<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 1998
------------------
[_] 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 Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification Number)
145 Brandywine Parkway, West Chester, PA 19380
- ------------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610) 344-0200
--------------------
Not Applicable
--------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, If Changed Since
Last Report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of August 10, 1998
----- ---------------------------------
Common Stock, par value $.01 28,630,972 Shares
This Report Includes a Total of 21 Pages
<PAGE>
CEPHALON, INC. and SUBSIDIARIES
-------------------------------
INDEX
-----
Page No.
-------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - 3
June 30, 1998 and December 31, 1997
Consolidated Statements of Operations - 4
Three and six months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows - 5
Six months ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $19,745,000 $10,271,000
Reverse repurchase agreements 15,198,000 27,414,000
Short-term investments 56,794,000 81,786,000
Other 6,634,000 7,680,000
----------- -----------
Total current assets 98,371,000 127,151,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $12,122,000 and $11,099,000 21,334,000 21,853,000
OTHER 1,519,000 2,204,000
----------- -----------
$121,224,000 $151,208,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,029,000 $2,724,000
Accrued expenses 13,968,000 16,075,000
Current portion of long-term debt 1,596,000 1,734,000
----------- -----------
Total current liabilities 17,593,000 20,533,000
LONG-TERM DEBT (Note 2) 15,990,000 27,587,000
OTHER 3,151,000 2,750,000
----------- -----------
Total liabilities 36,734,000 50,870,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
28,607,863 and 27,395,254 shares issued and outstanding 286,000 274,000
Additional paid-in capital 329,864,000 318,450,000
Accumulated deficit (245,660,000) (218,386,000)
----------- -----------
Total stockholders' equity 84,490,000 100,338,000
----------- -----------
$121,224,000 $151,208,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES: $ 3,412,000 $ 3,889,000 $ 6,980,000 $ 9,517,000
OPERATING EXPENSES:
Research and development 10,353,000 14,569,000 22,327,000 27,746,000
Selling, general and administrative 6,727,000 9,833,000 13,896,000 18,530,000
------------ ----------- ------------ -----------
17,080,000 24,402,000 36,223,000 46,276,000
------------ ----------- ------------ -----------
LOSS FROM OPERATIONS (13,668,000) (20,513,000) (29,243,000) (36,759,000)
------------ ----------- ------------ -----------
INTEREST:
Income 1,509,000 2,443,000 2,980,000 4,060,000
Expense (456,000) (1,002,000) (1,011,000) (1,503,000)
------------ ----------- ------------ -----------
1,053,000 1,441,000 1,969,000 2,557,000
------------ ----------- ------------ -----------
LOSS $(12,615,000) $(19,072,000) $(27,274,000) $(34,202,000)
============ =========== ============ ===========
BASIC AND DILUTED LOSS PER SHARE (Note 1) $(0.44) $(0.76) $(0.97) $(1.37)
============ =========== ============ ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 28,514,180 25,103,831 28,159,262 24,909,222
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss $(27,274,000) $(34,202,000)
Adjustments to reconcile loss to net cash
used for operating activities:
Depreciation and amortization 1,023,000 1,279,000
Non-cash compensation expense 936,000 1,650,000
Other 47,000 --
(Increase) decrease in operating assets:
Accounts receivable - contract 348,000 (1,168,000)
Other current assets 504,000 (794,000)
Other long-term assets (55,000) (1,668,000)
Increase (decrease) in operating liabilities:
Accounts payable (654,000) 2,790,000
Accrued expenses (2,198,000) 2,660,000
Other long-term liabilities 401,000 396,000
---------------- ----------------
Net cash used for operating activities (26,922,000) (29,057,000)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (504,000) (1,043,000)
Sale leaseback of property and equipment -- 743,000
Sales and maturities of investments, net 37,208,000 7,287,000
---------------- ----------------
Net cash provided by investing activities 36,704,000 6,987,000
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock options and warrants 391,000 2,535,000
Proceeds from issuance of long-term debt -- 30,000,000
Principal payments on long-term debt (699,000) (4,496,000)
---------------- ----------------
Net cash (used for) provided by financing activities (308,000) 28,039,000
---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,474,000 5,969,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,271,000 5,671,000
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $19,745,000 $11,640,000
================ ================
</TABLE>
5
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY 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 Company is highly dependent upon obtaining the U.S. Food and
Drug Administration ("FDA") approval to market PROVIGIL(R) (modafinil) Tablets.
There can be no assurance that the FDA will review the Company's PROVIGIL
marketing application in a timely manner or that the application will be
approved.
BASIS OF PRESENTATION
These consolidated financial statements are unaudited and include all
adjustments which, in the opinion of management, are necessary to present fairly
the financial condition and results of operations of the Company as of and for
the periods set forth in the Consolidated Balance Sheets, Consolidated
Statements of Operations and Consolidated Statements of Cash Flows. All such
adjustments are of a normal, recurring nature. The consolidated financial
statements do not include all of the information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K, filed with the Securities and Exchange Commission,
which includes financial statements as of and for each of the three years in the
period ended December 31, 1997. The results of the Company's operations for any
interim period are not necessarily indicative of the results of the Company's
operations for any other interim period or for a full year.
BASIC AND DILUTED LOSS PER SHARE
The Company has adopted Statement of Financial Standards ("SFAS") No. 128,
"Earnings per Share," which requires dual presentation of basic and diluted
earnings per share ("EPS") for complex capital structures on the face of the
statement of operations. Basic EPS is computed by dividing net income or loss
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 potentially dilutive securities also is generally included in the
denominator. The Company's calculation of diluted EPS excludes the effect of
converting or exercising stock options, restricted stock awards, warrants and
convertible notes since, due to the loss presented in each period, the effect
would be antidilutive.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income or loss and its
components in financial statements. For the periods presented, comprehensive
loss approximated the loss as presented in the accompanying Statements of
Operations.
6
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Segment Information
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." This statement establishes
standards for reporting financial and descriptive information about an
enterprise's operating segments in its financial statements. This statement need
not be applied to interim financial statements in the initial year of
application.
2. LONG-TERM DEBT
--------------
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.
As of December 31, 1997, $18,674,000 in principal of the Notes had been
converted into 1,938,000 shares of common stock. During the six months ended
June 30, 1998, $11,035,000 in principal of the Notes was converted into
1,145,000 shares of common stock, resulting in a $291,000 outstanding principal
balance as of June 30, 1998.
3. COMMITMENTS AND CONTINGENCIES
-----------------------------
RELATED PARTY
Cephalon Clinical Partners, L.P. (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") 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 future 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, 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
such commercialization.
Late in 1995, the Partnership depleted all of its available funding and has
not provided further funding of MYOTROPHIN development costs to the Company. The
amount of additional funding required for further development is determined by
the Partnership's general partner in advance of each quarter, and each quarter,
the Company has the right, but not the obligation, to contribute such funds. If
the Company decides to discontinue funding of the MYOTROPHIN program, the
Purchase Option and Interim License will terminate and commercialization rights
to MYOTROPHIN will revert back to the Partnership, as described in the preceding
paragraph.
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 for funding the Purchase Option, if it elects to exercise the
option.
The general partner of the Partnership is a wholly-owned subsidiary of the
Company, which owns 1% of the Partnership.
7
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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. The Company's motion to
dismiss the case was denied, and discovery has commenced and is expected to
continue through 1998. Plaintiffs have moved for certification of the class
alleged in the consolidated complaint, and the Company has opposed the
certification. The Court has not rendered a decision on the motion. A
judgement 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. 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.
8
<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 (whether orally or in
writing) 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 PROVIGIL(R) (modafinil) Tablets Approval
The Company is highly dependent upon obtaining U.S. Food and Drug
Administration ("FDA") approval to market PROVIGIL. There can be no assurance
that the FDA will review the Company's PROVIGIL marketing application in a
timely manner or that the application will be approved.
Regulatory Uncertainties Related to PROVIGIL
In its December 1997 "approvable letter," the FDA requested clarification
and/or confirmation of certain information contained in the Company's new drug
application ("NDA") seeking approval to market PROVIGIL for the treatment of
excessive daytime sleepiness associated with narcolepsy. The Company has
submitted a response to this request, and the FDA has indicated that its target
date for a decision on the NDA is December 31, 1998. This date represents only
a goal of the agency and its review could take longer. There can be no
assurance that the FDA will approve the NDA in a timely manner or at all.
On April 14, 1998, the Drug Enforcement Administration ("DEA") published a
Notice of Proposed Rulemaking to classify modafinil as a controlled substance in
Schedule IV under the Controlled Substances Act (the "CSA"). The public comment
period expired on May 14, 1998. In the proposed rule, the DEA has indicated
that the final rule will not be completed unless and until the FDA approves the
PROVIGIL NDA. Even if the FDA grants marketing authorization, the Company can
not initiate sales of PROVIGIL in the United States until the DEA's
classification of modafinil is completed. The DEA is not obligated to
promulgate the final rule by any specific date, and a delay in the final rule
could delay the initiation of sales. The commercial impact, if any, resulting
from marketing PROVIGIL as a controlled substance cannot be predicted; however,
status as a controlled substance and the restrictions imposed by the CSA may
limit physicians' willingness to prescribe the drug. Classification of
modafinil as a controlled substance in the United States may cause other
regulatory authorities to impose similar controls in other territories in which
the Company markets or plans to market PROVIGIL.
Regulatory Uncertainties Related to MYOTROPHIN(R) (rhIGF-I) Injection
The prospects for regulatory approval of MYOTROPHIN continue to be very
uncertain in the United States and Europe. In May 1998, the FDA issued a letter
stating that the new drug application ("NDA") by Cephalon and Chiron Corporation
("Chiron") to market MYOTROPHIN in the United States for the treatment of
amyotrophic lateral sclerosis ("ALS") was "potentially approvable," contingent,
however, upon the submission of additional information from ongoing clinical
studies which demonstrates to the satisfaction of the FDA that MYOTROPHIN is
effective in the treatment of ALS. Cephalon and Chiron are preparing to submit
information available through August 1997 from the ongoing treatment
investigational new drug ("T-IND") program. It is the only additional clinical
data available at this time to be submitted to the NDA. The T-IND is a
compassionate use program that is neither placebo-controlled nor blinded, and
therefore is not designed to produce evidence of efficacy. There can be no
assurance that this information will be sufficient to demonstrate MYOTROPHIN's
efficacy to the satisfaction of the FDA. The Company does not believe that the
collection of any additional information from the compassionate use program
would be cost-effective or timely. The study of MYOTROPHIN in ALS patients
being conducted by Kyowo Hakko in Japan is not under the control of Cephalon and
results from that study are not expected in the foreseeable future.
9
<PAGE>
If the information submitted to the FDA does not prove to be sufficient for
approval and additional efficacy data is required, a new study would be
necessary, which would be expensive and would take several years to complete.
There is no assurance that the potential profits from sales of MYOTROPHIN would
make an additional study cost-effective to conduct. See "No Assurance of
Profitability from any Product." Even if an additional study were to be
conducted, there can be no assurance that the results of a new study would be
sufficient to obtain regulatory approval.
A marketing authorization application ("MAA") is pending before the European
Medicines Evaluation Agency ("EMEA") for approval to market MYOTROPHIN in Europe
for the treatment of ALS. The member states, like the FDA, have questioned
whether the results of two controlled studies submitted in support of the MAA
are adequate for purposes of approval. Cephalon and Chiron have filed a
response to these questions explaining why the companies believe the two studies
are adequate evidence of MYOTROPHIN's efficacy and safety. 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 EMEA requires additional efficacy information, there
can be no assurance that satisfactory information can be obtained from ongoing
studies in a timely manner, or at all, for the reasons described above.
Furthermore, based on Cephalon's current assumptions, it is unlikely that an
additional study would be cost-effective solely for purposes of regulatory
approval in Europe. Even if an additional study were to be conducted, there can
be no assurance that the results of a new study would be sufficient to obtain
regulatory approval.
An adverse decision by the FDA could adversely influence the decision of the
EMEA, or vice versa.
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
revenues from any of the agreements will continue.
As of June 30, 1998, the Company's cash and investment resources are
sufficient to fund operations for at least twelve months, assuming then-current
expense and revenue rates. To meet its longer-term capital requirements, the
Company will need to obtain additional funding through debt and/or equity
financings. In addition, the Company is seeking additional corporate
collaborations to fund its research programs, which may require the Company to
license rights to certain of its technologies, product candidates or products.
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. If adequate additional
funds are not obtained, the Company would have to reduce its expenses by
significantly curtailing or eliminating one or more of its activities or
programs.
10
<PAGE>
Potential Dilution
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 June 30, 1998, the pro forma
conversion or exercise of outstanding options, warrants and convertible notes
with conversion or exercise prices at or below $6.50, the closing market price
of the Company's common stock at June 30, 1998, would increase the number of
shares of common stock outstanding by approximately 1%, or approximately 302,000
shares. The pro forma conversions or exercises of all other outstanding
options, warrants and convertible notes would increase the number of shares
outstanding by an additional 22%, or approximately 6,194,000 shares.
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 decisions to delay 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 PROVIGIL or MYOTROPHIN is approved for commercialization, there can be
no assurance that profitable operations can be achieved solely, if at all, on
sales of either or both of those products.
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.
Similarly, the Company's profits on sales of MYOTROPHIN, if any, would 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 financial arrangements
with Cephalon Clinical Partners, L.P. (the "Partnership") and Chiron, which
would reduce the Company's potential profits from product sales. In addition,
the Company is required to make a milestone payment to the Partnership upon
MYOTROPHIN approval in the United States or certain other territories, and would
need to exercise a purchase option from the Partnership in order to retain
rights to MYOTROPHIN, which further reduces the Company's potential return on
investment. 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.
Manufacturing Uncertainties
Laboratoire L. Lafon ("Lafon") is the sole supplier of bulk modafinil compound
for the Company. Furthermore, the Company has only one supplier that is
qualified to manufacture finished PROVIGIL tablets for commercial or clinical
use, and one of the raw 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.
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, if MYOTROPHIN is approved for commercialization.
11
<PAGE>
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, damage the commercial prospects for products under development,
including PROVIGIL and MYOTROPHIN, 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 and its 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.
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. The Company's motion to
dismiss the case was denied, and discovery has commenced and is expected to
continue through 1998. Plaintiffs have moved for certification of the class
alleged in the consolidated complaint, and the Company has opposed the
certification. The Court has not rendered a decision on the motion. 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. 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.
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. The Company is conducting two
studies evaluating MYOTROPHIN for neurological indications other than ALS.
There can be no assurance that the results of any studies in other indications
will be positive or sufficient to receive regulatory approval for such
indications. The initiation of clinical studies in other indications for
PROVIGIL could be delayed for a number of reasons, including lack of resources
and the need to conduct additional preclinical studies.
12
<PAGE>
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. Negative
efficacy results from clinical studies or adverse experiences reported in
clinical studies or marketing activities could adversely affect the regulatory
review of the Company's marketing applications for the same product candidates.
Limited Distribution Capabilities
The Company has established a small staff to oversee product manufacturing and
distribution, 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.
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 has implemented a plan
to review all hardware/software vendors, as well as other important Cephalon
suppliers, vendors and partners. Cephalon believes that, with minor
modifications to its computer systems, the year 2000 issue will not pose a
significant operational problem. The Company is assessing the possible effects
on its operations of the year 2000 readiness of third party vendors; however,
the potential impact and related costs, if any, are not known at this time.
Other Risks
The Company's business is subject to additional significant risks including,
but not limited to, the Company's relative inexperience in marketing commercial
products, uncertainties associated with obtaining and enforcing its patents,
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, reverse repurchase agreements and investments at June
30, 1998 and December 31, 1997 were $91,737,000 and $119,471,000, respectively,
representing 76% and 79%, 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. Under the
terms of a capital lease agreement, the company must maintain a minimum balance
in unrestricted cash and investments of $30,000,000 or deliver to the lessor an
irrevocable letter of credit in the amount of the then outstanding balance due
on all leased equipment.
The following is a summary of selected cash flow information for the six
months ended June 30:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Net cash used for operating activities................. $(26,922,000) $(29,057,000)
Net cash provided by investing activities.............. 36,704,000 6,987,000
Net cash (used for) provided by financing activities... (308,000) 28,039,000
</TABLE>
13
<PAGE>
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 the six months ended June 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
TAP Holdings...................... $4,584,000 $3,382,000
Chiron............................ 1,962,000 2,614,000
Medtronic......................... 958,000 --
Kyowa Hakko....................... 459,000 1,487,000
Bristol-Myers Squibb.............. 503,000 1,560,000
Aguettant......................... 250,000 --
Other............................. 225,000 1,601,000
Interest.......................... 3,279,000 4,005,000
</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.
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.
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 receives quarterly compensation based primarily upon sales activity
and the attainment of performance targets.
In July 1993, the Company entered into an agreement (the "Kyowa Hakko
Myotrophin Agreement") with Kyowa Hakko Kogyo Co., Ltd. ("Kyowa Hakko") to
develop and market MYOTROPHIN (rhIGF-I) in Japan. The payments received from
Kyowa Hakko primarily represent reimbursement of MYOTROPHIN (rhIGF-I) supplies
for the clinical trials conducted in Japan by Kyowa Hakko. Included in the
payments received from Kyowa Hakko in the first half of 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.
Under the agreements with Bristol Myers Squibb Company ("BMS"), Cephalon
markets two BMS 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
if the percentage of certain prescriptions written by neurologists exceeds a
predetermined base amount. The decrease in amounts received from BMS is because
the 1998 period contains a payment for only first quarter 1998 co-promotion
activity, while the amount received by the Company in the first half of 1997
represents payments earned for both fourth quarter 1996 and first quarter 1997
co-promotion activity. Additionally, sales of the co-promoted products have
decreased from the 1997 period.
14
<PAGE>
In December 1997, the Company entered into a ten-year agreement with
Laboratoire Aguettant S.A. ("Aguettant") to promote and market Apokinon(R)
(apomorphine hydrocloride) to neurologists in France. The Company receives
quarterly compensation from Aguettant based primarily on a fee per unit of
APOKINON sold.
Cash received from other collaborations by the Company in 1998 represents a
payment from Nippon Shoji Kaisha, Ltd. ("Nippon Shoji") upon the execution of an
agreement between the Company and Nippon Shoji for the development and marketing
of modafinil in Japan. Payments from other collaborations received by the
Company in 1997 represent research funding under agreements with SmithKline
Beecham ("SB") and Schering-Plough Corporation ("SP"), both of which concluded
in 1997.
--Operating cash outflows
The funding of research and development decreased for the six months ended
June 30, 1998 as compared to the same 1997 period, primarily due to decreases in
costs associated with clinical trials and a 20% decrease in staffing levels.
Additionally, costs associated with the purchase of bulk modafinil compound,
license fees and other research and development costs decreased from the
corresponding 1997 period. The funding of selling, general and administrative
activities decreased for the six months ended June 30, 1998 as compared to the
same 1997 period, primarily due to delays in pre-marketing efforts associated
with the Company's sales and marketing in support of the products in development
and decreases in external administrative costs.
--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 in the
United States and revenue received from product sales exceeds funding of
operating costs. Although the Company is currently marketing PROVIGIL in the
United Kingdom, sales of PROVIGIL in the United Kingdom are not expected to
provide a significant source of cash. Even if PROVIGIL is approved for sale in
the United States, the Company expects its cash flow from operating activities
to continue to be negative for at least several years.
The major source of the Company's current cash inflows is derived from
collaborative research and development agreements and co-promotion agreements.
The continuation of the research funding under the agreement with TAP is subject
to periodic review by TAP and may be terminated without cause with prior notice.
The level of potential payments to be received under the Company's co-promotion
agreements with BMS or Medtronic 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 Stadol NS(R) (butorphanol
tartrate) Nasal Spray, one of the two BMS proprietary products being co-promoted
by the Company. Potential receipts in 1998 from the Company's co-promotion
agreement with BMS, which are principally from STADOL NS sales, are expected to
decrease from 1997 levels. There can be no assurance that either co-promotion
agreement will be renewed when it expires. In future periods, receipt of
payments from Chiron or payments by the Company to Chiron will depend upon the
joint budget agreed to by both companies and the relative costs incurred in the
MYOTROPHIN program by the two companies. The Company may incur costs beyond the
joint budget, which are the sole responsibility of the Company. 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 PROVIGIL to
prepare for possible U.S. commercialization of this product, including to build
inventories and to investigate the utility of PROVIGIL in Phase IV clinical
trials and other indications. If MYOTROPHIN does not receive regulatory
approval in the United States or Europe, the Company will evaluate what level of
future expenditures, if any, is appropriate for the MYOTROPHIN program. If the
FDA or EMEA were to require an additional study to demonstrate MYOTROPHIN's
efficacy, and if the Company were to decide to conduct an additional study, a
significant outlay of funds would be required.
15
<PAGE>
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
extent of any collaborative research arrangements, the costs and timing of
seeking regulatory approvals of its products, technological changes, competition
and the success of the Company's sales and marketing activities.
Net cash provided by investing activities
A summary of net cash provided by investing activities for the six months
ended June 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Purchases of property and equipment............................ $ (504,000) $(1,043,000)
Sale leaseback of property and equipment....................... -- 743,000
Sales and maturities of investments, net....................... 37,208,000 7,287,000
----------- -----------
Net cash provided by investing activities.................... $36,704,000 $ 6,987,000
=========== ===========
</TABLE>
Sales and maturities of investments, net, represent the liquidation of
investments, the proceeds of which are used primarily to fund operations.
Net cash used for financing activities
A summary of cash used for financing activities for the six months ended June
30 is as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Proceeds from exercises of common stock options and warrants............ $ 391,000 $ 2,535,000
Proceeds from the issuance of long-term debt............................ -- 30,000,000
Principal payments on long-term debt.................................... (699,000) (4,496,000)
--------- -----------
Net cash (used for) provided by financing activities.................. $(308,000) $28,039,000
========= ===========
</TABLE>
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.
The proceeds from the issuance of long-term debt in the six months ended June
30, 1997 consists of a $30,000,000 private placement of senior convertible
notes. Conversions as of June 30, 1998 have reduced the principal balance
outstanding to $291,000.
The decrease in principal payments on long-term debt for the six months ended
June 30, 1998 from the corresponding 1997 period is due to the repayment in full
in March 1997 of the $3,750,000 balance due on an unsecured bank loan.
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
16
<PAGE>
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 future 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.
Late in 1995, the Partnership depleted all of its available funding and has
not provided further funding of MYOTROPHIN development costs to the Company. The
amount of additional funding required for further development is determined by
the Partnership's general partner in advance of each quarter, and each quarter,
the Company has the right, but not the obligation, to contribute such funds. If
the Company decides to discontinue funding of the MYOTROPHIN program, the
Purchase Option and Interim License will terminate and commercialization rights
to MYOTROPHIN will revert back to the Partnership, as described in the preceding
paragraph.
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 for funding the Purchase Option, if it elects to exercise the
option.
The general partner of the Partnership is a wholly-owned subsidiary of the
Company, which owns 1% of the Partnership.
--Legal Proceedings
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 its current cash
and investment balance to fund operations. The Company believes that its cash
and investment balance as of June 30, 1998 is adequate to fund the then-current
level of operations for at least twelve months. To finance continuing
operations and to finance other potential significant cash outflows, such as
those associated with marketing a product if approval is obtained or Phase IV
and other clinical trials, the Company will need to obtain additional funding
through debt and/or equity financings. Additionally, the Company may seek to
obtain additional funding through corporate collaborations or 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.
17
<PAGE>
RESULTS OF OPERATIONS
This section should be read in conjunction with the more detailed discussion
under "Liquidity and Capital Resources."
A summary of revenues and expenses for the six months ended June 30 is as
follows:
<TABLE>
<CAPTION>
% CHANGE
1998 1997 1998 vs. 1997
-------------- -------------- -----------------
<S> <C> <C> <C>
Revenues........................................ $ 6,980,000 $ 9,517,000 (27)%
Research and development expenses............... 22,327,000 27,746,000 (20)
Selling, general and administrative expenses.... 13,896,000 18,530,000 (25)
Interest income, net............................ 1,969,000 2,557,000 (23)
</TABLE>
The decrease in revenues for the six months ended June 30, 1998 as compared to
the corresponding 1997 period resulted primarily from decreases in revenue
recognized in the 1998 period under the Chiron collaboration and the termination
of funding under the research and development agreements with SB and SP.
Additionally, revenues in the first quarter of 1997 include the recording of a
milestone payment from Kyowa Hakko for the filing of the MYOTROPHIN NDA in the
United States. The decrease in revenues was partially offset by revenue
recognized under the co-promotion agreements with Medtronic and Aguettant, both
of which were initiated in 1997.
Research and development expenses decreased for the six months ended June 30,
1998 as compared to the corresponding 1997 period, primarily due to a reduction
in expenditures associated with clinical trials and a 20% decrease in staffing
levels. Additionally, the expenses associated with the purchase of bulk
modafinil compound, license fees and other research and development costs
decreased from the corresponding 1997 period.
The decrease in the selling, general and administrative area for the six
months ended June 30, 1998 as compared to the corresponding 1997 period, was
primarily due to delays in pre-marketing efforts associated with Company's sales
and marketing activities in support of the products in development and decreases
in external administrative expenses.
Results for the three months ended June 30, 1998 as compared to the
corresponding 1997 period were similarly affected by the items discussed above
in the six months comparison.
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 in the United States and
product sales exceed operating expenses. Although the Company is currently
marketing PROVIGIL in the United Kingdom, sales of PROVIGIL in the United
Kingdom are not expected to provide a significant source of revenue. Even if
PROVIGIL is approved for sales in the United States, the Company expects to
continue to incur operating losses for at least several years.
The majority of the Company's current revenue is derived from collaborative
research and development agreements and co-promotion agreements. The
continuation of any of these agreements is subject to the achievement of certain
milestones and periodic review by the parties involved. Additionally, all
agreements have termination clauses allowing either party to end the funding
under those agreements.
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 and PROVIGIL. The Company may also continue to incur
substantial expenses to purchase supplies of MYOTROPHIN and PROVIGIL.
18
<PAGE>
The Company expects to have significant fluctuations in quarterly results
based on the level and timing of recognition of contract and co-promotion
revenues and the incurrence of expenses, and may incur quarterly operating
losses in excess of the loss recorded for the three months ended June 30, 1998.
The Company does not believe that inflation has had a material impact on the
results of its operations since inception.
19
<PAGE>
PART II - OTHER INFORMATION
- ----------------------------
Item 4. Submission of Matters to a Vote of Security-Holders:
The following was voted upon at the annual meeting of stockholders of Cephalon,
Inc. held in Frazer, Pennsylvania on May 15, 1998:
I. On the election of the following persons as directors:
<TABLE>
<CAPTION>
NUMBER OF VOTES
--------------------------------------------------
FOR WITHHELD
------------------------- -----------------------
<S> <C> <C>
DR. FRANK BALDINO, JR. 25,985,263 180,529
WILLIAM P. EGAN 25,985,730 180,062
DR. ROBERT J. FEENEY 25,986,175 179,617
MARTYN D. GREENACRE 25,992,130 173,662
KEVIN E. MOLEY 25,991,530 174,262
BRUCE A. PEACOCK 25,990,896 174,896
DR. HORST WITZEL 25,986,575 179,217
</TABLE>
ITEM 5. OTHER INFORMATION
The deadline for submission of shareholder proposals pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended, for inclusion in the
Company's proxy statement for its 1999 Annual Meeting of Shareholders is
December 3, 1998. Additionally, if the Company receives notice of a shareholder
proposal after March 2, 1999, such proposal will be considered untimely pursuant
to Rules 14a-4 and 14a-5(e) and the persons named in proxies solicited by the
Board of Directors of the Company for its 1999 Annual Meeting of Shareholders
may exercise discretionary voting power with respect to such proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--------------- -----------------------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter
ended June 30, 1998.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEPHALON, INC.
(Registrant)
August 13, 1998 By /s/ Frank Baldino, Jr., Ph.D.
----------------------------------
Frank Baldino, Jr., Ph.d.
President, Chief
Executive Officer
and Director
(Principal executive office)
By /s/ J. Kevin Buchi
---------------------------------
J. Kevin Buchi
Senior Vice President,
Finance and Chief
Financial Officer
(Principal financial and
accounting officer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CEPHALON,
INC'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000873364
<NAME> CEPHALON, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 19,745,000
<SECURITIES> 71,922,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 98,371,000
<PP&E> 33,456,000
<DEPRECIATION> 12,122,000
<TOTAL-ASSETS> 121,224,000
<CURRENT-LIABILITIES> 17,593,000
<BONDS> 15,990,000
0
0
<COMMON> 286,000
<OTHER-SE> 84,204,000
<TOTAL-LIABILITY-AND-EQUITY> 121,224,000
<SALES> 0
<TOTAL-REVENUES> 6,980,000
<CGS> 0
<TOTAL-COSTS> 36,223,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,011,000
<INCOME-PRETAX> (27,274,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,274,000)
<EPS-PRIMARY> (.97)
<EPS-DILUTED> (.97)
</TABLE>
