750,000 2,003,000
------------- -------------
Total liabilities 50,870,000 40,565,000
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY: (Note 7)
Preferred stock, $.01 par value,
5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
27,395,254 and 24,618,223 shares issued and outstanding 274,000 246,000
Additional paid-in capital 318,753,000 296,868,000
Treasury stock (259,000) (1,778,000)
Accumulated deficit (218,386,000) (157,967,000)
Cumulative translation adjustment (44,000) (43,000)
------------- -------------
Total stockholders' equity 100,338,000 137,326,000
------------- -------------
$ 151,208,000 $ 177,891,000
============= =============
</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,
--------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES: (Notes 8 and 9)
Contract $ 23,140,000 $ 21,366,000 $ 41,764,000
Related party -- -- 5,235,000
--------------- --------------- ---------------
23,140,000 21,366,000 46,999,000
--------------- --------------- ---------------
OPERATING EXPENSES: (Notes 8 and 9)
Research and development 51,587,000 62,096,000 73,994,000
Selling, general and administrative 36,744,000 28,605,000 15,762,000
--------------- --------------- ---------------
88,331,000 90,701,000 89,756,000
--------------- --------------- ---------------
LOSS FROM OPERATIONS (65,191,000) (69,335,000) (42,757,000)
INTEREST:
Income 7,973,000 8,491,000 12,866,000
Expense (Note 5) (3,201,000) (2,286,000) (3,112,000)
--------------- --------------- ---------------
4,772,000 6,205,000 9,754,000
--------------- --------------- ---------------
GAIN ON SALE OF ASSETS (Note 3) -- 9,845,000 --
--------------- --------------- ---------------
LOSS (Note 10) $ (60,419,000) $ (53,285,000) $ (33,003,000)
============== ============== ==============
BASIC AND DILUTED LOSS PER SHARE (Note 1) $ (2.36) $ (2.19) $ (1.63)
============== ============== ==============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 25,637,508 24,319,163 20,262,071
============== ============== ==============
</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 Accumulated Translation
Stock Capital Stock Deficit Adjustment Total
----- ------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 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 -- 815,000 -- -- -- 815,000
Employee benefit plan -- 375,000 -- -- -- 375,000
Treasury stock acquired -- -- 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 -- 529,000 -- -- -- 529,000
Treasury stock acquired -- -- (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
Issuance of common stock upon
exercise of stock options, warrants
and other stock awards 3,000 4,020,000 -- -- -- 4,023,000
Restricted stock award plan 1,000 1,163,000 -- -- -- 1,164,000
Employee benefit plan -- 605,000 -- -- -- 605,000
Conversion of senior convertible notes 20,000 17,675,000 -- -- -- 17,695,000
Issuance of warrants in connection -- 400,000 -- -- -- 400,000
with senior convertible notes
Expired call option 5,000 (1,978,000) -- -- -- (1,973,000)
Treasury stock acquired -- -- (455,000) -- -- (455,000)
Treasury stock retirement (1,000) -- 1,974,000 -- -- 1,973,000
Translation adjustment -- -- -- -- (1,000) (1,000)
Loss -- -- -- (60,419,000) -- (60,419,000)
---------- ------------ ---------- ------------- --------- ------------
BALANCE, DECEMBER 31, 1997 $ 274,000 $318,753,000 $ (259,000) $(218,386,000) $ (44,000) $100,338,000
========== ============ ========== ============= ========= ============
</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,
----------------------------------------------
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss $(60,419,000) $(53,285,000) $(33,003,000)
Adjustments to reconcile loss to net cash
used for operating activities:
Depreciation and amortization 2,247,000 4,198,000 5,851,000
Gain on sale of assets -- (9,845,000) --
Non-cash compensation expense 1,811,000 2,602,000 --
Other 157,000 -- --
(Increase) decrease in operating assets:
Other current assets 61,000 1,840,000 (5,773,000)
Other long-term assets (1,656,000) 121,000 190,000
Increase (decrease) in operating liabilities:
Accounts payable 1,086,000 (2,741,000) 2,159,000
Accrued liabilities 1,289,000 2,947,000 4,224,000
Other long-term liabilities 747,000 948,000 571,000
--------------- --------------- ---------------
Net cash used for operating activities (54,677,000) (53,215,000) (25,781,000)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments from related party -- -- 4,337,000
Purchases of property and equipment (823,000) (2,058,000) (17,455,000)
Sale leaseback of property and equipment -- 427,000 237,000
Proceeds from sale of assets -- 17,192,000 --
Sales and maturities (purchases) of investments, net 31,977,000 30,325,000 (68,107,000)
--------------- --------------- ---------------
Net cash provided by (used for) investing activities 31,154,000 45,886,000 (80,988,000)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock and warrants -- -- 84,237,000
Proceeds from exercises of common stock options and warrants 3,458,000 8,516,000 14,387,000
Proceeds from issuance of long-term debt 30,000,000 1,838,000 21,073,000
Principal payments on long-term debt (5,335,000) (3,919,000) (17,426,000)
--------------- --------------- ---------------
Net cash provided by financing activities 28,123,000 6,435,000 102,271,000
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,600,000 (894,000) (4,498,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,671,000 6,565,000 11,063,000
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,271,000 $ 5,671,000 $ 6,565,000
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Cephalon, Inc. ("Cephalon" or the "Company") seeks to discover, develop and
market pharmaceutical products to treat neurological disorders such as
narcolepsy, amyotrophic lateral sclerosis ("ALS"), multiple sclerosis,
peripheral neuropathies, Alzheimer's disease and stroke. 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 upon obtaining U.S. Food and
Drug Administration ("FDA") and foreign regulatory approval to market products
under development, including MYOTROPHIN(R) (rhIGF-I) and PROVIGIL(R)
(modafinil). There can be no assurance that regulatory authorities will review
the Company's marketing applications in a timely manner or that the applications
will be approved.
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. 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. The Company's assets are reviewed for impairment
whenever events or circumstances have occured 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. No such revisions were required as of December 31,
1997. Expenditures for maintenance and repairs are charged to expense as
incurred, while major renewals and betterments are capitalized.
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 stipulated
objectives 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 Company's co-promotion agreements, revenue is recognized upon the
achievement of the stipulated sales
42
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
activity and performance targets. Under agreements to supply product for
clinical trials, the Company recognizes revenue upon shipment. (See Note 8).
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, 1997 have readily
ascertainable market values; however, the carrying values are considered to
approximate their respective fair values.
LOSS PER SHARE
The Company has adopted Statement of Financial Standards ("SFAS") No. 128,
"Earnings per Share," which is effective for financial statements for fiscal
years ending after December 15, 1997. This statement intends to simplify the
standards for computing earnings per share ("EPS") previously found in
Accounting Principles Board Opinion No. 15 and to make them comparable to
international EPS standards. SFAS No. 128 requires dual presentation of basic
and diluted EPS for complex capital structures on the face of the income
statement. Basic EPS is computed by dividing net income by the weighted-average
number of common shares outstanding during the period. Diluted EPS is similar
to basic EPS except that the effect of converting or exercising all potential
dilutive securities also is included in the denominator. For the years ended
December 31, 1997, 1996 and 1995, the calculation of diluted EPS excludes stock
options, restricted stock awards, warrants and the conversion of convertible
notes 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>
1997 1996
---- ----
<S> <C> <C>
Cash and cash equivalents ............................. $ 10,271,000 $ 5,671,000
Reverse repurchase agreements collateralized by
U.S. Treasury securities ............................ 27,415,000 5,207,000
U.S. Treasury bills and notes ......................... 76,788,000 125,158,000
Commercial paper ...................................... -- 983,000
Other corporate obligations ........................... 4,997,000 9,829,000
------------ ------------
$119,471,000 $146,848,000
============ ============
</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 consist primarily of U.S. Treasury backed securities, high grade
commercial paper and U.S. corporate obligations and asset-backed securities
having AAA ratings. Investments in overnight reverse repurchase agreements are
collateralized 102% by U.S. Treasury securities. These securities are held in a
trust account with a commercial bank on behalf of the Company. The Company
believes that the quantity and quality of the collateral are sufficient to
secure its investment in these instruments. Contractual maturities of the
Company's investments in debt securities are $87,465,000 in 1998 and $21,735,000
in 1999.
43
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," the Company considers its investments as being
"available for sale." 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, 1997 were immaterial.
Certain of the Company's lease agreements contain covenants that obligate the
Company to maintain certain minimum cash and investment balances (see Note 5).
3. PROPERTY AND EQUIPMENT:
At December 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and buildings ................................. $ 19,629,000 $19,423,000
Laboratory and office equipment .................... 13,323,000 11,515,000
------------ -----------
32,952,000 30,938,000
Less allowances for depreciation and amortization .. (11,099,000) (8,852,000)
------------ -----------
Property and equipment, net ........................ $ 21,853,000 $22,086,000
============ ===========
</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.
4. ACCRUED EXPENSES
At December 31, accrued expenses consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrued compensation and benefits.................... $ 964,000 $ 1,569,000
Accrued professional and consulting fees............. 2,092,000 2,749,000
Accrued clinical trial fees and related expenses..... 2,320,000 3,177,000
Accrued license fees and royalties................... 2,627,000 133,000
Accrued co-promotion expenses........................ 2,491,000 723,000
Other accrued expenses............................... 5,581,000 6,435,000
----------- -----------
$16,075,000 $14,786,000
=========== ===========
</TABLE>
5. LONG-TERM DEBT
At December 31, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Unsecured bank loan ............. $ -- $ 3,750,000
Capital lease obligations ....... 1,682,000 1,102,000
Mortgage loans .................. 16,313,000 17,286,000
Senior convertible notes ........ 11,326,000 --
----------- -----------
29,321,000 22,138,000
Less current portion ............ (1,734,000) (5,164,000)
----------- -----------
Long-term debt .................. $27,587,000 $16,974,000
=========== ===========
</TABLE>
44
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Aggregate maturities of long-term debt for the next five years are as follows:
1998--$1,734,000; 1999--$1,486,000; 2000--$1,514,000; 2001--$1,272,000; 2002--
$1,206,000; 2003 and thereafter--$20,375,000. The current portion of long-term
debt consists of payments due on the capital lease obligations and mortgage
loans.
The Company paid interest related to debt instruments of $2,242,000,
$1,388,000, and $2,501,000 in 1997, 1996 and 1995, respectively.
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. In March 1997, the
Company repaid in full the balance due on the unsecured bank loan.
SENIOR CONVERTIBLE NOTES
In April 1997, the Company completed a $30,000,000 private placement of senior
convertible notes (the "Notes"), which mature in October 1998 and bear interest,
payable quarterly in cash or common stock, at a rate of seven percent per annum.
The Notes were recorded at their face value and are convertible into registered
common shares of the Company, subject to certain limitations, at a six percent
discount to a market price formula at the time of conversion. The Company has a
right to 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. If not converted into common stock or redeemed,
the outstanding, unconverted notes plus accrued interest will be exchanged at
face value at maturity for an equal dollar amount of debentures bearing interest
at a rate of 10 3/4% per annum and maturing in 2013. As of December 31, 1997,
$18,674,000 in principal of the Notes had been converted into 1,938,000 shares
of common stock. The Company has limited the number of shares authorized which
remain available for conversion to 1,102,000. If based upon the market price
from time to time, a greater number of shares is required to enable full
conversion, the Company either must authorize a greater number of shares or must
redeem the inconvertible portion of the Notes for cash.
CAPITAL LEASE OBLIGATIONS
The Company currently leases $2,936,000 of laboratory and production equipment
under a February 1994 master lease agreement. Under the terms of the four-year
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 agreement.
MORTGAGE LOANS
In March 1995, the Company purchased the buildings housing its administrative
offices and research facilities in West Chester, Pennsylvania 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, 1997, the remaining
escrow balance, including earned interest, was $1,331,000. 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
45
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 does not consider its future annual minimum payments under
these leases to be material. In November 1996, the remaining operating lease
obligations of the Company's former manufacturing facility were transferred to
the purchaser of the facility. Lease expense under all operating leases totaled
$725,000, $3,423,000, and $3,518,000 in 1997, 1996, and 1995, respectively.
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
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 has granted the Company an exclusive license (the "Interim
License") to manufacture and market MYOTROPHIN for human therapeutic use 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 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 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 in the
Territory would revert to the Partnership, which may commercialize MYOTROPHIN
itself or license or assign its rights to a third party. The Company would not
receive any benefits from any such commercialization.
46
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The January 1994 collaboration between the Company and Chiron Corporation
("Chiron") is subject to the rights of the Partnership. 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 8).
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. The plaintiffs allege, based in
part on statements and opinions expressed at a June 1996 meeting of an FDA
advisory committee, that earlier statements by the Company about the results of
North American and European clinical studies of MYOTROPHIN were misleading. The
plaintiffs seek unspecified damages and other relief. A judgment adverse to the
Company could, under some theories of damages, result in an assessment which
materially exceeds the coverage obtained under the Company's directors' and
officers' liability insurance policy. The Company's motion to dismiss the case
was denied, and discovery has commenced and is expected to continue through
1998. Based on presently available information, management believes that it has
meritorious defenses to the claims and intends to vigorously defend the action.
Management believes that it is too early in the proceedings to determine with
any certainty the outcome of this action or the potential liability of the
Company, if any.
7. STOCKHOLDERS' EQUITY
CAPITAL STOCK
In May 1997, the Company purchased options (the "Options") from Swiss Bank
Corporation, London Branch ("SBC") to acquire 2,500,000 shares of the Company's
common stock. In payment of the purchase price of the Options, the Company
issued to SBC 490,000 shares of common stock. The Options, which were
exercisable by the Company on the expiration date of October 31, 1997 at a price
of $21.50 per share, expired unexercised. The transaction related to the
Options was recorded in stockholders' equity.
EQUITY COMPENSATION PLANS
The Company established the Stock Option Plan and the Equity Compensation Plan
for its employees, directors and certain other individuals. All grants and terms
are authorized by the Compensation Committee of the Company's Board of
Directors. 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. The options and restricted stock awards generally
become exercisable or vested ratably over four years from the grant date and
must be exercised within ten years of the grant date.
47
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables summarize the aggregate option activity under both plans:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1, 3,181,020 $14.07 2,942,697 $17.72 2,475,035 $10.72
Granted 873,520 12.94 583,835 19.27 966,587 13.23
Exercised (223,493) 8.27 (140,574) 7.83 (306,593) 6.42
Canceled (312,789) 19.16 (204,938) 19.83 (192,332) 12.39
--------- ------ --------- ------ --------- ------
Outstanding, December 31. 3,518,258 $13.96 3,181,020 $14.07 2,942,697 $17.72
========= ====== ========= ====== ========= ======
Exercisable at end of year 1,961,945 $12.93 1,722,378 $11.88 1,273,646 $10.41
Weighted average fair value of $ 7.67 $11.48 $ 9.76
options granted during the year
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICE OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
- ----------------------- ------- ---------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ .15 - $11.38 1,719,909 7.5 years $ 8.80 938,512 $ 7.80
$ 11.39 - $14.00 381,383 6.8 $12.80 237,283 $12.70
$ 14.01 - $31.00 1,416,966 7.4 $20.60 86,150 $19.20
--------- ---------
3,518,258 7.4 $13.96 1,961,945 $12.93
========= =========
</TABLE>
At December 31, 1997, 1,452,196 shares were available for future grants under
the plans.
During 1997, 1996 and 1995, the Company received proceeds of $2,205,000,
$1,127,000 and $1,968,000, respectively, from the exercise of stock options.
During 1997, 1996 and 1995, restricted stock awards for 113,450, 85,700 and
140,000 shares, respectively, were granted under the Equity Compensation Plan.
At December 31, 1997 and 1996, 56,525 and 35,000 shares, respectively, were
vested. During 1997 and 1996, the Company recognized compensation expense of
$1,679,000 and $2,073,000 for these awards.
Effective in 1996, Cephalon adopted the disclosure requirements of Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation." As permitted under SFAS 123, the Company applies APB No.
25 and related interpretations. 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, under APB No. 25, no compensation expense for
employees has been recognized for its stock-based compensation plans other than
for its restricted stock awards.
48
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
If the Company had elected to recognize compensation cost based on the fair
value of the options as prescribed by SFAS 123, pro forma loss and loss per
share amounts would have been reflected as set forth below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
As reported
Loss $(60,419,000) $(53,285,000) $(33,003,000)
Basic and diluted loss per share $ (2.36) $ (2.19) $ (1.63)
Pro forma
Loss $(62,315,000) $(58,885,000) $(37,103,000)
Basic and diluted loss per share $ (2.43) $ (2.42) $ (1.83)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts since SFAS 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
The fair value of the options granted during 1997, 1996 and 1995 were
estimated on the date of grant using the Black-Scholes option-pricing model
based on the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate 6.35% 6.11% 6.48%
Expected life 6 years 6 years 6 years
Expected volatility 56% 56% 56%
Expected dividend yield 0% 0% 0%
</TABLE>
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
1997, 1996 and 1995, 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 $1,090,000, $1,106,000, and $826,000 in cash and common
stock to the plan for the years 1997, 1996, and 1995, respectively.
WARRANTS
In April 1997, the Company issued warrants to purchase 84,000 shares of the
Company's common stock at an exercise price of $24.77 per share to the placement
agent in connection with the private placement of the Company's senior
convertible notes (see Note 5).
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.
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.
49
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, warrants to purchase shares of the Company's common
stock were outstanding as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
ISSUABLE UPON EXERCISE EXERCISE PRICE
OF WARRANTS EXPIRATION DATE PER SHARE
----------- --------------- ---------
<S> <C> <C>
1,659,837 August 31, 1999 $13.82
368,300 August 31, 1999 $13.70
17,963 August 31, 1999 $11.77
750,000 February 8, 2002 $18.50
84,000 April 7, 2000 $24.77
---------
2,880,100
=========
</TABLE>
During 1997 and 1996, 102,004 and 582,844 warrants were exercised, for an
aggregate exercise price of $1,183,000 and $6,800,000, respectively.
PREFERRED SHARE PURCHASE RIGHTS
In November 1993, the Board of Directors of the Company declared a dividend
distribution of one right ("Right") for each outstanding share of common stock.
In addition, a Right attaches to and trades with each new issue of the Company's
common stock. Each Right entitles each registered holder, upon the occurrence of
certain events, to purchase from the Company a unit consisting of one one-
hundredth of a share (a "Unit") of the Series A Junior Participating Preferred
Stock of the Company (the "Preferred Shares"), or a combination of securities
and assets of equivalent value, at a purchase price of $90.00 per Unit, subject
to adjustment.
8. REVENUES
RELATED PARTY--CEPHALON CLINICAL PARTNERS
In August 1992, Cephalon exclusively licensed to the Partnership rights to
MYOTROPHIN 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. 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.
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 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
enforcing agreements (described below) entered into by the Partnership,
prosecuting and
50
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
defending the intellectual property owned by the Partnership and 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 feasibility nor alternative future uses
of MYOTROPHIN have yet been established.
The Company is performing the development and clinical testing of MYOTROPHIN
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 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 from
its own cash resources. The amount of additional funding required for further
development will be determined by the Partnership's general partner in advance
of each quarter, and each quarter, the Company will have the right, but not the
obligation, to contribute such funds. For the year ended December 1995, the
Company recorded revenue of $5,235,000, net of warrant amortization, and
incurred related budgeted expense of $5,500,000 for the same period under the
Partnership Development Agreement.
The January 1994 collaboration between the Company and Chiron is subject to
the rights of the Partnership (see Note 9).
REVENUE--CONTRACT
The Company recorded revenues under its collaboration agreements for the year
ended December 31, as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Medtronic .................. $ 999,000 $ -- $ --
Bristol-Myers Squibb ....... 4,229,000 4,305,000 3,594,000
TAP Holdings ............... 7,873,000 6,022,000 5,243,000
SmithKline Beecham ......... 2,902,000 2,855,000 2,790,000
Kyowa Hakko Kogyo .......... 2,249,000 1,775,000 1,711,000
Schering-Plough ............ 588,000 3,000,000 2,250,000
Chiron (see Note 10) ....... 4,300,000 3,409,000 26,176,000
----------- ----------- -----------
$23,140,000 $21,366,000 $41,764,000
=========== =========== ===========
</TABLE>
Medtronic, Inc.
In April 1997, the Company and Medtronic, Inc. entered into a one-year,
renewable co-promotion agreement under which Cephalon markets Intrathecal
Baclofen Therapy(TM) ("ITB") to neurologists and physiatrists in the United
States. ITB is indicated for the treatment of intractable spasticity which can
be associated with multiple sclerosis, cerebral palsy, traumatic brain injury,
stroke, and spinal cord injury and disease.
The Company receives quarterly compensation primarily based upon sales
activity and attainment of performance targets. The agreement automatically
renews for successive one-year periods unless terminated by either party upon 60
days notice prior to the expiration of the initial term or subsequent term.
51
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Bristol-Myers Squibb
In July 1994, the Company and Bristol-Myers Squibb Company ("BMS") entered
into a co-promotion agreement under which Cephalon markets Stadol NS(R)
(butorphanol tartrate) to neurologists in the United States. STADOL NS 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.
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. The Company funded co-promotion
activities in the amount of $1,250,000, $1,250,000 and $2,250,000 in 1997, 1996
and 1995, respectively. The Company's 1995 revenues include $500,000
representing reimbursement of certain STADOL NS Phase IV clinical trial costs.
The co-promotion agreements expire at the end of 1998 unless BMS and the Company
agree to renew the arrangements.
TAP Holdings Inc.
The Company and TAP Holdings Inc. ("TAP") are parties to a licensing and
research and development collaboration to develop and commercialize certain
compounds for the treatment of human cancers and prostate disorders in the
United States. The compounds belong to a family of inhibitors from the Company's
signal transduction modulator program.
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 to Cephalon upon the
submission and approvalof NDAs, if any, that may emanate from the
collaboration, 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.
Effective December 1, 1997, SmithKline Beecham elected to conclude the
research collaboration with the Company. Upon conclusion, all rights related to
calpain inhibitors granted to SB under Cephalon patents reverted back to
Cephalon.
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
52
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
other newly synthesized compounds for their application in a number of
neurodegenerative disorders, including Alzheimer's disease, as well as potential
applications outside neurology.
Under the terms of the license, the Company has exclusive marketing rights to
these compounds in the United States and has an option to acquire semi-exclusive
marketing rights in Japan. Kyowa Hakko and the Company each have semi-exclusive
marketing rights throughout the rest of the world, including Europe. Pursuant to
the arrangement, Kyowa Hakko is to supply finished product at its cost for the
Company's use in conducting clinical trials. The Company will pay Kyowa Hakko
for bulk compound to be used for commercial supplies at a price equal to Kyowa
Hakko's cost of manufacture, and also will pay Kyowa Hakko a royalty on product
sales. The aggregate amount to be paid to Kyowa Hakko for commercial supplies
and royalties on sales is 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 in Europe,
Canada and Mexico to develop and market compounds arising out of its prostate
cancer program, which includes the compounds now being developed in the United
States in collaboration with TAP. If Cephalon exercises its option, Kyowa Hakko
will receive exclusive rights in Asia to the same compounds, and will receive a
royalty from Cephalon on European sales of the compounds.
The license agreement will automatically terminate if the Company discontinues
the development of licensed molecules because of lack of safety or efficacy.
In July 1993, the Company entered into a separate agreement with Kyowa Hakko
providing for the development of MYOTROPHIN in Japan. Kyowa Hakko is responsible
for funding product development activities in Japan, for conducting clinical
trials in Japan in ALS and for seeking authorization to market MYOTROPHIN in
Japan. The Company is to supply MYOTROPHIN at its cost to Kyowa Hakko for use in
Japanese clinical trials, and is to supply MYOTROPHIN at a percentage of net
selling price for commercial use. The Company will receive certain licensing,
milestone and royalty payments. Under certain circumstances, the Company has an
option to co-promote MYOTROPHIN in Japan.
The Company may terminate the agreement if (i) Kyowa Hakko fails to file for
marketing approval of MYOTROPHIN in Japan within eight 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 because of a lack
of its safety or efficacy.
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. In January 1997, the Company announced that SP
had decided to conclude its funding of the research program with the Company.
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.
Laboratoire Aguettant S.A.
In December 1997, the Company entered into a ten-year agreement with Aguettant
to promote and market APOKINON to neurologists in France. APOKINON, which is
injected subcutaneously by a unique metered dose injection, is indicated for the
treatment of levadopa therapy fluctuations common in late-stage Parkinson's
disease.
53
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In return for its marketing rights, the Company is responsible for annual
payments to Aguettant during the first five years of the agreement. In 1997,
fees in the amount of $2,140,000 were recorded as selling, general and
administrative expense. The Company is to receive quarterly compensation from
Aguettant based primarily on a rate per unit of APOKINON sold. No revenues
related to the agreement were recorded in 1997.
The agreement automatically renews for successive one-year periods unless
terminated by either party upon 90 days notice prior to the expiration of the
initial term or subsequent term.
9. RESEARCH AND DEVELOPMENT
Chiron Corporation
Since January 1994, the Company and Chiron have collaborated in the
development of MYOTROPHIN in the neurological field, for commercialization in
all countries of the world other than Japan. Currently, the collaboration is
developing MYOTROPHIN for the treatment of ALS and other neurological disorders.
The costs of the program are shared equally by the two companies with the
exception of the ongoing study of MYOTROPHIN in the treatment of multiple
sclerosis, which is currently being funded solely by the Company.
Initially, 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 (the "Note") 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 1995, the Company
received $22,929,000 from Chiron representing reimbursement of the Company's
prior unreimbursed 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 from October 1993 through September
1995. The Company also received interest on the reimbursement payments in the
amount of $2,051,000.
Profits, if any, and losses from the marketing of MYOTROPHIN for the treatment
of ALS and other neurological disorders 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, 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 8).
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 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 8).
54
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Laboratoire L. Lafon
In January 1993, the Company entered into an agreement with Laboratoire L.
Lafon ("Lafon"), a French pharmaceutical company, under which Cephalon obtained
an exclusive license to develop, market and sell PROVIGIL in the United States
and Mexico. The license was subsequently expanded to include the United Kingdom,
the Republic of Ireland, Japan, and Italy. The agreement provided for annual
fees to be paid to Lafon to maintain the license to modafinil in each of the
years 1993 through 1997. Additionally, payments are to be paid to Lafon upon
certain milestones. Maintenance fees and milestone payments in the amount of
$2,401,000, $1,633,000, and $1,633,000 for the years 1997, 1996 and 1995,
respectively, were 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 bulk modafinil
compound for the Company's commercial use at a purchase price equal to a
percentage of net product sales achieved. In addition, the Company is to pay
trademark and license royalties, which also are based on a percentage of net
product sales.
The Company's rights in Japan are contingent upon entering into an agreement
for commercialization of PROVIGIL with a Japanese partner.
10. INCOME TAXES
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $159,000,000, 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% 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>
1997 1996
---- ----
<S> <C> <C>
Net operating loss carryforwards .......................... $ 54,051,000 $ 25,550,000
Capitalized research and development expenditures ......... 16,478,000 23,638,000
Other--net ................................................ 6,657,000 257,000
------------ ------------
Total deferred tax assets ................................. 77,186,000 49,445,000
Valuation allowance for deferred tax assets ............... (77,186,000) (49,445,000)
------------ ------------
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.
55
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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. ........ 44 Director, President and Chief Executive Officer and
founder of the Company
Bruce A. Peacock ................. 46 Director, Executive Vice President and Chief Operating
Officer
J. Kevin Buchi ................... 42 Senior Vice President, Finance and Chief Financial Officer
Peter E. Grebow, Ph.D.............. 51 Senior Vice President, Worldwide Business Development
Barbara S. Schilberg ............. 48 Senior Vice President, Secretary and General Counsel
Jeffry L. Vaught, Ph.D. .......... 47 President, Research and Development Division and
Senior Vice President, Research
Kenneth P. Wolski, M.D. .......... 55 Senior Vice President, Worldwide Clinical Research and
Regulatory Affairs
William P. Egan(1) ............... 53 Director
Robert J. Feeney, Ph.D.(2) ....... 72 Director
Martyn D. Greenacre(1) ........... 56 Director
Kevin E. Moley(1) ................ 51 Director
Horst Witzel, Dr.-Ing.(2) ........ 70 Director
</TABLE>
(1) Members of the Audit Committee of the Board of Directors.
(2) Members of the Stock Option and Compensation Committee of the Board of
Directors.
All directors hold office until the next annual meeting of the stockholders of
the Company and until their successors are elected and qualified or until their
earlier resignation or removal.
All executive officers are elected annually by the Board of Directors to serve
in their respective capacities until their successors are elected and qualified
or until their earlier resignation or removal.
Dr. Baldino, the founder of the Company, has served as President, Chief
Executive Officer and a director since its inception. Dr. Baldino holds several
adjunct academic appointments, including Adjunct Professor of Pharmacology at
Temple University Medical School, Adjunct Professor of Physiology and Biophysics
and Adjunct Professor of Neurology at Allegheny University Hospital. Dr. Baldino
received his Ph.D. degree from Temple University. Dr. Baldino currently serves
as a director of ViroPharma, Inc., a biopharmaceutical company,
56
<PAGE>
Integrated Systems Consulting Group, Inc., which provides consulting services
for information processing, and Pharmacopeia, Inc., a developer of proprietary
technology.
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.
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.
Dr. Grebow joined the Company in January 1991 and was Senior Vice President,
Drug Development prior to his current position as Senior Vice President,
Worldwide Business 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 in June 1994 and currently serves as Senior
Vice President, Secretary and General Counsel. 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 her 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 President, Research and
Development Division and 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. Mr.
Greenacre has been President, Chief Executive Officer and Director of Delsys
Pharmaceutical Corp. since June 1997. 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.
57
<PAGE>
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., which
provides clinical research and other development services to pharmaceutical
companies, Creative Biomolecules, Inc., a biotechnology company, and Genset
s.a., a human genome sciences company.
Mr. Moley was appointed to the Board of Directors in 1994. In January 1996,
Mr. Moley was appointed president and CEO of Integrated Medical Systems, where
he has served as a director since 1994. From February 1993 to December 1995, Mr.
Moley was Senior Vice President of PCS Health Systems, a provider of
prescription management services. From 1984 to 1993 he held positions of
increasing responsibility with the U.S. Department of Health and Human Services.
Mr. Moley also serves as a director of Merge Technologies, Inc., a medical
imaging software company.
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., each a biotechnology
company.
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 1998 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 1998 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 1998 annual meeting of
stockholders.
58
<PAGE>
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, 1997 and 1996.
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995.
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995.
Notes to Consolidated Financial Statements.
SCHEDULES
All schedules are omitted because they are not applicable or are not required,
or because the required information is included in the consolidated financial
statements or notes thereto.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter.
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.
---
<S> <C>
3.1 Restated Certificate of Incorporation, as amended. (Exhibit 3.1)(21)
3.2 Bylaws of the Registrant, as amended. (Exhibit 3.1)(21)
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 Deliberately omitted.
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)(22).
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
---
<S> <C>
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)(22).
10.5(a) Supply Agreement, dated January 20, 1993, between Cephalon, Inc. and Laboratoire L. Lafon
(Exhibit 10.1)(7)(22).
10.5(b) License Agreement, dated January 20, 1993, between Cephalon, Inc. and Laboratoire L. Lafon
(Exhibit 10.2)(7)(22).
10.5(c) Trademark Agreement, dated January 20, 1993, between Cephalon, Inc. and Genelco S.A.
(Exhibit 10.3)(7)(22).
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
Genelco S.A. (Exhibit 10.2)(12)(22).
10.5(f) Amendment No. 3 to License Agreement dated June 8, 1995, between 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,
between Cephalon, Inc. and Laboratoire L. Lafon (Exhibit 10.5(g))(19)(22).
+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(b))(19).
+10.6(c) Cephalon, Inc. Non-Qualified Deferred Compensation Plan (Exhibit 10.6(c))(11).
10.7 Form of Note Purchase Agreement, dated as of January 15, 1997, between Cephalon, Inc. and
the several purchasers of Cephalon's Senior Convertible Notes, without exhibits (10.1)(20).
10.8(a) Stadol NS Co-promotion Agreement between Cephalon, Inc. and Bristol-Myers Squibb
Company, dated as of July 22, 1994 (Exhibit 99.1)(15)(22).
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)(22).
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)(22).
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)(221).
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).
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
--------
<S> <C>
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)(22).
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)(22).
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 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)(22).
10.12(a) Agreement between Cephalon, Inc. and Chiron Corporation dated as of January 7, 1994
(Exhibit 10.1)(13)(22).
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)(22).
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)(22).
10.13(b) Amendment dated June 28, 1996 amending Agreement between Cephalon, Inc. and TAP
Holdings Inc. (Exhibit 10.13(b))(21)(23)
*21 Subsidiaries of Cephalon, Inc.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
*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.
<TABLE>
<CAPTION>
<S> <C>
+ Compensation plans and arrangements for executives and others.
(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 on 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
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) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
(22) 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.
(23) 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.
</TABLE>
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 report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 30, 1998 Cephalon, Inc.
By: /s/ Frank Baldino, Jr., Ph.D.
------------------------------------
Frank Baldino, Jr., Ph.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Frank Baldino,
Jr. or Bruce A. Peacock, and each of them acting alone, his true and lawful
attorney-in-fact, with full power of substitution, to execute and cause to be
filed with the Securities and Exchange Commission any or all amendments to this
report.
<TABLE>
<CAPTION>
Signature TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ Frank Baldino, Jr., Ph.D.
------------------------------- President, Chief Executive March 30, 1998
Frank Baldino, Jr., Ph.D. Officer and Director
(Principal executive officer)
By: /s/ Bruce A. Peacock
------------------------------- Executive Vice President, March 30, 1998
Bruce A. Peacock Chief Operating Officer
and Director
By: /s/ J. Kevin Buchi
------------------------------- Sr. Vice President, Finance March 30, 1998
J. Kevin Buchi and Chief Financial Officer
(Principal financial and
accounting officer)
By: /s/ William P. Egan
------------------------------- Director March 30, 1998
William P. Egan
By: /s/ Robert J. Feeney, Ph.D.
----------------------------- Director March 30, 1998
Robert J. Feeney, Ph.D.
By: /s/ Martyn D. Greenacre
------------------------- Director March 30, 1998
Martyn D. Greenacre
By: /s/ Kevin E. Moley
-------------------- Director March 30, 1998
Kevin E. Moley
By: /s/ Horst Witzel, Dr.-Ing.
---------------------------- Director March 30, 1998
Horst Witzel, Dr.-Ing
</TABLE>
63
<PAGE>
EXHIBIT INDEX
-------------
Page
Exhibit No. No.
- ----------- ----
21 Subsidiaries of Cephalon, Inc. 2
23.1 Consent of Arthur Andersen LLP. 3
23.2 Consent of Clark & Elbing LLP. 4
27 Financial Data Schedule 5
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF CEPHALON, INC.
<TABLE>
<CAPTION>
Jurisdiction Percentage
Name Incorporation Ownership
- ---- ------------- ---------
<S> <C> <C>
Cephalon Development Corporation.................................... Delaware 100%
Cephalon Investments, Inc........................................... Delaware 100%
Cephalon Technology, Inc............................................ Delaware 100%
Cephalon International Holdings, Inc................................ Delaware 100%
</TABLE>
<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, into the Company's previously filed
Registration Statement File No. 33-43716, No. 33-71920, No. 33-85776, No. 33-
67244, No. 33-69096, No. 33-74320, No. 333-02888, and No. 333-20321.
ARTHUR ANDERSEN LLP
Philadelphia, PA
March 25, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF COUNSEL
Clark & Elbing LLP hereby consents to the use of its name under the caption
"Patents and Proprietary Technologies" in the Annual Report of Cephalon, Inc.
(the "Company") on Form 10-K for the fiscal year ended December 31, 1997 to be
filed with the Securities and Exchange Commission.
In giving such consent, Clark & Elbing LLP does not thereby admit that it is
acting within the category of persons whose consent is required under the
Securities and Exchange Act of 1934, as amended, or the rules and regulations of
the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ KAREN L. ELBING
----------------------
Clark & Elbing LLP
By: Karen L. Elbing
Date: March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM Cephalon,
Inc.'s Form 10K for the year ended December 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,271,000
<SECURITIES> 109,200,000
<RECEIVABLES> 6,858,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 127,151,000
<PP&E> 32,952,000
<DEPRECIATION> 11,099,000
<TOTAL-ASSETS> 151,208,000
<CURRENT-LIABILITIES> 20,533,000
<BONDS> 27,587,000
0
0
<COMMON> 274,000
<OTHER-SE> 100,338,000
<TOTAL-LIABILITY-AND-EQUITY> 151,208,000
<SALES> 0
<TOTAL-REVENUES> 23,140,000
<CGS> 0
<TOTAL-COSTS> 88,331,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,201,000
<INCOME-PRETAX> (60,419,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60,419,000)
<EPS-PRIMARY> (2.36)
<EPS-DILUTED> (2.36)
</TABLE>
