<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 September 30, 1999
------------------
[ ] 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 November 8, 1999
---------------------------- ----------------------------------
Common Stock, par value $.01 32,401,424 Shares
This Report Includes a Total of 28 Pages
<PAGE>
CEPHALON, INC. and SUBSIDIARIES
-------------------------------
INDEX
-----
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - 3
September 30, 1999 and December 31, 1998
Consolidated Statements of Operations - 4
Three and nine months ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows - 5
Nine months ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
2
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $33,483,000 $7,484,000
Short-term investments 179,865,000 59,862,000
Receivables, net 3,432,000 3,887,000
Inventory (Note 2) 3,724,000 38,000
Other 2,339,000 1,323,000
---------------- ----------------
Total current assets 222,843,000 72,594,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $14,829,000 and $13,439,000 19,881,000 20,505,000
OTHER 3,142,000 1,574,000
---------------- ----------------
$245,866,000 $94,673,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $3,166,000 $3,558,000
Accrued expenses 12,814,000 13,298,000
Current portion of long-term debt 1,844,000 1,624,000
---------------- ----------------
Total current liabilities 17,824,000 18,480,000
LONG-TERM DEBT (Note 3) 39,188,000 15,096,000
OTHER 4,003,000 3,495,000
---------------- ----------------
Total liabilities 61,015,000 37,071,000
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY: (Note 6)
Preferred stock, $.01 par value, 5,000,000 shares authorized,
2,500,000 shares issued and outstanding 25,000 --
Common stock, $.01 par value, 100,000,000 shares authorized,
32,385,168 and 28,802,323 shares issued and outstanding 324,000 288,000
Additional paid-in capital 504,256,000 331,107,000
Accumulated deficit (319,754,000) (273,793,000)
---------------- ----------------
Total stockholders' equity 184,851,000 57,602,000
---------------- ----------------
$245,866,000 $94,673,000
================ ================
</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, Nine Months Ended,
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Product sales - PROVIGIL (Note 7) $ 7,865,000 $ 219,000 $15,117,000 $ 450,000
Other revenues (Note 7) 3,691,000 2,554,000 11,418,000 9,303,000
--------------- --------------- --------------- ---------------
11,556,000 2,773,000 26,535,000 9,753,000
COSTS AND EXPENSES:
Cost of product sales - PROVIGIL (Note 2) 874,000 -- 1,713,000 --
Research and development (Note 7) 11,207,000 10,712,000 31,359,000 33,546,000
Selling, general and administrative 12,331,000 6,922,000 36,111,000 20,311,000
--------------- --------------- --------------- ---------------
24,412,000 17,634,000 69,183,000 53,857,000
--------------- --------------- --------------- ---------------
LOSS FROM OPERATIONS (12,856,000) (14,861,000) (42,648,000) (44,104,000)
--------------- --------------- --------------- ---------------
OTHER:
Interest income 1,857,000 1,438,000 3,597,000 4,418,000
Interest expense (Note 3) (2,413,000) (446,000) (5,803,000) (1,457,000)
--------------- --------------- --------------- ---------------
(556,000) 992,000 (2,206,000) 2,961,000
LOSS $(13,412,000) $(13,869,000) $(44,854,000) $(41,143,000)
Dividends on preferred stock (Note 6) (1,107,000) -- (1,107,000) --
--------------- --------------- --------------- ---------------
LOSS APPLICABLE TO COMMON SHARES $(14,519,000) $(13,869,000) $(45,961,000) $(41,143,000)
============== ============== ============== ==============
BASIC AND DILUTED LOSS PER COMMON SHARE $(0.47) $(0.48) $(1.57) $(1.45)
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 30,739,090 28,655,804 29,182,454 28,313,019
============== ============== ============== ==============
</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>
Nine Months Ended
September 30,
--------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss (44,854,000) (41,143,000)
Adjustments to reconcile loss to net cash
used for operating activities:
Depreciation and amortization 3,269,000 1,530,000
Non-cash compensation expense 990,000 1,466,000
Other 1,068,000 47,000
(Increase) decrease in operating assets:
Receivables 70,000 1,471,000
Inventory (3,686,000) (38,000)
Other current assets (877,000) 1,098,000
Other long-term assets (1,992,000) (62,000)
Increase(decrease) in operating liabilities:
Accounts payable (392,000) (353,000)
Accrued expenses (2,249,000) (1,298,000)
Other long-term liabilities 508,000 477,000
---------------- --------------
Net cash used for operating activities (48,145,000) (36,805,000)
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (71,000) (573,000)
Sales and maturities (purchases) of investments, net (120,003,000) 31,535,000
---------------- --------------
Net cash (used for) provided by investing activities (120,074,000) 30,962,000
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 120,352,000 --
Proceeds from issuance of common stock and warrants 12,000,000 --
Proceeds from exercises of common stock options and warrants 33,197,000 406,000
Proceeds from issuance of long-term debt 30,000,000 --
Principal payments on long-term debt (1,331,000) (1,117,000)
---------------- --------------
Net cash provided by (used for) financing activities 194,218,000 (711,000)
---------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,999,000 (6,554,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,484,000 10,271,000
---------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $33,483,000 $3,717,000
================ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Cephalon, Inc., headquartered in West Chester, PA, is a biopharmaceutical
company dedicated to the discovery, development and marketing of products to
treat neurological disorders and cancer. We have had negative cash flow from
operations since inception and have funded our operations primarily from the
proceeds of public and private placements of our securities. Sales of
PROVIGIL(R) (modafinil) Tablets [C-IV] were initiated in the United Kingdom in
March 1998 and in the United States and the Republic of Ireland in February
1999. PROVIGIL is approved in those countries for use by those suffering from
excessive daytime sleepiness associated with narcolepsy. We entered into a
collaborative agreement with Abbott Laboratories in June 1999 to market and
further develop their product, Gabitril(R) (tiagabine hydrochloride), in the
United States for the treatment of epilepsy.
Our business is subject to a number of significant risks, including the risks
inherent in pharmaceutical research and development activities. We are highly
dependent upon the successful commercialization of PROVIGIL and there is no
assurance that we will achieve profitability solely on sales of PROVIGIL.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnote disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in our annual report on Form 10-K, filed with the Securities and
Exchange Commission, which includes financial statements as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998.
The results of our operations for any interim period are not necessarily
indicative of the results of our operations for any other interim period or for
a full year.
2. INVENTORY
Inventory consists solely of PROVIGIL:
September 30, December 31,
1999 1998
------------- ------------
Raw material................... $2,353,000 $ --
Work-in-process................ 1,214,000 --
Finished goods................. 157,000 38,000
---------- -------
$3,724,000 $38,000
========== =======
Inventory is stated at the lower of cost or market value using the first-in,
first-out method. Essentially all of the PROVIGIL sold in the United States
during the nine months ended September 30, 1999 was produced prior to its
December 1998 FDA approval and, in accordance with SFAS No. 2 "Accounting for
Research and Development Costs," the costs of producing that material were
recorded as research and development expense in those prior periods. As of
September 30, 1999, we maintained approximately $923,000 of inventory on hand
that was previously charged to research and development expense. We anticipate
that this remaining expensed material will be sold during the fourth quarter of
1999. Cost of product sales through September 30, 1999 consisted primarily of
royalties due to Laboratoire L. Lafon.
6
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
3. DEBT
In February 1999, we completed a private placement of $30,000,000 of revenue-
sharing notes. The notes are repayable in cash in February 2002. The notes are
secured by our rights to PROVIGIL in the United States and bear an annual
interest rate of 11%. Holders of the notes also receive a payment of 6% of net
sales of PROVIGIL in the United States through March 1, 2004, which is being
recorded as interest expense. We have the right to redeem the notes at a premium
prior to maturity, which would reduce the royalty period by one year.
Alternatively, we may also extend the maturity and the royalty period by one
year under certain circumstances. The notes contain a number of covenants
including a requirement to maintain a minimum level of cash, cash equivalents
and investments equal to $40,000,000 during 1999 and $30,000,000 through
February 2002 or as long as the principal remains outstanding. We incurred debt
issuance costs related to this offering of approximately $1,918,000 which we
recorded in other assets and is being amortized and charged to interest expense
over the life of the notes. (See Note 6).
4. LEGAL PROCEEDINGS
Cephalon, a current director and officer, and a former officer, were named as
defendants in a class action filed in the U.S. District Court for the Eastern
District of Pennsylvania. Plaintiffs sought to hold defendants liable for stock
trading losses stemming from allegations that statements made about the results
of certain clinical studies of MYOTROPHIN were misleading. On July 30, 1999, the
Court entered an order approving the settlement of this action and dismissing
all claims against the defendants in consideration of payment by Cephalon to the
plaintiffs of $17,000,000, inclusive of attorneys fees and expenses. This order
became final on August 30, 1999. Of the settlement amount, $7,500,000 was paid
by our directors' and officers' liability insurance carriers and the remaining
$9,500,000 was paid by Cephalon.
A further complaint has been filed with the Court alleging that Cephalon is
liable under common law for misrepresentations concerning the results of the
MYOTROPHIN clinical trials, and that Cephalon and certain of its current and
former officers and directors are liable for the actions of certain
non-employees who allegedly traded in Cephalon common stock on the basis of
material inside information. We believe that we have valid defenses to all
claims raised in this action and we have filed a motion to dismiss these claims
which is pending with the Court. Moreover, even if there is a judgment against
us, it will not have a material adverse effect on our financial condition or
results of operations.
Due to our involvement in promoting STADOL NS(R) (butorphanol tartrate) Nasal
Spray, a product of Bristol-Myers Squibb Company, we are co-defendant in a
product liability action brought against Bristol-Myers. Although we cannot
predict with certainty the outcome of this litigation, we believe that any
expenses or damages that are incurred will be paid by Bristol-Myers under the
indemnification provisions of our co-promotion agreement. As such, we do not
believe that this action will have a negative effect on our financial condition
or results of operations.
5. COMMITMENTS AND CONTINGENCIES
Related party
Cephalon Clinical Partners, L.P., or CCP, granted us an exclusive license to
manufacture and market MYOTROPHIN within the United States, Canada and Europe in
return for royalty payments equal to 10.1% of MYOTROPHIN sales and a milestone
payment of approximately $16,000,000 that we must make if MYOTROPHIN receives
regulatory approval in the United States or certain other countries. We have the
option to pay the milestone payment in cash, common stock, or a combination
thereof.
We have a contractual option to purchase all of the limited partnership
interests in CCP in specified circumstances following the initiation of
commercial sales, if any, of MYOTROPHIN. To exercise the purchase
7
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
option, we are required to make an advance payment of $40,275,000 in cash or, at
our election, $42,369,000 in shares of our common stock, valued at the market
price at the time we exercise the purchase option, or a combination thereof. In
addition to the advance payment, the exercise of the purchase option requires us
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 United States, Canada and
Europe. If we do not exercise the purchase option prior to its expiration date,
the license will terminate and all development and marketing rights to
MYOTROPHIN in the United States, Canada and Europe would revert to CCP, which
may commercialize MYOTROPHIN itself or license or assign its rights to a third
party. We would not receive any benefits from any such commercialization,
license or assignment of rights.
We are performing the development and clinical testing of MYOTROPHIN on behalf
of CCP and our costs incurred to develop MYOTROPHIN in the Territory were
reimbursed by CCP to the extent of its available funds. Late in 1995, CCP
depleted all of its available funding and has not provided any further funding
of MYOTROPHIN development costs. The amount of additional funding required for
further development is determined by CCP's general partner in advance of each
quarter, and each quarter, we have the right, but not the obligation, to
contribute such funds. If we decide to discontinue funding of the MYOTROPHIN
program, the purchase option and license will terminate and commercialization
rights to MYOTROPHIN will revert back to CCP.
The January 1994 collaboration between Cephalon and Chiron is subject to the
rights of CCP. We are solely responsible for making any royalty and milestone
payments owed to CCP and for funding any exercises of the purchase option.
The general partner of CCP is a wholly-owned subsidiary of Cephalon and owns
1% of CCP.
6. STOCKHOLDERS' EQUITY
During the third quarter of 1999, we completed a private offering to
institutional investors of 2,500,000 shares of convertible exchangeable
preferred stock at $50 per share. Proceeds from the offering, net of fees and
expenses, totaled $120,352,000. Dividends on the preferred stock are payable
quarterly commencing November 15, 1999 and will be cumulative at the annual rate
of $3.625 per share. We recognized $1,107,000 of preferred dividends during the
quarter ended September 30, 1999. The preferred stock is convertible into an
aggregate of 6,975,000 shares of our common stock at a conversion price of
$17.92 per share, subject to adjustment in certain circumstances. The preferred
stock will be exchangeable, at our option, into 7 1/4% convertible debentures
which are also convertible into shares of our common stock. We may redeem the
preferred stock and the debentures at declining redemption prices commencing in
August 2001.
The private placement of the revenue-sharing notes (see Note 3) included the
issuance of warrants, expiring March 1, 2004, to purchase 1,920,000 shares of
our common stock at an exercise price of $10.08. The investors will forfeit
480,000 warrants if specified aggregate PROVIGIL sales levels are achieved in
the United States through March 1, 2002. In addition, we may, with notice, call
up to 720,000 of the warrants for redemption at a nominal price after November
24, 2001 if the market value of our common stock exceeds certain thresholds. The
investors can choose to exercise the warrants prior to redemption. The estimated
aggregate value of the warrants of $6,236,000 was recorded as a discount to the
notes and is being amortized and charged to interest expense over the term of
the notes.
In connection with the May 1999 collaboration, H. Lundbeck A/S purchased
1,000,000 shares of our common stock at a price of $12.00 per share, which was
the average market price for the five trading days prior to the date of the
agreement. (See Note 7).
8
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
7. REVENUE RECOGNITION
Product sales
Product sales are recognized upon shipment of product and are recorded net of
reserves for returns and allowances. The reserve for product returns is derived
by utilizing reports obtained from external, independent sources, NDC Health
Information Services, IMS Health and a sample of wholesalers, which provide
prescription data, wholesaler stocking levels and wholesaler sales to retail
pharmacies. From this data, we estimate retail pharmacy stocking levels. This
data is reviewed to monitor product movement through the supply chain to
identify slow moving product that is more likely to be returned. The reserves
are reviewed at each reporting period and adjusted to reflect data available at
that time. Any changes in the reserve will result in changes in the amount of
revenue recognized in the period (i.e. a decrease in the reserve will result in
an increase in revenue).
Sales of PROVIGIL were initiated in the United Kingdom in March 1998 and in
the United States and the Republic of Ireland in February 1999. For the three
months ended September 30, 1999, shipments of PROVIGIL to customers were
$8,233,000 and the reserve for returns and allowances increased by $368,000,
resulting in product sales of $7,865,000. For the nine months ended September
30, 1999, shipments to customers were $20,515,000 and $5,398,000 was recorded
for returns and allowances, resulting in product sales of $15,117,000.
Our methodology described above has resulted in the recognition of revenue for
only product that we believe was prescribed to patients or that is currently in
inventory at distribution centers and retail pharmacy locations and that we
believe, based upon the history of reorders of product by these distribution
centers and retail pharmacy locations, is likely to be used. We believe this
approach is appropriate given that: (i) PROVIGIL is a new product and we have
limited sales, product return and collection history; (ii) at this time we are
not able to reasonably estimate market penetration; and, (iii) to date, returns
have been limited, however, product may be returned for credit up to its
expiration date, which is currently 36 months from its date of manufacture. At
each reporting period, we intend to continue to monitor inventory levels at the
wholesalers and retail pharmacies, as well as reorder history. Should this
information indicate a steady stream of the product moving through the supply
chain, which would indicate that returns are less likely to occur, the product
reserve balance would be reduced, resulting in the recognition of additional
revenue.
Other revenues
Other revenues include revenue recognized under collaborative research and
development agreements as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ------------------------------
1999 1998 1999 1998
---------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
H. Lundbeck A/S...... $1,595,000 $ -- $4,345,000 $ --
TAP Holdings Inc. ... 1,802,000 1,821,000 4,885,000 5,575,000
</TABLE>
Under the terms of the agreement with Lundbeck to discover, develop and market
products to treat neurodegenerative diseases, Lundbeck will compensate us for
our research efforts and will share in joint development costs of our product
candidate, CEP-1347, and any other molecules that emerge from the research
program. In return, Lundbeck will obtain our commercial rights in Europe and
certain other territories, and will pay us a royalty on sales in those
territories. Cephalon retains exclusive rights in the United States. The revenue
recognized in the nine months ended September 30, 1999, represents a license fee
of $2,400,000 and reimbursement of research and development costs of $1,945,000.
We have a research and development collaboration with TAP Holdings Inc. to
develop and commercialize certain compounds for the treatment of human cancers
and prostate disorders in the United States. Under the terms of the agreement,
we perform research and preclinical development of these compounds for which we
are
9
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain Risks Related to Cephalon's Business
During the next several years we will be very dependent on the commercial
success of PROVIGIL, and we may be unable to attain profitability on sales of
PROVIGIL.
In December 1998, the FDA approved PROVIGIL for use by those suffering from
excessive daytime sleepiness associated with narcolepsy. At our present level of
operations, we may not be able to attain profitability if physicians prescribe
PROVIGIL only for those who are diagnosed narcoleptics. Under current FDA
regulations, we are limited in our ability to promote PROVIGIL outside of this
approved use. The market for use of PROVIGIL in narcolepsy patients is
relatively small; it is limited to approximately 125,000 persons in the United
States, of which we estimate between 30,000 and 45,000 currently are seeking
treatment from a physician. We have initiated clinical studies to examine
whether or not PROVIGIL is effective and safe when used to treat disorders other
than narcolepsy, but we do not know whether these studies will in fact
demonstrate safety and efficacy, or if they do, whether we will succeed in
receiving regulatory approval to market PROVIGIL for additional disorders. If
the results of these studies are negative, or if adverse experiences are
reported in these clinical studies or otherwise in connection with the use of
PROVIGIL by patients, this could undermine physician and patient comfort with
the product, could limit the commercial success of the product and could even
impact the acceptance of PROVIGIL in the narcolepsy market. Even if the results
of these studies are positive, the impact on sales of PROVIGIL may be negligible
unless we are able to obtain FDA approval to expand the authorized use of
PROVIGIL. FDA regulations restrict our ability to communicate the results of
additional clinical studies to patients and physicians without first obtaining
approval from the FDA to expand the authorized uses for this product. As a
result, it may be several years before we have significant sales revenue from
PROVIGIL beyond that attributable to prescriptions for diagnosed narcoleptics.
In addition, the following factors could limit the rate and level of market
acceptance of PROVIGIL:
. the effectiveness of our sales and marketing efforts relative to those
of our competitors;
. the availability and level of reimbursement for PROVIGIL by third-
party payors, including federal, state and foreign government
agencies; and
. the occurrence of any side effects, adverse reactions or misuse (or
unfavorable publicity relating thereto) stemming from the use of
PROVIGIL.
We have described these and other factors in more detail below.
Our lack of experience selling pharmaceuticals, together with significant
competition, may impact our ability to effectively market and sell PROVIGIL
in the United States.
In the United States and elsewhere, PROVIGIL faces significant competition in
the marketplace since narcolepsy is currently treated with several drugs, all of
which have been available for a number of years and many of which are available
in inexpensive generic forms. Thus, we will need to demonstrate to physicians
and third party payors that the cost of PROVIGIL is reasonable and appropriate
in light of the safety and efficacy of the product, the price of competing
products and the related health care benefits to the patient.
As PROVIGIL is used commercially, unintended side effects, adverse reactions
or incidents of misuse may appear that could result in additional regulatory
controls and reduce sales of PROVIGIL.
Until recently, the use of PROVIGIL has been limited to clinical trial
patients under controlled conditions and under the care of expert physicians. We
cannot predict whether the widespread commercial use of PROVIGIL will produce
undesirable or unintended side effects that have not been evident in our
clinical trials to date. As PROVIGIL becomes more widely utilized by significant
numbers of patients who could take multiple medications, adverse drug
interactions could occur that are difficult to predict. Additionally, incidents
of product misuse may
11
<PAGE>
occur. These events, among others, could result in additional regulatory
controls, including withdrawal of the product from the market.
The efforts of government entities and third party payors to contain or
reduce the costs of health care may adversely affect our sales and limit the
commercial success of PROVIGIL.
In certain foreign markets, pricing or profitability of pharmaceutical
products is subject to governmental control. In the United States, there have
been, and we expect there will continue to be, various federal and state
proposals to implement similar government controls. The commercial success of
PROVIGIL could be limited if federal or state governments adopt any such
proposals. In addition, in both the United States and elsewhere, sales of
pharmaceutical products depend in part on the availability of reimbursement to
the consumer from third party payors, such as government and private insurance
plans. Third party payors increasingly challenge the prices charged for
products, and limit reimbursement levels offered to consumers for such products.
If third party payors focus their cost control efforts on PROVIGIL, this could
impair the commercial success of the product.
We may not be able to maintain market exclusivity for PROVIGIL, and
therefore potential competitors may develop competing products, which could
result in a decrease in sales and market share, could cause us to reduce
prices to compete successfully, and could prevent PROVIGIL from being a
commercial success.
We hold exclusive license rights to a composition-of-matter patent covering
modafinil as the active drug substance in PROVIGIL; this patent was to have
expired in 1998 in the United States, but we have applied for a patent extension
that, if granted, would run through November 18, 2001. In addition, we own a
United States patent covering the particle size of modafinil which issued in
1997. However, we may not succeed in obtaining any extension for the
composition-of-matter patent, and we cannot guarantee that any of our patents
will be found to be valid if their validity is challenged by a third party, or
that these patents (or any other patent owned or licensed by us) would prevent a
potential competitor from developing competing products or product formulations
that avoid infringement.
In the United States, the Orphan Drug Act provides incentives to drug
manufacturers to develop and manufacture drugs for the treatment of rare
disorders. The FDA has granted orphan drug status to PROVIGIL for its use in the
treatment of excessive daytime sleepiness associated with narcolepsy. The grant
of orphan drug status to PROVIGIL allows us a seven-year period of marketing
exclusivity for the product in that indication. While the marketing exclusivity
provided by the orphan drug law should prevent other sponsors from obtaining
approval of the same compound for the same indication (unless the other sponsor
can demonstrate clinical superiority or we are unable to provide or obtain
adequate supplies of PROVIGIL), it would not prevent approval of the compound
for other indications that otherwise are non-exclusive, nor approval of other
kinds of compounds for the same indication.
Manufacturing, supply and distribution problems could create supply
disruptions that would damage commercial prospects for PROVIGIL.
We depend upon Laboratoire L. Lafon as our sole supplier of bulk modafinil
compound, the active drug substance contained in PROVIGIL. Moreover, we depend
upon a single manufacturer that is qualified to manufacture finished PROVIGIL
for commercial purposes. We maintain an inventory of modafinil compound to
protect against supply disruptions.
Additionally, a non-active ingredient used in PROVIGIL is no longer
manufactured or commercially available. At anticipated levels of demand, we have
over a year's supply of this ingredient. We have prepared a new formulation of
PROVIGIL that does not include the now unavailable ingredient, and could enable
us to qualify additional tablet manufacturers with regulatory authorities.
However, the introduction of any such new formulation requires that we show that
the new formulation is bioequivalent to the current one, and also requires
regulatory approval. If we are unable to obtain approval for a new formulation,
or if demand for the product were to exceed expectations, we could face supply
disruptions that would result in significant costs and delays, undermine
goodwill established with physicians and patients, and damage commercial
prospects for PROVIGIL.
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We must comply with all applicable regulatory requirements of the FDA and
foreign authorities, including current Good Manufacturing Practice regulations,
or cGMP. The facilities used to manufacture, store and distribute our products
are subject to inspection by regulatory authorities at any time to determine
compliance with regulations. 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.
We rely on several third parties in the United States to formulate, tablet,
package, distribute, provide customer service activities and accept and process
returns. Although we employ a small number of persons to coordinate and manage
the activities undertaken by these third parties, we have relatively limited
experience in this regard. Any disruption in these activities could impede our
ability to sell PROVIGIL and could reduce sales revenue.
Our sales of PROVIGIL and financial results will fluctuate and these
fluctuations may adversely affect our stock price.
A number of the analysts and investors who follow our stock have developed
models to attempt to forecast future PROVIGIL sales and have established
expectations based upon those models. Forecasting revenue is difficult,
especially when there is little commercial history and when market acceptance of
the product is uncertain. Forecasting is further complicated by the difficulties
in estimating stocking levels at pharmaceutical wholesalers and at retail
pharmacies and in estimating potential product returns. As a result, it is
likely that there will be significant fluctuations in quarterly revenues, which
may not meet with market expectations and which may adversely affect our stock
price. Other factors which may cause our quarterly financial results to
fluctuate include the cost of PROVIGIL sales, achievement and timing of research
and development milestones, contract and co-promotion revenues, cost and timing
of clinical trials, marketing and other expenses and manufacturing or supply
disruption.
We anticipate we will incur continued losses.
To date, we have not been profitable. At September 30, 1999, our accumulated
deficit was approximately $320 million. Our losses have resulted principally
from costs incurred in research and development, including clinical trials, and
from selling, general and administrative costs associated with our operations.
We expect to continue to incur significant losses until such time as product
revenues from PROVIGIL or other products and product candidates exceed the
expenses of operating our business.
We cannot be sure that we will ever achieve product revenues from PROVIGIL or
from any of our other product candidates sufficient for us to obtain
profitability. We cannot be sure that we or our collaborators will obtain
required regulatory approvals, or successfully develop, commercialize,
manufacture and market any product candidates.
The results and timing of future clinical trials cannot be predicted and future
setbacks may materially affect our business.
We or our collaborators must demonstrate through preclinical testing and
clinical trials that the product candidate is safe and efficacious. The results
from preclinical testing and early clinical trials may not be predictive of
results obtained in subsequent clinical trials, and we cannot be sure that we or
our collaborators' clinical trials will demonstrate the safety and efficacy
necessary to obtain regulatory approval for any product candidates. A number of
companies in the biotechnology and pharmaceutical industries have suffered
significant setbacks in advanced clinical trials, even after obtaining promising
results in earlier trials. In addition, certain clinical trials are conducted
with patients having the most advanced stages of disease. During the course of
treatment, these patients often die or suffer other adverse medical effects for
reasons that may not be related to the pharmaceutical agent being tested. Such
events can hurt the statistical analysis of clinical trial results.
The completion of clinical trials of our product candidates may be delayed by
many factors. One such factor is the rate of enrollment of patients. Neither we
nor our collaborators can control the rate at which patients present themselves
for enrollment, and we cannot be sure that the rate of patient enrollment will
be consistent with our
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<PAGE>
expectations or be sufficient to enable clinical trials of our product
candidates to be completed in a timely manner. Any significant delays in, or
termination of, clinical trials of our product candidates may have a material
adverse effect on our business.
We cannot be sure that we or our collaborators will be permitted by regulatory
authorities to undertake additional clinical trials for any of our product
candidates, or that if such trials are conducted, any of our product candidates
will prove to be safe and efficacious or will receive regulatory approvals. Any
delays in or termination of our or our collaborator's clinical trial efforts may
have a material adverse effect on our business.
Our research and development activities may not result in any additional
pharmaceutical products, which may adversely affect our business.
We are highly focused on the research and development of potential
pharmaceutical products. These activities include engaging in discovery research
and process development, conducting preclinical and clinical studies, and
seeking regulatory approval in the United States and abroad. In all of these
areas, we have relatively limited resources and compete against major
multinational pharmaceutical companies. Moreover, even if we undertake these
activities in an effective and efficient manner, regulatory approval for the
sale of new pharmaceutical products remains highly uncertain since, in our
industry, the majority of compounds fail to enter clinical studies and the
majority of therapeutic candidates entering clinical studies fail to be
commercialized.
Our research and development and marketing efforts are highly dependent on
corporate collaborators who may not devote sufficient time, resources and
attention to our programs, which may adversely impact our efforts to develop and
market potential products.
Because we have limited resources, we have entered into a number of agreements
with other pharmaceutical companies. These agreements may call for our partner
to control:
. the supply of bulk or formulated drugs for commercial use or for use
in clinical trials;
. the design and execution of clinical studies;
. the process of obtaining regulatory approval to market the product;
and
. the marketing and selling of any approved product.
In each of these areas, our partners may not support fully our research and
commercial interests since our program may well compete for time, attention and
resources with the internal programs of our corporate collaborators. As such, we
cannot be sure that our corporate collaborators will share our perspectives on
the relative importance of our program, that they will commit sufficient
resources to our program to move it forward effectively, or that the program
will advance as rapidly as it might if we had retained complete control of all
research, development, regulatory and commercialization decisions. For example,
we rely on several of these collaborators for the production of compounds and
the manufacture and supply of pharmaceutical products. One of them, Kyowa Hakko,
has informed us that they will not be able to meet our increased requirements of
the compound used in our signal transduction modulator program beyond the year
2000. We have identified an alternate manufacturer and Kyowa Hakko is working
with us to transfer technology to them. We cannot be certain that this new
manufacturer will be able to manufacture such compounds or products in
sufficient quantities, at reasonable prices, and in accordance with cGMP
requirements established by the FDA and other regulatory authorities.
We experience intense competition in our fields of interest, which may adversely
affect our business.
Large and small companies, 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 we develop or sell. Many of these companies and institutions
have substantially greater capital resources,
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<PAGE>
research and development staffs and facilities than us, and substantially
greater experience in conducting clinical trials, obtaining regulatory approvals
and manufacturing and marketing pharmaceutical products. These entities
represent significant competition for us. In addition, competitors who are
developing products for the treatment of neurological or oncological disorders
might succeed in developing technologies and products that are more effective
than any that we develop or sell or that would render our technology and
products obsolete or noncompetitive. Competition and innovation from these or
other sources potentially could materially adversely affect any sales of
products that might be developed or are currently being sold by us or make them
obsolete. Advances in current treatment methods may also adversely affect the
market for such products.
We may not be able to obtain adequate patent protection either in the United
States or abroad, which could impact our ability to compete effectively.
We place considerable importance on obtaining patent and trade secret
protection for new technologies, products and processes. We intend to file
applications for patents covering the composition of matter or uses of our drug
candidates or our proprietary processes. We also rely on trade secrets, know-how
and continuing technological advancements to support our competitive position.
Although we have entered into confidentiality and invention rights agreements
with our employees, consultants, advisors and collaborators, we cannot be sure
that such agreements will be honored or that we will be able to effectively
protect our rights to our unpatented trade secrets and know-how. Moreover, we
cannot be sure that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
our trade secrets and know-how. In addition, many of our scientific and
management personnel have been recruited from other biotechnology and
pharmaceutical companies where they were conducting research in areas similar to
those that we now pursue. As a result, we could be subject to allegations of
trade secret violations and other claims.
In addition, we could incur substantial costs in defending any patent
infringement suits or in asserting any patent rights, including those licensed
to us by third parties, and in defending suits against us or our employees
relating to ownership of or rights to intellectual property. Such disputes could
substantially delay our drug development or commercialization. The U.S. Patent
and Trademark Office or a private party could institute an interference
proceeding involving us in connection with one or more of our patents or patent
applications. Such proceedings could result in an adverse decision as to
priority of invention, in which case we would not be entitled to a patent on the
invention at issue in the interference proceeding. The PTO or a private party
could also institute reexamination proceedings involving us in connection with
one or more of our patents, and such proceedings could result in an adverse
decision as to the validity or scope of the patents.
We are involved in a number of legal proceedings that, if adversely adjudicated
or settled, could materially impact our financial condition.
Cephalon, a current director and officer, and a former officer, were named as
defendants in a class action filed in the U.S. District Court for the Eastern
District of Pennsylvania. Plaintiffs sought to hold defendants liable for stock
trading losses stemming from allegations that statements made about the results
of certain clinical studies of MYOTROPHIN were misleading. On July 30, 1999, the
Court entered an order approving the settlement of this action and dismissing
all claims against the defendants in consideration of payment by Cephalon to the
plaintiffs of $17,000,000, inclusive of attorneys fees and expenses. This order
became final on August 30, 1999. Of the settlement amount, $7,500,000 was paid
by our directors' and officers' liability insurance carriers; the remaining
$9,500,000 was paid by Cephalon.
A further complaint has been filed with the Court alleging that Cephalon is
liable under common law for misrepresentations concerning the results of the
MYOTROPHIN clinical trials, and that Cephalon and certain of its current and
former officers and directors are liable for the actions of certain non-
employees who allegedly traded in Cephalon common stock on the basis of material
inside information. We believe that we have valid defenses to all claims raised
in this action and we have filed a motion to dismiss these claims which is
pending with the Court. Moreover, even if there is a judgment against us, it
will not have a material adverse effect on our financial condition or results of
operations.
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<PAGE>
Due to our involvement in co-promoting STADOL NS, a product of Bristol-Myers,
we are co-defendant in a product liability action brought against Bristol-Myers.
Although we cannot predict with certainty the outcome of this litigation, we
believe that any expenses or damages that we may incur will be paid by Bristol-
Myers under the indemnification provisions of our co-promotion agreement. As
such, we do not believe that this action will have a material effect on our
financial condition or results of operations.
We face significant product liability risks, which may have a negative effect on
our financial performance.
The administration of drugs to humans, whether in clinical trials or
commercially, can result in product liability claims even if our drugs or a
collaborator's drugs are not actually at fault for causing an injury.
Furthermore, our products may cause, or may appear to have caused, adverse side
effects or potentially dangerous drug interactions that we may not learn about
or understand fully until the drug is actually manufactured and sold for some
time. Product liability claims can be expensive to defend and may result in
large judgments or settlements against us, which could have a negative effect on
our financial performance. We maintain product liability insurance at a
relatively limited level, and as such, claims could exceed our coverage.
Furthermore, we cannot be certain that we will always be able to purchase
sufficient insurance at an affordable price. Even if a product liability claim
is not successful, the adverse publicity and time and expense of defending such
a claim may interfere with our business.
We may never obtain approval to market MYOTROPHIN, it may not be cost-effective
to pursue MYOTROPHIN for other indications, and therefore we may never derive
revenue from MYOTROPHIN.
In September 1998, Cephalon and Chiron withdrew the joint marketing
authorization application for MYOTROPHIN in Europe for the treatment of ALS. We
made this decision because of comments we received from the European reviewer of
the application concerning the results of our two pivotal ALS studies. These
comments led us to believe that the reviewer would not approve our application.
The withdrawal of our marketing authorization application for MYOTROPHIN in
Europe may negatively affect the FDA approval process for MYOTROPHIN in the
United States.
In May 1998, the FDA issued a letter stating that the NDA application
submitted jointly by Cephalon and Chiron to market MYOTROPHIN in the United
States for the treatment of ALS was "potentially approvable," contingent,
however, upon the submission of additional information from ongoing clinical
studies that demonstrates to the satisfaction of the FDA that MYOTROPHIN is
effective in the treatment of ALS. We are not planning to submit additional data
to the FDA at this time. A study of MYOTROPHIN in ALS patients being conducted
by Kyowa Hakko in Japan is not under our control. Results from that study may be
available in 2000 but are unlikely to satisfy the FDA's request for additional
information. The prospects for regulatory approval of MYOTROPHIN continue to be
very uncertain in the United States. We will continue to evaluate the prospects
of receiving regulatory approval and, based on communications with the FDA, may
determine to withdraw the new drug application.
If the information submitted to the FDA to date does not prove to be
sufficient for approval, a new study would be necessary, which would be
expensive and would take several years to complete. We are not sure whether the
potential profits from sales of MYOTROPHIN would make an additional study cost-
effective to conduct. Even if an additional study were conducted, the results of
a new study may not be sufficient to obtain regulatory approval. If MYOTROPHIN
were not approved for ALS, we do not believe it would be cost-effective to
pursue MYOTROPHIN for any other indication.
The value of our common stock may fluctuate significantly due to the volatility
of its market price and trading volume and exercise of outstanding warrants,
which may impact your decision to buy, sell or hold your stock.
The market price and trading volume of shares of our common stock are
volatile, and we expect it to continue to be volatile for the foreseeable
future. For example, during the previous 52 weeks, our common stock traded at a
high price of $21.94 and a low price of $6.75. Negative announcements (such as
adverse regulatory decisions,
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<PAGE>
disputes concerning patent or other proprietary rights, or operating results
that fall below the market's expectations) could trigger significant declines in
the price of our common stock. In addition, news concerning certain external
events, such as that concerning our competitors or changes in government
regulations that may impact the biotechnology or pharmaceutical industries, also
could affect the price of our common stock.
Our dependence on key executives and scientists could impact the development and
management of our business.
The nature of our business is such that we are highly dependent upon our
ability to attract and retain qualified scientific, technical and managerial
personnel. There is intense competition for qualified personnel in the
pharmaceutical and biotechnology industries, and we cannot be sure that we will
be able to continue to attract and retain qualified personnel necessary for the
development and management of our business. Our research and development
programs and our business might be harmed by the loss of the services of
existing personnel, as well as the failure to recruit additional key scientific,
technical and managerial personnel in a timely manner. Much of the know-how we
have developed resides in our scientific and technical personnel and is not
readily transferable to other personnel.
We may be required to incur significant costs to comply with environmental laws
and regulations and our compliance may limit any future profitability.
Our research and development activities involve the controlled use of
hazardous, infectious and radioactive materials that could be hazardous to human
health, safety or the environment. We store these materials and various wastes
resulting from their use at our facility pending ultimate use and disposal. We
are subject to a variety of federal, state and local laws and regulations
governing the use, generation, manufacture, storage, handling and disposal of
these materials and wastes resulting from their use, and we may be required to
incur significant costs to comply with both existing and future environmental
laws and regulations.
We believe that although our safety procedures for handling and disposing of
these materials comply with federal, state and local laws and regulations, the
risk of accidental injury or contamination from these materials cannot be
entirely eliminated. In the event of an accident, we could be held liable for
any resulting damages.
If we are unable to maintain certain cash balances under the terms of our
revenue-sharing notes, holders of our revenue-sharing notes have the right to an
increased royalty percentage, which will increase our royalty expense, and may
have the right to accelerate the notes and foreclose on the security, which will
result in the loss of our rights to PROVIGIL.
The notes contain a number of covenants, including a requirement to maintain
cash, cash equivalent and investment balances of $40,000,000 through December
31, 1999 and $30,000,000 through February 2002 or as long as the principal
remains outstanding. This requirement to maintain cash and investment balances
may limit our flexibility to use our cash resources for other corporate
purposes. The notes are secured by our licenses, patents and FDA rights relating
to PROVIGIL. The notes also require us to pay a royalty of 6% on net United
States PROVIGIL sales for 5 years, which we may reduce to 4 years under certain
circumstances. If we fail to maintain the required cash and investment balances,
the holders of the notes can declare a default and increase the royalty
percentage to 25% of net United States PROVIGIL sales and, if the default is not
cured within one year, can accelerate the due date of the notes and foreclose on
the security. The holders of the notes can also foreclose on the security if we
fail to pay principal and interest when due or violate certain other covenants.
The Year 2000 issue may cause compliance failure and service interruptions in
our business or operations if certain of our suppliers or vendors are unable to
become year 2000 compliant which may cause us to incur additional expense.
The "Year 2000 Issue" is typically the result of software and firmware being
written using two digits rather than four to define the applicable year. If our
software and firmware with date-sensitive functions are not Year 2000 compliant,
these systems may recognize a date using "00" as the year 1900 rather than the
year 2000.
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We have completed minor modifications to our computer systems and at this time
we do not expect the Year 2000 Issue to pose a significant internal operational
problem. However, we cannot be sure that the systems of other companies on which
we rely will be compliant on or before January 1, 2000 and will not have an
adverse effect on our operations. We have initiated formal communication with
significant suppliers and third party vendors to determine the extent to which
our operations are vulnerable to those third parties' failure to remediate their
own Year 2000 hardware and software issues. Significant suppliers or third party
vendors that are unable to become Year 2000 compliant could adversely affect our
business or operations. We are also vulnerable to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions. We have
not developed a comprehensive contingency plan addressing situations that may
result if we are unable to achieve Year 2000 readiness of our critical
operations.
Anti-takeover provisions may deter a third party from acquiring Cephalon,
limiting our stockholders' ability to profit from such a transaction.
We are subject to the anti-takeover provisions of Section 203 of the Delaware
Corporation Law, which prohibits us from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person becomes an interested stockholder, unless
the business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of control
of Cephalon. We also have adopted a "poison pill" rights plan that will dilute
the stock ownership of an acquirer of our stock upon the occurrence of certain
events. Section 203, the rights plan, and the provisions of our certificate of
incorporation, our bylaws and Delaware corporate law, may have the effect of
deterring hostile takeovers or delaying or preventing changes in control of our
management, including transactions in which stockholders might otherwise receive
a premium for their shares over then current market prices.
You should not expect to receive dividends on our common stock.
We have not paid cash dividends on our common stock and we do not expect to do
so in the foreseeable future.
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In addition to historical facts or statements of current condition, this
report contains forward-looking statements. Forward-looking statements provide
our current expectations or forecasts of future events. These may include
statements regarding anticipated scientific progress in our research programs,
development of potential pharmaceutical products, prospects for regulatory
approval, manufacturing capabilities, market prospects for our products, sales
and earnings projections, and other statements regarding matters that are not
historical facts. Some of these forward-looking statements may be identified by
the use of words in the statements such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe" or other words and terms of similar
meaning. Our performance and financial results could differ materially from
those reflected in these forward-looking statements due to general financial,
economic, regulatory and political conditions affecting the biotechnology and
pharmaceutical industries as well as more specific risks and uncertainties such
as those set forth above and in our reports to the SEC on forms 8-K and 10-K.
Given these risks and uncertainties, any or all of these forward-looking
statements may prove to be incorrect. Therefore, you are cautioned not to place
too much reliance on any such forward-looking statements. Furthermore, we do not
intend (and we are not obligated) to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
This discussion is permitted by the Private Securities Litigation Reform Act of
1995.
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Liquidity and Capital Resources
Cash, cash equivalents, and investments at September 30, 1999 were
$213,348,000, representing 87% of total assets, and at December 31, 1998 were
$67,346,000, representing 71% of total assets. Cash equivalents and investments
consisted primarily of short to intermediate-term corporate obligations,
overnight investments that are backed by collateral in the form of government
securities with a value equal to at least 102% of such investments and short to
intermediate-term obligations of the United States government.
The following is a summary of selected cash flow information:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
------------------------------------------
1999 1998
--------------------- -------------------
<S> <C> <C>
Net cash used for operating activities................ $ (48,145,000) $(36,805,000)
Net cash (used for) provided by investing activities.. (120,074,000) 30,962,000
Net cash provided by (used for) financing activities.. 194,218,000 (711,000)
</TABLE>
Net Cash Used for Operating Activities
--Operating Cash Inflows
The following is a summary of the major sources of cash receipts reflected in
net cash used for operating activities:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
------------------------------------------
1999 1998
--------------------- -------------------
<S> <C> <C>
PROVIGIL sales.................................... $16,830,000 $ 330,000
TAP Holdings Inc.................................. 5,260,000 6,240,000
H. Lundbeck A/S................................... 3,813,000 --
Bristol-Myers Squibb Company...................... 1,008,000 1,482,000
Chiron Corporation................................ -- 1,962,000
Medtronic, Inc.................................... 1,015,000 1,435,000
Interest.......................................... 2,669,000 5,146,000
</TABLE>
Sales of PROVIGIL commenced in the United Kingdom in March 1998 in the United
States and the Republic of Ireland in February 1999.
We have a research and development collaboration with TAP Holdings Inc. to
develop and commercialize certain compounds for the treatment of human cancers
and prostate disorders in the United States. Under the terms of the agreement,
we perform research and preclinical development of these compounds for which we
are 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 September 30, 1999,
$1,802,000 was receivable from TAP.
In May 1999, we entered into a collaborative agreement with H. Lundbeck A/S to
discover, develop and market products to treat neurodegenerative diseases, such
as Parkinson's disease and Alzheimer's disease. Initially, the program will seek
to advance our product candidate, CEP-1347, into clinical development for the
treatment of Parkinson's disease. Lundbeck will compensate us for our research
efforts and will share in joint development costs of CEP-1347 and any other
molecules that emerge from the research program. In return, Lundbeck will obtain
our commercial rights in Europe and certain other territories, and will pay us a
royalty on sales in those territories. Cephalon will retain exclusive rights in
the United States. Included in the payments received from Lundbeck in the
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nine months ended September 30, 1999 is a license fee of $2,400,000 and
reimbursement of research and development costs of $1,413,000. At September 30,
1999, $1,313,000 was receivable from Lundbeck for our research and development
efforts.
We market STADOL NS(R) (butorphanol tartrate) Nasal Spray for Bristol-Myers
Squibb to neurologists in the United States. Pursuant to our agreement, we
receive quarterly payments equal to a percentage of total STADOL NS sales
attributed to prescriptions written by neurologists which exceeds a
predetermined base amount. The decrease in amounts received from Bristol-Myers
in the nine months ended September 30, 1999 is due to a reduction in payments
earned by Cephalon from the comparable 1998 period and because of timing
differences in the remittance of payments. At September 30, 1999, $1,175,000 was
receivable from Bristol-Myers.
Cephalon has been developing MYOTROPHIN in collaboration with Chiron
Corporation for the treatment of ALS and other neurological disorders. The
amounts we received in 1998 generally represented reimbursement from Chiron for
MYOTROPHIN program costs incurred in excess of our fifty percent share of
program costs. Since June 30, 1998, the companies have been bearing their own
MYOTROPHIN costs and we have not received reimbursement of MYOTROPHIN
expenditures since that time.
Under an April 1997 agreement with Medtronic, Inc., we were co-promoting
Intrathecal Baclofen Therapy (ITB(TM)) to neurologists and physiatrists in the
United States for the treatment of intractable spasticity. The agreement with
Medtronic terminated pursuant to its terms on April 29, 1999.
The decrease in interest received in 1999 compared to 1998 was primarily due
to lower average investment balances.
--Operating Cash Outflows
Cash used in operating activities in the nine months ended September 30, 1999
increased as compared to the corresponding period in 1998 as a result of
expenditures associated with the settlement of our securities litigation and an
increase in the size of our sales force to fully support both PROVIGIL and our
collaboration with Abbott to market GABITRIL. Additionally, cash outflows
increased from the prior year for expenditures associated with PROVIGIL
including; the commercial launch of PROVIGIL in the United States, clinical
studies of PROVIGIL and the purchase of PROVIGIL inventory.
--Cash and Funding Requirements Outlook
During the third quarter of 1999, Cephalon, Inc. completed a private offering
to institutional investors of 2,500,000 shares of convertible exchangeable
preferred stock at $50 per share. Proceeds from the offering, net of fees and
expenses, totaled $120,352,000. Due to this inflow of funds, we believe that our
cash and investment balance as of September 30, 1999 will be adequate to fund
the then-current level of operations for at least several years. We expect cash
flow from operating activities to continue to be negative until such time, if
ever, sales from PROVIGIL provide enough funds to generate cash inflows in
excess of the present level of cash outflows from operations. Factors such as
the degree of market acceptance of a recently-introduced product, competition,
the effectiveness of our sales and marketing efforts and our ability to
demonstrate the utility of PROVIGIL in disorders other than narcolepsy will all
have a significant impact on PROVIGIL sales. These factors are not predictable
at this point in time. Cash inflows also include receipts from our collaborative
research and development agreements and from co-promotion agreements. The
continuation of funding under any of these agreements is subject to the
achievement of certain milestones and periodic review by the parties involved.
We expect our cash requirements for PROVIGIL to increase for the next several
years due to efforts associated with the commercialization of PROVIGIL in the
United States, including sales and marketing activities, building PROVIGIL
inventory and conducting clinical studies of PROVIGIL in disorders other than
narcolepsy. Additionally, under our collaboration with Abbott, we are obligated
to fund marketing and clinical trial activities for GABITRIL.
21
<PAGE>
We expect to increase our expenditure of funds on research and development
activities for our other products in development. We may seek sources of funding
for these research programs through collaborative arrangements with third
parties but we still expect to spend significant funds on our share of the cost
of these programs, including the costs of research, preclinical development,
manufacturing and clinical research.
Additionally, the following may also require substantial funds:
. expanding and renovating our West Chester facility;
. maintaining minimum cash balance requirements pursuant to our
revenue-sharing notes agreements;
. paying quarterly preferred stock dividends and servicing our debt;
. retiring our revenue-sharing notes; and
. obtaining additional product rights through licensing or acquisition.
Net Cash (Used for) Provided by Investing Activities
The following is a summary of net cash (used for) provided by investing
activities:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
------------------------------------------
1999 1998
--------------------- -------------------
<S> <C> <C>
Purchases of property and equipment.................... $ (71,000) $ (573,000)
Sales and maturities (purchases) of investments, net... (120,003,000) 31,535,000
------------- -----------
Net cash (used for) provided by investing activities... $(120,074,000) $30,962,000
============= ===========
</TABLE>
Sales and maturities of investments represent the liquidation of investments.
Purchases of investments represent the accumulation of investments.
Net Cash Provided by (Used for) Financing Activities
The following is a summary of net cash provided by (used for) financing
activities:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
------------------------------------------
1999 1998
--------------------- -------------------
<S> <C> <C>
Proceeds from issuance of convertible exchangeable preferred stock.... $120,352,000 $ --
Proceeds from issuance of common stock and warrants................... 12,000,000 --
Proceeds from exercises of common stock options and warrants.......... 33,197,000 406,000
Proceeds from issuance of long-term debt.............................. 30,000,000 --
Principal payments on long-term debt.................................. (1,331,000) (1,117,000)
------------ -----------
Net cash provided by (used for) financing activities................ $194,218,000 $ (711,000)
============ ===========
</TABLE>
During the quarter ended September 30, 1999, we completed a sale of 2,500,000
shares of convertible exchangeable preferred stock at $50 per share. The
preferred stock is convertible into shares of our common stock at a conversion
price of $17.92 per share. Dividends will be cumulative at the annual rate of
$3.625 per share.
In connection with the May 1999 collaborative agreement, H. Lundbeck A/S
purchased 1,000,000 shares of Cephalon's common stock at a price of $12.00 per
share, which was the average market price for the five trading days prior to the
closing of the agreement.
The extent and timing of future warrant and option exercises, if any, are
primarily dependent upon the market price of Cephalon's common stock, as well as
the exercise prices and expiration dates of the warrants and options. During the
quarter ended September 30, 1999, investors associated with Cephalon Clinical
Partners, L.P. exercised approximately 1,949,000 warrants to purchase shares of
common stock. Proceeds associated with these exercises
22
<PAGE>
totaled $26,919,000. All outstanding warrants associated with Cephalon Clinical
Partners expired on August 31, 1999.
Proceeds from the issuance of long-term debt in the nine months ended
September 30, 1999 consist of a private placement of $30,000,000 of revenue-
sharing notes.
For all periods presented, principal payments on long-term debt include
payments on mortgage loans and payments on capital lease obligations.
Commitments and Contingencies
--Related Party
Cephalon Clinical Partners, L.P., or CCP, granted us an exclusive license to
manufacture and market MYOTROPHIN within the United States, Canada and Europe in
return for royalty payments equal to 10.1% of MYOTROPHIN sales and a milestone
payment of approximately $16,000,000 that we must make if MYOTROPHIN receives
regulatory approval in the United States or certain other countries. We have the
option to pay the milestone payment in cash, common stock, or a combination
thereof.
We have a contractual option to purchase all of the limited partnership
interests in CCP in specified circumstances following the initiation of
commercial sales, if any, of MYOTROPHIN. To exercise the purchase option, we are
required to make an advance payment of $40,275,000 in cash or, at our election,
$42,369,000 in shares of our common stock, valued at the market price at the
time we exercise the purchase option, or a combination thereof. In addition to
the advance payment, the exercise of the purchase option requires us 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 United States, Canada and Europe. If
we do not exercise the purchase option prior to its expiration date, the license
will terminate and all development and marketing rights to MYOTROPHIN in the
United States, Canada and Europe would revert to CCP, which may commercialize
MYOTROPHIN itself or license or assign its rights to a third party. We would not
receive any benefits from any such commercialization, license or assignment of
rights.
We are performing the development and clinical testing of MYOTROPHIN on behalf
of CCP and our costs incurred to develop MYOTROPHIN in the Territory were
reimbursed by CCP to the extent of its available funds. Late in 1995, CCP
depleted all of its available funding and has not provided any further funding
of MYOTROPHIN development costs. The amount of additional funding required for
further development is determined by CCP's general partner in advance of each
quarter, and each quarter, we have the right, but not the obligation, to
contribute such funds. If we decide to discontinue funding of the MYOTROPHIN
program, the purchase option and license will terminate and commercialization
rights to MYOTROPHIN will revert back to CCP.
The January 1994 collaboration between Cephalon and Chiron is subject to the
rights of the CCP. We are solely responsible for making any royalty and
milestone payments owed to CCP and for funding any exercises of the purchase
option.
The general partner of CCP is a wholly-owned subsidiary of Cephalon and owns
1% of CCP.
--Legal Proceedings
On August 30, 1999, an order issued by the U.S. District Court for the Eastern
District of Pennsylvania became final that approved the settlement of an action
stemming from allegations that statements made about the results of certain
clinical studies of MYOTROPHIN were misleading. A further complaint has been
filed with the Court alleging liability under common law for misrepresentations
relating to these same studies and for failing to prevent certain non-employees
from trading in Cephalon common stock on the basis of material inside
information. In a separate matter, due to our involvement in promoting STADOL
NS, a product of Bristol-Myers
23
<PAGE>
Squibb Company, we are co-defendant in a product liability action brought
against BMS. See "Certain Risks Related to Cephalon's Business."
Results of Operations
This section should be read in conjunction with the more detailed discussion
under "Liquidity and Capital Resources."
The following is a summary of revenues and expenses:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------------ -------------------------------------
% %
--------- ----------
1999 1998 CHANGE 1999 1998 CHANGE
------------ ----------- --------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Product sales - PROVIGIL........................ $ 7,865,000 $ 219,000 3,491% $15,117,000 $ 450,000 3,259%
Other revenues................................... 3,691,000 2,554,000 45 11,418,000 9,303,000 23
Cost of product sales - PROVIGIL................. 874,000 -- -- 1,713,000 -- --
Research and development expenses................ 11,207,000 10,712,000 5 31,359,000 33,546,000 (7)
Selling, general and administrative expenses..... 12,331,000 6,922,000 78 36,111,000 20,311,000 78
Interest (expense) income, net................... (556,000) 992,000 (156) (2,206,000) 2,961,000 (175)
Preferred dividends.............................. 1,107,000 -- -- 1,107,000 -- --
</TABLE>
Sales of PROVIGIL were initiated in the United Kingdom in March 1998 and in
the United States and Republic of Ireland in February 1999. Product sales are
recognized upon shipment of product and are recorded net of reserves for returns
and allowances. The reserve for product returns is derived by utilizing reports
obtained from external, independent sources, NDC Health Information, IMS Health
and a sample of wholesalers, which provide prescription data, wholesaler
stocking levels and wholesaler sales to retail pharmacies. From this data, we
estimate retail pharmacy stocking levels. This data is reviewed to monitor
product movement through the supply chain to identify slow moving product that
is more likely to be returned. The reserves are reviewed at each reporting
period and adjusted to reflect data available at that time. Any changes in the
reserve will result in changes in the amount of revenue recognized in the period
(i.e. a decrease in the reserve will result in an increase in revenue).
Our methodology described above has resulted in the recognition of revenue for
only product that we believe was prescribed to patients or which is currently
in inventory at distribution centers and retail pharmacy locations and which we
believe, based upon the history of reorders of product by these distribution
centers and retail pharmacy locations, is likely to be used. We believe this
approach is appropriate given that: (i) PROVIGIL is a new product and we have
limited sales, product return and collection history; (ii) at this time we are
not able to reasonably estimate market penetration; and, (iii) to date, returns
have been limited, however, product may be returned for credit for up to its
expiration date, which is currently 36 months from its date of manufacture. At
each reporting period, we intend to continue to monitor inventory levels at the
wholesalers and retail pharmacies, as well as reorder history. Should this
information indicate a steady stream of the product moving through the supply
chain, which would indicate that returns are less likely to occur, the product
reserve balance would be reduced, resulting in the recognition of additional
revenue.
24
<PAGE>
For the three and nine months ended September 30, 1999, cost of product sales
was 11% of sales and consisted primarily of royalties due to Lafon. This is not
indicative of future expectations. Prior to FDA approval of PROVIGIL in December
1998, we recorded the costs of producing PROVIGIL as research and development
expense in accordance with Statement of Financial Accounting Standards No. 2
"Accounting for Research and Development Costs." For the nine months ended
September 30, 1999, approximately $2,042,000 of inventory costs were excluded
from cost of product sales. As of September 30, 1999, we maintained
approximately $923,000 of inventory on hand that was previously charged to
research and development expense. We anticipate that this remaining expensed
material will be sold during the fourth quarter of 1999. Once this inventory has
been sold, we expect cost of product sales to be between 21% and 26% of sales.
Three months ended September 30, 1999 compared to the three months ended
September 30, 1998
For the three months ended September 30, 1999, shipments of PROVIGIL to
customers were $8,233,000 and the reserve for returns and allowances increased
by $368,000, resulting in product sales of $7,865,000.
Other revenues increased in the three months ended September 30, 1999 from the
1998 period due primarily to $1,595,000 in revenue recognized under the
initiation of a collaborative agreement with H. Lundbeck A/S in May 1999. This
increase was partially offset by a decrease in revenue recognized under the
Medtronic co-promotion agreement which terminated in April 1999.
For the three months ended September 30, 1999, research and development
expenses increased slightly from the same 1998 period due primarily to
expenditures associated with our clinical programs for PROVIGIL and CEP-1347.
The increase in the selling, general and administrative area for the three
months ended September 30, 1999 as compared to the corresponding 1998 period was
due primarily to marketing expenses associated with the commercialization of
PROVIGIL and an increase in the size of our sales force to fully support both
PROVIGIL and our collaboration with Abbott to market GABITRIL.
The decrease in net interest income is primarily due to the recognition of
interest expense related to the revenue-sharing notes, consisting of 11% of the
principal of the notes, 6% of net PROVIGIL sales in the United States payable to
the holders of the notes and amortization of warrant valuation and debt issuance
costs.
Preferred dividends of $1,107,000 were recognized in the third quarter of 1999
in connection with the August 1999 private offering of 2,500,000 shares of
convertible exchangeable preferred stock.
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998
For the nine months ended September 30, 1999, shipments of PROVIGIL to
customers were $20,515,000 and $5,398,000 was recorded for returns and
allowances, resulting in product sales of $15,117,000.
Other revenues increased in the 1999 period from the 1998 period due primarily
to $4,345,000 in revenue recognized under the initiation of a collaborative
agreement with H. Lundbeck A/S in May 1999. This increase was partially offset
by decreases in revenue from TAP, Chiron and Medtronic.
For the nine months ended September 30, 1999, research and development
expenses decreased from the same 1998 period because 1998 includes expenses for
license fees associated with our agreements with Laboratoire L. Lafon and Kyowa
Hakko and the purchase of bulk modafinil, the active drug substance in PROVIGIL.
These decreases were partially offset by increased expenditures in 1999 on our
clinical program for PROVIGIL.
The increase in the selling, general and administrative area for the nine
months ended September 30, 1999 as compared to the corresponding 1998 period was
due principally to marketing expenses associated with the commercial launch of
PROVIGIL, an increase in the size of our sales force to fully support both
PROVIGIL and
25
<PAGE>
our collaboration with Abbott to market GABITRIL and the recording of a
$4,300,000 provision related to our securities litigation.
The decrease in net interest income is primarily due to lower average
investment balances and the recognition of interest expense related to the
revenue-sharing notes.
Results of operations outlook
We expect to continue to incur operating losses unless and until sales of
PROVIGIL exceed operating expenses. We expect that sales of PROVIGIL may be
limited since we can only market the product to treat excessive daytime
sleepiness associated with narcolepsy. We may never be able to achieve
profitability solely through sales of PROVIGIL even if our market-base is
expanded to include other indications.
Other revenues include revenue recognized under 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 to
periodic review by the parties involved.
We expect to continue to incur significant expenditures associated with the
commercialization of PROVIGIL in the United Sates, including sales and marketing
activities, and conducting clinical studies of PROVIGIL in disorders other than
narcolepsy. Additionally, Under our agreement with Abbott, we are obligated to
fund marketing and clinical trial activities for GABITRIL.
We expect to increase our expenditures on research and development activities
for our other products in development. We may seek sources of funding for these
research and development programs through collaborative arrangements with third
parties but we still expect to have significant expenditures for our share of
the costs of these programs, including the costs of research, preclinical
development, manufacturing and clinical research. We also expect interest
expense to be higher in 1999 as compared to 1998 due to the revenue-sharing
notes issued in February 1999. As of September 30, 1999, Cephalon had recorded
$5,398,000 for returns and allowances which would result in approximately
$324,000 of additional interest expense associated with the revenue-sharing
notes if such revenues are ultimately recognized. In connection with our sale of
2,500,000 shares of convertible exchangeable preferred stock during the third
quarter of 1999, we will continue to recognize quarterly preferred stock
dividends unless the preferred stock is converted into shares of our common
stock.
We expect to have significant fluctuations in quarterly results based
primarily on the level and timing of:
. PROVIGIL sales, including provisions for product returns;
. cost of PROVIGIL sales;
. contract and co-promotion revenues;
. and the occurrence of expenses.
We do not believe that inflation has had a material impact on the results of
our operations since our inception.
26
<PAGE>
PART II - OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings
The information set forth in Footnote 4 to the Notes to Consolidated
Financial Statements included herein is hereby incorporated by reference.
Item 2. Changes in Securities and Use of Proceeds
The information set forth in the first paragraph of Footnote 6 to the
Notes to Consolidated Financial Statements included herein is hereby
incorporated by reference.
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:
During the quarter ended September 30, 1999, the Registrant
filed the following Current Reports on Form 8-K:
(i) On July 19, 1999, Cephalon, Inc. filed (i) Amendment No.
2 to License Agreement dated January 3, 1994 between the
Registrant and Laboratoire L. Lafon and (ii) Amendment
No. 2 to Trademark Agreement dated August 23, 1995
between the Registrant and Genelco S.A. which were not
previously filed.
(ii) On August 3, 1999, Cephalon, Inc. re-filed (i) Amendment
No. 2 to License Agreement dated January 3, 1994 between
the Registrant and Laboratoire L. Lafon and (ii)
Amendment No. 2 to Trademark Agreement dated August 23,
1995 between the Registrant and Genelco S.A. to reinstate
portions of the exhibits that were redacted in the
previous filing.
(iii) On August 18, 1999, Cephalon, Inc. filed a Current Report
on Form 8-K for the following events:
On August 5, 1999, Cephalon announced that it
intended, subject to market and other conditions, to
raise $100 million, excluding the proceeds of the
over-allotment option, through an offering of
convertible exchangeable preferred stock.
On August 13, 1999, Cephalon announced that it had
entered into a purchase agreement providing for the
sale to certain initial purchases of 2,000,000
shares of convertible exchangeable preferred stock
at $50 per share in a private offering to certain
institutional investors expected to close August 18,
1999.
(iv) On September 28, 1999, Cephalon, Inc. announced that the
initial purchasers of its previously announced offering of
2,000,000 shares of convertible exchangeable preferred
stock at $50 per share have exercised in full the over-
allotment option.
27
<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)
November 12, 1999 By /s/ Frank Baldino, Jr., Ph.D.
--------------------------------
Frank Baldino, Jr., Ph.D.
President, Chief
Executive Officer and Director
(Principal executive officer)
By /s/ J. Kevin Buchi
-------------------------------
J. Kevin Buchi
Senior Vice President,
Chief Financial Officer
(Principal financial and accounting
officer)
28
<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 SEPTEMBER 30, 1999 AND IS QUALIFIED IN
IT'S ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000873364
<NAME> CEPHALON, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 33,483,000
<SECURITIES> 179,865,000
<RECEIVABLES> 3,432,000
<ALLOWANCES> 0
<INVENTORY> 3,724,000
<CURRENT-ASSETS> 222,843,000
<PP&E> 34,710,000
<DEPRECIATION> 14,829,000
<TOTAL-ASSETS> 245,866,000
<CURRENT-LIABILITIES> 17,824,000
<BONDS> 39,188,000
0
25,000
<COMMON> 324,000
<OTHER-SE> 184,502,000
<TOTAL-LIABILITY-AND-EQUITY> 245,866,000
<SALES> 15,117,000
<TOTAL-REVENUES> 26,535,000
<CGS> 1,713,000
<TOTAL-COSTS> 1,713,000
<OTHER-EXPENSES> 31,359,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,803,000
<INCOME-PRETAX> (45,961,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,961,000)
<EPS-BASIC> (1.57)
<EPS-DILUTED> (1.57)
</TABLE>
