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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-19119
Cephalon, Inc.
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 23-2484489
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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<S> <C>
145 Brandywine Parkway,
West Chester, Pennsylvania 19380-4245
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (610) 344-0200
Securities registered pursuant to Section 12(b) of the Act:
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Title of Name of each
each class exchange on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X]. No [_] .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $1,193,374,192. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the Nasdaq National Market on March 21, 2000. For purposes of making this
calculation only, the registrant has defined affiliates as including all
directors, executive officers and beneficial owners of more than ten percent
of the Common Stock of the Company.
The number of shares of the registrant's Common Stock outstanding as of
March 21, 2000 was 33,264,686.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2000 annual
meeting of stockholders are incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I
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ITEM 1. Business..................................................... 3
ITEM 2. Properties................................................... 19
ITEM 3. Legal Proceedings............................................ 19
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 20
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 21
ITEM 6. Selected Consolidated Financial Data......................... 22
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 23
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.... 36
ITEM 8. Financial Statements and Supplementary Data.................. 37
ITEM 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure .................................... 54
PART III
ITEM 10. Directors and Executive Officers of the Registrant........... 54
ITEM 11. Executive Compensation....................................... 56
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 56
ITEM 13. Certain Relationships and Related Transactions............... 56
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... 57
SIGNATURES ............................................................. 63
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PART I
ITEM 1. BUSINESS
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 this report. Given these
risks and uncertainties, any or all of these forward-looking statements may
prove to be incorrect. Therefore, you should not rely on any such forward-
looking statements. Furthermore, we do not intend (and we are not obligated)
to update publicly any forward-looking statements. Risks that we anticipate
are discussed in more detail in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Certain Risks
Related to Our Business." This discussion is permitted by the Private
Securities Litigation Reform Act of 1995.
We market PROVIGIL(R) (modafinil) Tablets [C-IV] for treating excessive
daytime sleepiness associated with narcolepsy. We began marketing the product
in the United States in 1999, and also market the product in the United
Kingdom, the Republic of Ireland and Austria. In addition, we hold commercial
rights to PROVIGIL in Italy, Switzerland, Latin America, Japan, South Korea
and Taiwan; in these territories, we either are collaborating with, or seeking
to collaborate with, a corporate partner to develop and further market the
product.
We have an ongoing clinical program to explore the utility of PROVIGIL in
treating excessive daytime sleepiness and fatigue associated with disorders
other than narcolepsy. We have completed studies using PROVIGIL in patients
suffering from fatigue associated with multiple sclerosis, and excessive
daytime sleepiness due to obstructive sleep apnea, as well as a study to
demonstrate improvement in performance and alertness in a simulated shiftwork
environment. We have initiated a study to investigate PROVIGIL's use in
treating attention deficit hyperactivity disorder in adults and a second study
in obstructive sleep apnea. Depending upon the results of our studies and
discussions with the Food and Drug Administration, or FDA, we may decide to
pursue regulatory approval to market PROVIGIL for a range of indications, each
of which would require us to successfully complete additional clinical
studies. Our future success is highly dependent on the commercial success of
PROVIGIL in the United States.
In addition to our clinical program focused on PROVIGIL, we have other
significant research programs that seek to discover and develop treatments for
neurological and oncological disorders. We have formed alliances with TAP
Holdings, Inc. and Schwarz Pharma AG for the development of signal
transduction modulators to treat cancers, including prostate and pancreatic
cancers. TAP has completed two Phase I clinical studies and recently initiated
a Phase II clinical program in patients with prostate cancer, using the
program's orally administered lead molecule, CEP-701. Schwarz Pharma is
expected to initiate clinical studies in Europe in 2000 using CEP-701. We are
collaborating with H. Lundbeck A/S for the development of signal transduction
modulators to treat neurodegenerative disorders, including Parkinson's and
Alzheimer's diseases. Cephalon and Lundbeck have initiated a Phase I clinical
study using the program's orally administered lead molecule, CEP-1347. In
addition, we are collaborating with Leo Pharmaceuticals for the development of
gene transcription regulators for the treatment of Alzheimer's disease.
We also enter into collaborative commercial arrangements where we market the
products of third parties. In June 1999, we entered into an agreement with
Abbott Laboratories, Inc. to market and further develop GABITRIL(R) (tiagabine
hydrochloride), an adjunctive treatment for partial seizures associated with
epilepsy.
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COMMERCIAL PRODUCTS
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Product Indication Status
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PROVIGIL(1)....... Excessive daytime sleepiness (EDS) in narcolepsy Marketed
EDS in obstructive sleep apnea (OSA) Phase III
and other disorders
Fatigue in multiple sclerosis (MS) Phase II
Attention deficit hyperactivity disorder (ADHD) Phase II
GABITRIL(2)....... Epilepsy Marketed
STADOL NS(3)...... Migraine pain Marketed
APOKINON(4)....... Parkinson's Disease Marketed
</TABLE>
(1) We acquired from Laboratoire L. Lafon rights to develop and market
PROVIGIL in Italy, Latin America, the Republic of Ireland, the United
Kingdom, the United States, Japan and several other countries in Asia. We
granted certain rights in Italy and Japan to Dompe S.p.A. and Azwell,
Inc., respectively. We acquired rights to market and promote PROVIGIL in
Austria and Switzerland from Merckle GmbH, another licensee of Lafon.
(2) In the United States, we co-market and co-develop GABITRIL(R) (tiagabine
hydrochloride), a proprietary product of Abbott Laboratories, Inc.
(3) In the United States, we promote and market STADOL NS(R) (butorphanol
tartrate), a proprietary product of Bristol-Myers Squibb Company.
(4) In France, we promote and market APOKINON(R) (apomorphine hydrochloride),
a proprietary product of Laboratoire Aguettant S.A.
PROVIGIL
Narcolepsy
Narcolepsy is a debilitating, lifelong disorder that often originates in
late childhood. Its most notable symptom is an uncontrollable propensity to
fall asleep during the day. There is no cure for narcolepsy, which is
estimated to affect over 125,000 people in the United States, of which
approximately 45,000 are believed to currently seek treatment from a
physician. We believe that there is a proportionate incidence of narcolepsy in
the other territories in which we have obtained a license, but the relative
extent of diagnosis and treatment in those other countries varies and is
believed to be not as high as it is in the United States.
We conducted two Phase III, double-blind, placebo-controlled, nine-week
multi-center studies of PROVIGIL with more than 550 patients who met the
American Sleep Disorders Association criteria for narcolepsy. Subjects in both
studies were randomized to a daily dose of PROVIGIL 200 mg, PROVIGIL 400 mg,
or placebo. Both studies demonstrated improvement in objective and subjective
measures of excessive daytime sleepiness for both the 200 mg and 400 mg doses
compared to placebo. PROVIGIL was found to be generally well tolerated, with a
low incidence of adverse events relative to placebo. Most adverse events were
mild to moderate; the most commonly observed were headache, infection, nausea,
nervousness, anxiety, and insomnia. No specific symptoms of withdrawal were
observed after discontinuation of PROVIGIL therapy. The FDA approved dosing is
200 mg once daily.
Disorders other than narcolepsy
Due to the proven efficacy of PROVIGIL in reducing excessive daytime
sleepiness, or EDS, associated with narcolepsy, we believe that PROVIGIL may
have utility in treating sleepiness and fatigue in disorders other than
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narcolepsy. Our ongoing clinical program focuses on exploring PROVIGIL's
potential use in treating fatigue associated with neurological disorders such
as multiple sclerosis, EDS associated with sleep disorders such as obstructive
sleep apnea, hypersomnia and shiftwork/circadian rhythm disorders and
attention deficit hyperactivity disorder. We can not be sure that we will
receive regulatory approval for any indication beyond EDS associated with
narcolepsy. Under current FDA regulations, we are limited in our ability to
promote PROVIGIL outside its approved use.
. EDS in Obstructive Sleep Apnea
Individuals with obstructive sleep apnea, or OSA, experience frequent
awakenings, sometimes occurring hundreds of times during the night as a
result of blockage of the airway passage during sleep. OSA afflicts more
than 12 million Americans, of whom approximately 1 million are currently
treated. Patients suffering from OSA may be excessively sleepy during the
day because of disruption to their normal sleep cycle, even when the
underlying disease is treated. We have completed a multi-center, double-
blind, placebo-controlled study in the United States which demonstrated
that PROVIGIL reduced the daytime sleepiness in these patients in a
statistically significant manner.
. EDS in Shiftwork/Circadian Rhythm Disorders
Because shift workers typically work during the night, they often
experience a disruption in their sleep/wake cycle, which can lead to
impaired performance. Many industrial accidents occur at night and have
been at least partially attributable to operator fatigue. According to the
U.S. Department of Labor, approximately 14 million Americans are shift
workers. We have completed a placebo-controlled simulated shiftwork study
that showed that 200mg of PROVIGIL promoted alertness and improved
performance as measured by several validated scales. These data were
statistically significant.
. Fatigue in Multiple Sclerosis
Patients suffering from multiple sclerosis may suffer from fatigue and
sleepiness caused either by their disease or by the therapeutics used to
treat it. Approximately 80% of the 250,000--350,000 people with multiple
sclerosis experience fatigue; in many patients, fatigue may be the most
prominent and disabling symptom. We have completed a placebo-controlled
multiple sclerosis fatigue study that showed that 200mg of PROVIGIL reduced
fatigue in those patients. This reduction was statistically significant as
measured by several validated fatigue rating scales.
. Attention Deficit Hyperactivity Disorder
Attention deficit hyperactivity disorder, or ADHD, is characterized by an
inability to concentrate on tasks and may lead to disruptive behavior,
especially in children. ADHD afflicts 7 million Americans, of whom
approximately 1.5 million are currently treated. We are conducting a multi-
center, double-blind, placebo-controlled study with PROVIGIL in adult
sufferers of ADHD.
PROVIGIL: Collaborations
. Laboratoire L. Lafon
Under our agreements with Lafon, a French pharmaceutical company, we have
obtained an exclusive license to develop, market and sell PROVIGIL in
Italy, Japan, Latin America, the Republic of Ireland, the United Kingdom,
the United States and several countries in Asia. Under the agreements,
Lafon supplies bulk modafinil compound, the active drug substance in
PROVIGIL, for our commercial use at a purchase price equal to a percentage
of net product sales. In addition, we pay trademark and license royalties,
which also are calculated as a percentage of net product sales.
. Azwell, Inc.
In June 1998, we entered into an agreement with Azwell, a Japanese
pharmaceutical company, to develop and market PROVIGIL in Japan. Azwell is
responsible for funding product development activities,
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conducting clinical trials and seeking authorization to market PROVIGIL in
Japan. We will supply bulk modafinil compound to Azwell for use in Japanese
clinical trials, which are expected to commence in 2000. We will receive a
percentage of net product sales as a license royalty and in exchange for
supplying bulk compound for commercial use. We also will receive payments
upon the achievement of certain milestones. The agreement with Azwell
expires ten years from the date of initial commercial sale.
.Dompe S.p.A.
In June 1998, we entered into an agreement with Dompe, an Italian
pharmaceutical company, under which we granted Dompe the right to market,
sell and distribute PROVIGIL in Italy. We jointly manage regulatory matters
and Dompe is obligated to fund a minimum of promotional activities during
the first two years following commercial launch. We supply finished product
to Dompe for a purchase price equal to a percentage of net product sales.
The agreement with Dompe has an initial term of ten years and automatically
renews for successive two-year periods unless terminated by either party
upon 180 days notice prior to the expiration.
.Merckle GmbH
In October 1998, we entered into an agreement with Merckle, a German
pharmaceutical company, under which we obtained the rights to market and
promote PROVIGIL in Austria and Switzerland for the treatment of
narcolepsy. Under the agreement, we are responsible for promoting and
marketing the product while Merckle retains responsibility for all other
activities. We receive quarterly compensation from Merckle based on sales
levels achieved. The agreement with Merckle has a ten-year term.
GABITRIL
Epilepsy
Epilepsy is a chronic disorder characterized by seizures that cause sudden,
involuntary, time limited alteration in behavior including a change in motor
activity, autonomic function, consciousness, or sensation which is accompanied
by an abnormal electrical discharge in the brain. A partial seizure arises
from a disorder emanating from a distinct, identifiable region of the brain
and produces a given set of symptoms depending on the area of onset. A general
seizure arises from a general dysfunction of biochemical mechanisms throughout
the brain and may produce different types of convulsions. Epilepsy usually
begins in early childhood, but can appear at any time during an individual's
lifespan. It is estimated that more than 2 million Americans suffer from
epilepsy, of which approximately 1.4 million are treated by physicians.
Abbott Laboratories, Inc.
In June 1999, we entered into a collaborative agreement with Abbott to
market and further develop GABITRIL(R) (tiagabine hydrochloride) in the United
States. GABITRIL is an antiepilepsy drug used as adjunctive therapy in the
treatment of partial seizures. Under the agreement, we are required to make
calls on physicians and contribute to marketing and clinical trial activities
for GABITRIL. In exchange, we receive quarterly compensation from Abbott
calculated as a percentage of sales in excess of a base amount. The agreement
expires in April 2010 unless extended by mutual agreement.
Other Commercial Collaborations
Bristol-Myers Squibb Company
In July 1994, we entered into a co-promotion agreement with Bristol-Myers to
promote and market STADOL NS(R) (butorphanol tartrate) to neurologists in the
United States. STADOL NS is indicated for the management of pain when the use
of an opioid analgesic is appropriate. We receive compensation from Bristol-
Myers equal to a percentage of total STADOL NS sales attributed to
prescriptions written by neurologists which exceeds a predetermined base
amount. This agreement expires at the end of December 2000. We may terminate
this agreement upon 90 days notice.
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Laboratoire Aguettant S.A.
In December 1997, we entered into an agreement with Aguettant to promote and
market APOKINON(R) (apomorphine hydrochloride) to neurologists in France.
APOKINON, which is injected subcutaneously by a unique metered dose injection,
is indicated for the treatment of levadopa therapy fluctuations common in
late-stage Parkinson's disease. In return for marketing rights, we make annual
payments to Aguettant during the first five years of the agreement. We receive
quarterly compensation from Aguettant primarily based on a rate per unit of
APOKINON sold. The ten-year agreement automatically renews for successive one-
year periods unless terminated by either party upon 90 days notice.
RESEARCH AND DEVELOPMENT
Our research and development efforts focus primarily on two areas:
neurodegenerative disorders and cancers. Neurodegenerative disorders are
characterized by the death of neurons (the specialized conducting cells of the
nervous system) that results in the loss of certain functions such as memory
and motor coordination. Cancers are characterized by the uncontrolled
proliferation of cells that form tumors. Our research strategy has focused on
understanding the intracellular molecular events that underlie the processes
of cell proliferation, cell survival and cell death. We utilize our technical
expertise in molecular biology, molecular pharmacology, biochemistry, cell
biology, tumor biology and chemistry to create novel, orally active, synthetic
molecules to inhibit key targets in intracellular pathways that govern cell
proliferation, survival and death. These novel molecules are designed to (i)
enhance the survival of neurons, thereby intervening in the progression of
neurodegenerative disease or (ii) facilitate the death of tumor cells leading
to new therapies in oncology.
We believe that our technology facilitates the development of a portfolio of
potential products for the treatment of (i) neurological disorders in which
neuronal death is a primary pathology such as Parkinson's disease, Alzheimer's
disease and stroke, and (ii) oncological disorders where cellular
proliferation is a primary pathology such as prostate cancer, pancreatic
cancer and a variety of other cancers. Our research programs currently focus
on four core technology areas: signal transduction modulators, gene
transcription regulators, protease inhibitors and neurotrophic factors.
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Program Indication Status(1) Commercial Rights
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Signal Transduction Parkinson's and Phase I Cephalon/Lundbeck/Kyowa Hakko
Modulators............. Alzheimer's diseases
Prostate and Phase II Cephalon/TAP/Kyowa
pancreatic cancer Hakko/Schwarz Pharma
Solid tumors Development Cephalon
Gene Transcription
Regulators............. Alzheimer's disease Development Cephalon/Leo
Protease Inhibitors..... Alzheimer's disease Research Cephalon
Stroke Research Cephalon
Neurotrophic Factors
(MYOTROPHIN) .......... ALS NDA(2) Cephalon/Chiron/Kyowa Hakko
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(1) "Research" includes the identification of novel molecular targets,
development of assay systems, discovery and evaluation of prototype
compounds in vitro and in vivo. "Development" includes product
formulation, toxicology and additional animal testing of a lead compound.
"Phase I" clinical trials involves administration of a product to a
limited number of subjects to assess safety, pharmacokinetics and
determine
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appropriate dosage. "Phase II" clinical trials generally involve
administration of a product to a limited number of patients with a
particular disorder to determine dosage, efficacy and safety. "Phase III"
clinical trials generally examine the clinical efficacy and safety of a
product in an expanded patient population at multiple clinical sites. "NDA"
indicates that a new drug application has been filed with the FDA in the
United States for the treatment of the indication listed. See "Government
Regulation."
(2) We have conducted clinical trials using MYOTROPHIN(R) (mecasermin)
Injection in amyotrophic lateral sclerosis, or ALS, patients in North
America and Europe. In February 1997 Cephalon and Chiron submitted an NDA
to the FDA for approval to market MYOTROPHIN in the United States for the
treatment of ALS. In May 1998 the FDA issued a letter stating that the NDA
was "potentially approvable," under certain conditions. At this time, we
do not believe those conditions can be met without conducting an
additional Phase III clinical study.
Signal Transduction Modulators
Survival of cells, including neurons, is regulated and influenced by factors
that exert differential effects on the cell by promoting cell survival or
inducing cell death through activation of intracellular signaling pathways.
Once activated, these pathways initiate a series of biochemical events,
controlled in large part by intracellular kinases, that regulate the molecular
pathways of survival or death. Our signal transduction modulator program
focuses on identifying small molecules that modulate these signal transduction
events.
Neurology
In neurodegenerative disorders where neuronal death is a primary pathology
and results in the clinical condition, a growing body of research suggests
that specific molecular processes are activated which leads to progressive
neuronal death. Thus, inhibition of these molecular events in death-promoting
pathways provides novel therapeutic targets for molecules. Our research, as
well as research conducted by others in the field, has demonstrated that a
specific pathway, known as the stress activated protein kinase pathway, is
integral in the cell death process. We have developed an extensive proprietary
library of molecules that inhibit the activation of this stress activated
protein kinase pathway by inhibiting several related kinases known as mixed
lineage kinases, or MLKs. We have established that inhibition of the
activation of MLKs blocks the cell death process and enhances the survival of
neurons, in vitro and in vivo, where damage has been induced by a variety of
harmful stimuli. We are pursuing the development of these molecules for the
treatment of Alzheimer's disease, Parkinson's disease and other
neurodegenerative disorders.
. Alzheimer's and Parkinson's Diseases
Alzheimer's disease is an intractable, chronic, and progressively
incapacitating disease characterized by the presence of core neurotic
plaques, neurofibrillary tangles and gliosis in the brain that are
associated with significant death and dysfunction of several types of
neuronal populations. Patients afflicted with this disease become severely
demented. Alzheimer's disease afflicts an estimated 5% to 10% of the
population over the age of 65, or approximately 4 million Americans, with
more than 100,000 new cases diagnosed each year. The age-dependent nature
of the disorder suggests that an increasing percentage of the population
may be affected as the population ages. Parkinson's disease is a
progressive disorder of the central nervous system affecting over 1 million
Americans. The primary pathology of the disease is caused by the
degeneration of the pigmented neurons in the substantia nigra of the brain,
resulting in a decrease in the dopamine neurotransmitter. This results in
the primary clinical symptoms of decrease in spontaneous movements, gait
difficulty, postural instability, rigidity and tremor.
Several of the MLK inhibitors have been shown to prevent neuronal death
in vitro and in several models of neuronal death in vivo. One of these
compounds, CEP-1347, currently is in development for use as a potential
treatment for Parkinson's disease. In preclinical models of Parkinson's
disease, CEP-1347 has demonstrated therapeutic potential in the treatment
and prevention of the pathological and behavioral consequences of this
disease. In rodents and non-human primate models, treatment with CEP-1347
protected against loss of dopamine neurons in regions of the brain affected
in Parkinson's disease and
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prevented the appearance of behavioral symptoms associated with loss of
dopamine neurons. Cephalon and Lundbeck have recently initiated a Phase I
clinical study using CEP-1347. CEP-1347 is licensed under our agreement with
Kyowa Hakko.
Oncology
In normal tissues, cellular proliferation is balanced by cellular death and
these processes are governed in part by a class of soluble protein molecules
(growth factors) that serve as communication signals between cells. Cancer is
a disease of uncontrolled proliferation of cells that may sometimes be linked
to inappropriate signaling from specific growth factor receptors. Many of
these growth factors bind to specific cell surface receptors (or receptor
kinases) and initiate intracellular signals that maintain cell survival and/or
direct the cell to proliferate. Inhibition of these receptor kinases provides
a unique therapeutic strategy for treating a variety of oncological disorders
and provides the opportunity for treatment without the undesirable effects on
other organ systems produced by traditional chemotherapeutics.
. Prostate and Pancreatic Cancer
Prostate cancer is the most common form of cancer in men, affecting
approximately 1 million men in the United States, and is the second leading
cause of cancer death in men. Pancreatic cancer results in approximately
35,000 deaths in men and women each year in the United States. Research
conducted with our collaborators has demonstrated that the nerve growth
factor, or NGF, and its receptor tyrosine kinase, or trk, may play an
integral role in the development and propagation of hormone dependent and
independent cancer and also in pancreatic cancer.
We have synthesized a class of small, orally active molecules that are
selective inhibitors of trk, thus, antagonizing the "survival" signal
elicited by this receptor. In preclinical models, we have demonstrated that
these selective trk inhibitors inhibit tumor growth in a variety of
prostate and pancreatic cancer models.
We have entered into two collaborations to develop these trk inhibitors
for the treatment of prostate disorders and other cancers: (i) with TAP in
the United States and (ii) with Schwarz Pharma in Europe. In the United
States, TAP has completed two Phase I clinical studies and has initiated a
Phase II clinical program in patients with prostate cancer using the
program's orally administered lead molecule, CEP-701. Schwarz Pharma is
expected to initiate Phase II clinical studies in Europe in 2000 using CEP-
701. Some of the molecules covered under our agreement with TAP and Schwarz
Pharma are licensed under our agreement with Kyowa Hakko.
. Solid Tumors
As tumor cells aggregate, they promote the formation of new blood vessels
that provide nutrients to the growing tumor. This process is called
angiogenesis. Angiogenesis is mediated by a number of factors but appears
to be particularly dependent upon the vascular endothelial growth factor,
or VEGF. As a result, we believe that inhibitors of the receptor kinase for
this growth factor have potential utility in the treatment of solid tumors.
We have synthesized a number of proprietary orally active molecules,
which are potent and selective inhibitors of the VEGF receptor kinase.
These molecules have been shown to slow the growth of certain tumors when
used in vivo. We have selected one of these molecules as a candidate for
further development.
Signal Transduction Modulators: Collaborations
. Kyowa Hakko Kogyo Co., Ltd.
In May 1992, we licensed from Kyowa Hakko patent and other intellectual
property rights to a specific class of small molecules that we have
identified as signal transduction modulators, two of which are currently in
clinical trials. We are developing CEP-1347 for use in the treatment of
neurological disorders and CEP-701 for the treatment of cancers.
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We have exclusive marketing rights to CEP-701 in North America and
Europe, and we are developing this compound for the treatment of prostate
and pancreatic cancer; Kyowa Hakko retains exclusive marketing rights to
this compound in Asia. We have sublicensed our rights to CEP-701 in Europe
to Schwarz Pharma and in the United States to TAP. We have exclusive
marketing rights to CEP-1347 in North America and semi-exclusive rights to
CEP-1347 in Europe, and we are seeking to develop this compound for the
treatment of neurological disorders; Cephalon and Kyowa Hakko each hold
semi-exclusive marketing rights to CEP-701 and CEP-1347 throughout the rest
of the world, including Japan. We have sublicensed our rights to CEP-1347
in Europe to Lundbeck. We will pay Kyowa Hakko a royalty on all net product
sales of pharmaceutical products containing the compounds. We recently
agreed with Kyowa Hakko to modify the related supply agreement so that we
will be responsible for supplying the compounds under development. We have
selected another manufacturer to produce these compounds and Kyowa Hakko is
working with us to transfer the applicable manufacturing technology to this
third party.
. TAP Holdings, Inc.
In May 1994, Cephalon and TAP entered into a licensing and research and
development collaboration to develop and commercialize certain compounds,
including CEP-701, for the treatment of prostate disorders and other
cancers 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. Compensation is based on a contract rate per individual assigned to
the program for that quarter and also includes reimbursement of certain
external costs. TAP is responsible for conducting and funding all clinical
trials in the United States and activities required for regulatory
submissions for U.S. marketing approval. The agreement provides for TAP to
make milestone payments to us upon the submission and approval of new drug
applications that may emanate from the collaboration and to purchase
commercial supplies of product from us at a price equal to a fixed
percentage of net product sales plus royalties on net product sales. The
research under the agreement may be extended for one-year periods. TAP may
terminate the research under the agreement upon 90 days notice prior to
expiration.
. H. Lundbeck A/S
In May 1999, Cephalon and Lundbeck entered into a collaborative agreement
to discover, develop and market products to treat neurodegenerative
disorders, such as Parkinson's and Alzheimer's diseases. The compounds
include CEP-1347 and other proprietary orally active small molecules that
inhibit specific processes associated with the death of neurons.
Under the terms of the agreement, Lundbeck paid a non-refundable license
fee and is responsible for the costs of research and development through
Phase I clinical testing as well as reimbursing us for certain program
related costs. The companies will share the costs of later stage clinical
trials. Lundbeck is responsible for commercialization in Europe and certain
other territories while we retain exclusive marketing rights in the United
States. The agreement provides for Lundbeck to make milestone payments and
to pay royalties on net product sales in Europe. Lundbeck may terminate the
agreement after one year upon 30 days prior notice.
. Schwarz Pharma AG
In December 1999, Cephalon and Schwarz Pharma, a German pharmaceutical
company, entered into a licensing agreement under which we granted to
Schwarz Pharma our rights to develop and market CEP-701 for the treatment
of prostate and other cancers in Europe and several other countries outside
the United States. We also granted to Schwarz Pharma an option to acquire
rights to develop and market other compounds that we are developing.
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Under the terms of the agreement, Schwarz Pharma paid a non-refundable
license fee and is responsible for funding specified levels of product
development, including conducting clinical trials and seeking regulatory
approval in the territories. We are responsible for providing Schwarz
Pharma with data resulting from the conduct of our research and development
program with TAP. We also are responsible for supplying clinical supplies
at cost and commercial supplies for a percentage of net sales. The
agreement provides for Schwarz Pharma to make milestone payments and to pay
royalties on net product sales in the territories. Schwarz Pharma may
terminate the agreement upon six months prior notice up until commercial
launch of a product in the territory or upon twelve months prior notice at
any time thereafter.
Gene Transcription Regulators
Neurotrophic factors have been shown to promote the survival of neurons (see
"Neurotrophic Factors"). In particular, nerve growth factor, or NGF, has been
shown to promote the survival of one population of neurons that is seriously
compromised in Alzheimer's disease. Unfortunately, NGF cannot cross the blood-
brain barrier and, as a result, has to be administered through invasive means.
The inability of systemically administered trophic factors to cross the blood-
brain barrier must be overcome in order to address disorders of the central
nervous system, or CNS, where the neurons as well as their axonal projections
lie within the blood-brain barrier. We are developing a proprietary series of
molecules that have demonstrated the ability to enhance the endogenous
expression in the CNS of nerve growth factor and other growth factors. These
molecules are believed to influence gene transcription by binding to a
receptor in neurons that is widely distributed in the brain. These orally
active small molecules cross the blood-brain barrier and initiate
transcriptional events at the genes responsible for the production of certain
neurologically active factors within the CNS. Elevating levels of neurotrophic
factors in the CNS through the regulation of gene transcription may provide a
way to circumvent the blood-brain barrier as a limitation on the potential of
neurotrophic proteins to treat neurodegenerative disorders. Such agents may
have therapeutic potential in disorders such as Alzheimer's disease.
Gene Transcription Regulators: Collaborations
. Leo Pharmaceutical Products, Ltd.
In November 1996, Cephalon and Leo entered into an agreement to
collaborate in the development of gene transcription regulators for
potential use in the treatment of neurological disorders.
Under this agreement, we will use our proprietary technology to evaluate
molecules synthesized by Leo. Cephalon and Leo intend to jointly develop
selected products and will share the cost of development. Leo is
responsible for the cost of Phase I studies, we are responsible for the
cost of Phase II, and we will both share equally in the cost of Phase III.
We will have the exclusive rights to market and sell jointly developed
products in the United States and Mexico in the neurological field; in
return, we will pay to Leo a percentage of net sales as a royalty and for
the supply of product. We will receive a royalty from Leo's net sales of
jointly developed products in other territories. A lead molecule has been
identified for development as a potential treatment for Alzheimer's
disease.
Protease Inhibitors
A protease is a naturally occurring enzyme that is responsible for the
processing or cleavage of a protein. Certain proteases have been implicated in
the pathogenesis of neurodegenerative disorders, either directly by causing
neuronal death or indirectly by cleaving proteins into smaller peptide
fragments that threaten the survival of neurons. We have developed expertise
in identifying, isolating and assaying specific types of proteases believed to
be involved in certain neurodegenerative disorders. In addition, our expertise
in chemistry has enabled the synthesis of molecules that, in preclinical
studies, specifically inhibit the action of these proteases. In the past, we
have focused on developing small molecule therapeutics that inhibit the
actions of the protease calpain, which is thought to play a role in causing
the neuronal damage associated with stroke. We also have focused on developing
other compounds that inhibit the protease gamma-secretase, which plays a
pivotal role in the production of the toxic beta-amyloid protein associated
with the degeneration in Alzheimer's disease. We believe that this core
technology can be applied to any number of proteases and disorders.
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Neurotrophic Factors (MYOTROPHIN)
A major advance in neuroscience was the discovery of naturally occurring
proteins, referred to as neurotrophic, trophic or growth factors, that promote
the survival of neurons. Several different neurotrophic factors have been
identified that affect the survival of different types of neurons. Our
development efforts in this area focus on using the neurotrophic factor,
MYOTROPHIN, in disorders such as amyotrophic lateral sclerosis, or ALS and
peripheral neuropathies, where the projections of the damaged neurons lie or
extend outside the blood-brain barrier and are therefore accessible to trophic
factors.
Amyotrophic Lateral Sclerosis
Amyotrophic lateral sclerosis is a fatal disorder of the nervous system
characterized by the chronic, progressive degeneration of motor neurons. It is
the loss of the spinal (lower) motor neurons that leads to muscle weakness,
muscle atrophy and, eventually, to the patient's death. The disease usually
progresses over a three to five-year period, with death usually resulting from
loss of respiratory muscle control rendering the patient unable to breathe.
ALS affects approximately 15,000-20,000 people in the United States. We
believe that there is a proportionate incidence of ALS in the populations of
Europe and Japan.
We have conducted clinical trials using MYOTROPHIN in ALS patients in North
America and Europe. In February 1997, Cephalon and Chiron submitted an NDA to
the FDA for approval to market MYOTROPHIN in the United States for the
treatment of ALS. In May 1998, the FDA issued a letter stating that the NDA
was "potentially approvable," under certain conditions. At this time, we do
not believe those conditions can be met without conducting an additional Phase
III clinical study.
Neurotrophic Factors (MYOTROPHIN): Collaborations
. Cephalon Clinical Partners, L.P.
In August 1992, we exclusively licensed our rights to MYOTROPHIN for
human therapeutic use within the United States, Canada and Europe to
Cephalon Clinical Partners, L.P., or CCP. We perform any development and
clinical testing of MYOTROPHIN on behalf of CCP under a research and
development agreement with CCP.
CCP has granted us an exclusive license to manufacture and market
MYOTROPHIN for human therapeutic use within the United States, Canada and
Europe in return for royalty payments equal to a percentage of product
sales and a milestone payment of approximately $16 million that will be
made if MYOTROPHIN receives regulatory approval.
We have a contractual option to purchase all of the limited partnership
interests of CCP. To exercise this purchase option, we are required to make
an advance payment of $40.3 million in cash or, at our election, $42.4
million in shares of common stock or a combination thereof. The purchase
option will become exercisable upon the occurrence of certain events once
sales activity commences. Should we discontinue development of MYOTROPHIN
or if we do not exercise the purchase option, our license will terminate
and all rights to manufacture or market MYOTROPHIN in the United States,
Canada and Europe will revert to CCP, which may then commercialize
MYOTROPHIN itself or license or assign its rights to a third party. In that
event, we would not receive any benefits from such commercialization,
license or assignment of rights.
. Kyowa Hakko Kogyo Co., Ltd.
In July 1993, we entered into an agreement with Kyowa Hakko providing for
the development of MYOTROPHIN in Japan. Kyowa Hakko is responsible for
funding product development activities, conducting clinical trials in ALS
and seeking authorization to market MYOTROPHIN in Japan. We will supply
MYOTROPHIN to Kyowa Hakko for commercial use in exchange for a percentage
of net product sales. In addition, we are to receive certain licensing,
milestone and royalty payments. Under certain circumstances, we have an
option to co-promote MYOTROPHIN in Japan.
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We may terminate the agreement if (i) Kyowa Hakko fails to file for
marketing approval of MYOTROPHIN in Japan within eight years from the date
of the agreement, except where such failure is not within Kyowa Hakko's
control, or (ii) if Kyowa Hakko discontinues the development of MYOTROPHIN
because of a lack of safety or efficacy.
. Chiron Corporation
Since January 1994, Cephalon and Chiron have collaborated in the
development of MYOTROPHIN for the treatment of ALS and certain other
neurological disorders for commercialization in all countries of the world
other than Japan. Through June 1998, the costs of the program had generally
been shared equally by the two companies. Since that time, Cephalon and
Chiron have funded their own program expenses.
Cephalon and Chiron generally will share equally in all profits and
losses from the marketing of MYOTROPHIN for the treatment of ALS and other
neurological disorders in North America, the countries of the European
Community and certain other western European countries. In addition, we
will receive a royalty on sales of MYOTROPHIN in western Europe to treat
ALS. Chiron will market the products in the collaboration's territories
outside of North America and western Europe in return for royalties to the
collaboration, which also will be shared equally by Cephalon and Chiron.
Either party may terminate the collaboration if there is no reasonable
basis for developing any of the collaboration's compounds. If we are the
non-terminating party, we may continue to license the technology or require
Chiron to supply product on a "cost plus" basis for a certain period of
time. The agreement also is subject to termination if we do not exercise
the CCP purchase option.
PATENTS AND PROPRIETARY TECHNOLOGIES
An important part of our product development strategy is to seek protection
for our products and technologies through the use of U.S. and foreign patents
and trademarks. As described below, we hold rights to and have filed
applications for various U.S. and foreign patents, though we cannot be certain
that any of these patent applications will issue, or if issued, that they will
not be challenged by third parties on the basis of invalidity or non-
infringement, or that we will not be found to have infringed upon the rights
of others in any case.
PROVIGIL
PROVIGIL(R) is a licensed trademark used in connection with pharmaceutical
products containing modafinil as the active drug substance. The composition-
of-matter patent was to have expired in 1998 in the United Kingdom and the
United States; however, we have applied for extensions of the patent
protection in those countries. We have been granted a Supplemental Protection
Certificate for the United Kingdom patent covering modafinil, extending the
protection afforded by this patent until March 30, 2003. In the United States,
if we were to secure the maximum extension permitted under the terms of the
U.S. Drug Price Competition and Patent Term Restoration Act of 1984, as
amended, the composition-of-matter patent for modafinil would expire on
November 18, 2001. We cannot be certain that we will receive this patent
extension or that we will be able to take advantage of any other patent
benefits of the patent restoration act. The composition-of-matter patent
claiming modafinil as the active drug substance in PROVIGIL expired in 1998 in
the Republic of Ireland, Japan, Italy and Mexico. Other than Italy, we do not
believe that extension of the protection conferred by the modafinil
composition-of-matter patent is possible in any other of our licensed
territories.
The particle size pharmaceutical composition of modafinil is claimed in our
U.S. patent which was issued in 1997 and in our European patent which was
granted in January 2000. These patents are currently set to expire on October
6, 2014 and October 4, 2015, respectively. Other foreign patents claiming the
particle size pharmaceutical composition of modafinil are pending or issued in
other territories. We have filed a reissue application in the United States in
order to obtain broader coverage for the modafinil particle size patent. We
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also hold rights to a U.S. patent that issued in January 1993 for the use of
PROVIGIL in treating Parkinson's disease and a U.S. patent issued in 1990 which
claims the composition of certain isomers of PROVIGIL.
Since modafinil is a new chemical entity, or NCE, PROVIGIL has been granted a
five-year period of marketing exclusivity under FDA regulations, preventing the
submission of an Abbreviated New Drug Application, or ANDA, for any
pharmaceutical product containing modafinil for any indication for a period of
five years following FDA approval. This exclusivity period expires in December,
2003. The FDA also has designated PROVIGIL as an orphan drug for use in the
treatment of EDS associated with narcolepsy. This designation provides for a
seven-year period of marketing exclusivity for PROVIGIL in this indication, and
prevents the approval of an ANDA until December, 2005.
MYOTROPHIN
MYOTROPHIN(R) (mecasermin) Injection is our trademark for recombinant human
insulin-like growth factor-I, known as rhIGF-I or IGF-I. We believe that the
composition of rhIGF-I is in the public domain and therefore cannot be patented
under a composition-of-matter patent. However, we own issued U.S., European,
Canadian and Japanese patents which include claims covering the use of IGF-I
for the treatment of diseases caused by the death of non-mitotic, cholinergic
neurons, including motor neurons compromised in ALS. We also own U.S. patents
claiming the use of IGF-I in treating certain types of peripheral neuropathies,
and we have filed similar applications in Canada, Europe and Japan. We have
filed patent applications in the United States, Canada, Europe and Japan
covering the use of IGF-I in enhancing the survival of neuronal cells and use
in multiple sclerosis. We also have issued patents and pending patent
applications directed to manufacturing and purification processes, and we have
obtained a license from SIBIA Neurosciences, Inc. to use certain patent rights
and other technology related to the manufacture of rhIGF-I in certain strains
of yeast host cells. The issued patents and all patent applications relating to
IGF-I in the United States, Canada and Europe have been licensed to Cephalon
Clinical Partners, L.P., or CCP. Subject to the rights of CCP, Cephalon and
Chiron have agreed to cross-license all of their respective patents and patent
applications related to IGF-I (excluding our rights under the SIBIA license, as
to which Chiron has the option to sublicense) in the field of neurological
diseases and disorders.
Under our collaboration with Chiron, Chiron has the primary responsibility
for manufacturing commercial supplies of MYOTROPHIN. Chiron is currently
involved in interference proceedings with Genentech, Inc. concerning U.S.
patent rights related to certain methods for manufacturing rhIGF-I. It is not
known when or how these interference proceedings will ultimately conclude, or
whether the issued claims will cover any portion of the current manufacturing
process. We are aware of other patents and patent applications owned by third
parties, which may cover certain aspects of the current method of manufacturing
rhIGF-I. Cephalon and Chiron also intend to either seek licenses under any
valid patents related to the manufacturing of rhIGF-I as required or,
alternatively, modify the manufacturing process. We cannot be sure that, if
required, such licenses can be obtained at all or on acceptable terms or that a
modified manufacturing process can be implemented at all or without substantial
cost or delay. If neither approach is feasible, we could be subject to a claim
of patent infringement which, if successful, could prevent us from
manufacturing or selling MYOTROPHIN in the United States.
We are aware of an issued U.S. patent, and a granted European patent, both
owned by Genentech, that claim the use of IGF-I in treating neuronal damage
suffered after a central nervous system insult affecting glia and/or other non-
cholinergic cells. We have filed an opposition against the granted European
patent and also have initiated interference proceedings against the U.S.
patent. We cannot predict the outcome of the opposition or the interference
proceeding at this time. If the claims of the issued U.S. patent and the
granted European patent are not otherwise invalid or unenforceable, or if the
grant is not revoked by the European Patent Office, we could be prevented from
selling MYOTROPHIN in the United States and Europe for uses of IGF-I claimed in
the patents, unless we obtain a license to any granted or issued patents. We
cannot be sure that a license could be obtained, or that any such license would
be granted under terms acceptable to us.
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We also are aware of other third party patents and patent applications that
claim the use of IGF-I in affecting a change in the central nervous system and
use in diabetic neuropathy. These patents and applications may be construed to
cover our commercial activities with IGF-I. We cannot be sure that licenses to
such patents and applications could be obtained, or that any such license(s)
would be granted under terms acceptable to us.
Other Programs
We also own issued and pending U.S. patents and applications claiming
compositions and/or uses of certain kinase inhibitors including two novel
classes of small molecules referred to as "indolocarbazoles" and "fused
pyrrolocarbazoles." We have filed foreign counterparts of these patents in
other countries, as appropriate. We also own issued and pending U.S. and
foreign patents and applications claiming compositions and/or uses of
inhibitors of certain proteases, including novel classes of small molecules for
inhibition of calpain, and novel classes of small molecules for inhibition of
the multicatalytic protease.
Through collaborative agreements with researchers at several academic
institutions, we have licenses to or the right to license, generally on an
exclusive basis, patents and patent applications issued or filed in the United
States and certain other countries arising under or related to such
collaborations. We also have licensed U.S. and European composition-of-matter
and use patents and applications for novel compositions under our collaborative
agreement with Kyowa Hakko, including compositions and uses of certain
indolocarbazoles for the treatment of pathological conditions of the prostate
(including prostate cancer) and for the treatment of neurological disorders.
We cannot be sure that any additional patents will be issued on any of the
patent applications we own or license from third parties. Furthermore, even if
such patents are issued, we cannot be sure that the validity of the patents
would be upheld if challenged, that such patents would provide protection
against competitive products or otherwise be commercially valuable, or that
applications filed by others would not result in patents that would be
infringed by the manufacture, use or sale of our products.
Our products could infringe the patent rights of others. If licenses required
under any such patents or proprietary rights of third parties are not obtained,
we could encounter delays in product market introductions, or could find that
the development, manufacture or sale of products requiring such licenses is
foreclosed. In addition, patent litigation is both costly and time-consuming,
even if the outcome is favorable to us. In the event that we are a defendant in
such litigation, an adverse outcome would subject us to significant liabilities
to third parties, require us to license disputed rights from third parties, or
require us to cease selling our products.
We also rely upon trade secrets and other unpatented proprietary information
in our product development activities. Our employees enter into agreements
providing for confidentiality and the assignment of rights to inventions made
by them while employed by us. We also have entered into non-disclosure
agreements to protect our confidential information delivered to third parties
in conjunction with possible corporate collaborations and other purposes. We
cannot be sure that these types of agreements will effectively prevent
unauthorized disclosure of our confidential information.
MANUFACTURING AND PRODUCT SUPPLY
Our ability to conduct clinical trials on a timely basis, to obtain
regulatory approvals and to commercialize our products will depend in part upon
our ability to manufacture our products, either directly or through third
parties, at a competitive cost and in accordance with applicable FDA and other
regulatory requirements, including current Good Manufacturing Practice, or
cGMP, regulations. We do not own manufacturing facilities and we rely on third
parties for all of our manufacturing requirements.
We rely on Lafon for all of our requirements of bulk modafinil compound and
upon third party manufacturers to provide final formulation, tabletting and
packaging of PROVIGIL.
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We rely on Chiron for all of our manufacturing requirements for MYOTROPHIN.
To date, we have relied on Kyowa Hakko to supply a key chemical intermediate
for our signal transduction modulator programs; however, we recently agreed
with Kyowa Hakko to modify the related supply agreements so that we will be
responsible for supplying the compounds under development. We have contracted
with another manufacturer to develop, scale-up and supply bulk intermediates
and Kyowa Hakko is working with us to transfer the applicable manufacturing
technology to this third party. This intermediate is supplied to Lundbeck for
use in the synthesis of clinical and commercial supplies. It also is used to
manufacture product for use in clinical trials, and ultimately for purposes of
manufacturing commercial supplies under our agreements with TAP and Schwarz
Pharma.
COMPETITION
Large and small companies, academic institutions, governmental agencies, and
other public and private research organizations conduct research, seek patent
protection, and establish collaborative arrangements for product development
in competition with us. 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, 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 also may adversely affect the
market for such products.
With respect to PROVIGIL, there are several other products used for the
treatment of narcolepsy in the United States and in our other licensed
territories, all of which have been available for a number of years and many
of which are available in inexpensive generic forms. We cannot be sure that we
will be able to demonstrate the potential advantages of PROVIGIL to
prescribing physicians and their patients on an absolute basis and/or in
comparison to other presently marketed products.
GOVERNMENT REGULATION
The manufacture and sale of therapeutics are subject to extensive regulation
by U.S. and foreign governmental authorities. In particular, pharmaceutical
products are subject to rigorous preclinical and clinical trials and other
approval requirements by the FDA under the Federal Food, Drug, and Cosmetic
Act and by analogous agencies in countries outside the United States.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animals to identify potential safety
problems and, in some cases, evaluate potential efficacy. The results of the
preclinical studies are submitted to regulatory authorities as a part of an
investigational new drug application, or IND, that is filed with regulatory
agencies prior to beginning studies in humans. However, for several of our
drug candidates, no animal model exists that is potentially predictive of
results in humans. As a result, no in vivo indication of efficacy is available
until these drug candidates progress to human clinical trials.
Clinical trials are typically conducted in three sequential phases, although
the phases may overlap. Phase I typically begins with the initial introduction
of the drug into human subjects prior to introduction into patients. In Phase
I, the compound is tested for safety, dosage tolerance, absorption,
biodistribution, metabolism, excretion and clinical pharmacology, as well as,
if possible, to gain early information on effectiveness. Phase II typically
involves studies in a small sample of the intended patient population to
assess the efficacy of the drug for a specific indication, determine dose
tolerance and the optimal dose range, and to gather additional information
relating to safety and potential adverse effects. Phase III trials are
undertaken to further evaluate clinical safety
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and efficacy in an expanded patient population, generally at multiple study
sites, to determine the overall risk-benefit ratio of the drug and to provide
an adequate basis for physician labeling. Each trial is conducted in
accordance with certain standards under protocols that detail the objectives
of the study, the parameters to be used to monitor safety and the efficacy
criteria to be evaluated. In the United States, each protocol must be
submitted to the FDA as part of the IND. Further, one or more independent
Institutional Review Boards must evaluate each clinical study. The
Institutional Review Board considers, among other things, ethical factors, the
safety of the study, the adequacy of informed consent by human subjects, and
the possible liability of the institution. Similar procedures and requirements
must be fulfilled to conduct studies in other countries. The process of
completing clinical trials for a new drug is likely to take a number of years
and require the expenditure of substantial resources.
Data from Phase II preclinical and Phase III clinical trials are submitted
to the FDA in a new drug application or NDA for marketing approval and to
foreign regulatory authorities under applicable requirements. Preparing an NDA
or foreign application involves considerable data collection, verification,
analyses and expense, and there can be no assurance that the applicable
regulatory authority will grant an approval on a timely basis, if at all. The
approval process is affected by a number of factors, including primarily the
safety and efficacy demonstrated in clinical trials and the severity of the
disease. Regulatory authorities may deny an application in their sole
discretion, if they determine that applicable regulatory criteria have not
been satisfied or if additional testing or information is required. One of the
conditions for marketing approval is that a prospective manufacturer's quality
control and manufacturing procedures conform to the cGMP regulations of the
regulatory authority. In complying with these regulations, a manufacturer must
continue to expend time, money and effort in the area of production, quality
control and quality assurance to ensure full technical compliance.
Manufacturing establishments, both foreign and domestic, also are subject to
inspections by or under the authority of the FDA and by other federal, state,
local or foreign agencies.
Even after initial regulatory approval has been obtained, further studies,
including Phase IV post-marketing studies, may be required to provide
additional data on safety or for other reasons. Further studies will be
required to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially approved.
Results of post-marketing programs may limit or expand the further marketing
of the products. Further, if there are any modifications to the drug,
including any change in indication, manufacturing process, labeling or
manufacturing facility, it may be necessary to submit an application seeking
approval of such changes to the FDA or foreign regulatory authority. Moreover,
marketed products are subject to continued regulatory oversight and the
failure to comply with applicable regulations could result in financial
penalties or other sanctions.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals
vary widely from country to country, and the time required for approval may be
longer or shorter than that required for FDA approval. Although there are
procedures for unified filings for most European countries, in general, each
country also has its own additional procedures and requirements, especially
related to pricing of new pharmaceuticals. Further, the FDA regulates the
export of products produced in the United States and, in some circumstances,
may prohibit the export even if such products are approved for sale in other
countries.
In the United States, the Orphan Drug Act provides incentives to drug
manufacturers to develop and manufacture drugs for the treatment of either (i)
rare diseases, currently defined as diseases that affect fewer than 200,000
individuals in the United States or, (ii) for a disease that affects more than
200,000 individuals in the United States, where the sponsor does not
realistically anticipate its product becoming profitable. The FDA has granted
PROVIGIL orphan drug status for use in treating excessive daytime sleepiness
associated with narcolepsy and has designated MYOTROPHIN as an orphan drug for
use in treating ALS, because each indication currently affects fewer than
200,000 individuals in the United States. Under the Orphan Drug Act, a
manufacturer of a designated orphan product can seek certain tax benefits, and
the holder of the first FDA approval of a designated orphan product will be
granted a seven-year period of marketing exclusivity for that
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product for the orphan indication. While the marketing exclusivity of an
orphan drug would prevent other sponsors from obtaining approval of the same
drug compound for the same indication unless the sponsors could demonstrate
clinical superiority, it would not prevent other sponsors from obtaining
approval of the same compound for other indications or the use of other types
of drugs for the same use as the orphan drug. Orphan drug designation does not
confer any special or preferential treatment in the regulatory review process.
The U.S. Congress has considered, and may consider in the future, legislation
that would restrict the duration or scope of the market exclusivity of an
orphan drug and, thus, we cannot be sure that the benefits of the existing
statute will remain in effect.
Under the terms of the U.S. Drug Price Competition and Patent Term
Restoration Act of 1984, a sponsor may be granted a maximum five-year
extension of the term of a patent for a period of time following the initial
FDA approval of an NDA for a new chemical entity. The statute specifically
allows a patent owner to extend the term of the patent for a period equal to
one-half the period of time elapsed between the approval of the IND and the
filing of the corresponding NDA, plus the period of time between the filing of
the NDA and FDA approval, up to a maximum of five years of patent term
extension. Any such extension, however, cannot extend the patent term beyond a
maximum term of fourteen years following FDA approval and is subject to other
restrictions. Additionally, under this statute, five years of marketing
exclusivity is granted for the first approval of a NCE. During this period of
exclusivity, sponsors generally may not file and the FDA may not approve an
ANDA or a 505(b)(2) application for a drug product equivalent or identical to
the NCE. An ANDA is the application form typically used by manufacturers
seeking approval of a generic version of an approved drug. Subsequent approved
indications for the NCE are eligible, under this statute, to three years of
limited marketing exclusivity for the indication. During any three-year
exclusivity period, a third party may file an ANDA or a 505(b)(2) application
seeking approval of their version of the drug if any five-year exclusivity
granted to the NCE has expired. However the third party would not obtain
marketing approval for the generic version of the NCE for the three years of
exclusivity. We intend to seek the benefits of this statute as applicable, but
there can be no assurance that we will be able to obtain any such benefits.
The Controlled Substances Act, or CSA, imposes various registration, record-
keeping and reporting requirements, procurement and manufacturing quotas,
labeling and packaging requirements, security controls and a restriction on
prescription refills on certain pharmaceutical products. A principal factor in
determining the particular CSA requirements, if any, applicable to a product
is its actual or potential abuse profile. A pharmaceutical product may be
listed as a Schedule I, II, III, IV or V substance, with Schedule I substances
considered to present the highest risk of substance abuse and Schedule V
substances the lowest. Modafinil, the active drug substance in PROVIGIL, has
been scheduled under the CSA as a Schedule IV substance. Schedule IV
substances are allowed no more than five prescription refills during a six-
month period and are subject to special handling procedures relating to the
storage, shipment, inventory control and disposal of the product.
Additionally, PROVIGIL may be subject to various state statutes regulating
controlled substances that, in some cases, may be more restrictive than the
CSA. In 1997, STADOL NS was listed as a Schedule IV controlled substance at
the request of Bristol-Myers. In addition, a number of state regulatory
agencies in the United States have independently controlled the distribution
of STADOL NS under their local authority.
In addition to the statutes and regulations described above, we also are
subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state and local regulations.
SCIENTIFIC AND MEDICAL ADVISORY BOARDS
We maintain a Scientific Advisory Board consisting of individuals with
expertise in neuroscience and related fields. Members of the Scientific
Advisory Board advise us concerning long-term scientific planning, research
18
<PAGE>
and development, and also periodically evaluate our research programs. We
compensate the members for their services. The current members of our
Scientific Advisory Board are as follows:
Stanley H. Appel, M.D.,
Baylor College of Medicine
Stanley Cohen, Ph.D.,
Vanderbilt University School of Medicine
Robert Y. Moore, M.D., Ph.D.,
University of Pittsburgh
Robert H. Roth, Ph.D.,
Yale University School of Medicine
Shirley M. Tilghman, Ph.D.,
Princeton University
We also maintain a Medical Advisory Board consisting of individuals with
expertise in clinical development who periodically review and evaluate our
clinical development plans and clinical trials. We compensate the members for
their services. The current members of our Medical Advisory Board are as
follows:
Arthur K. Asbury, M.D.,
University of Pennsylvania Medical Center
Robert L. Barchi, M.D., Ph.D.,
University of Pennsylvania Medical Center
Dennis Choi, M.D., Ph.D.,
Washington University School of Medicine
Steven T. DeKosky, M.D.,
Western Psychiatric Institute and Clinic
Richard Johnson, M.D.,
Johns Hopkins Hospital
Robert Y. Moore, M.D., Ph.D.,
University of Pittsburgh
EMPLOYEES
As of December 31, 1999, we had a total of 382 full-time employees, of which
356 were employed in the United States and 26 were located at our facilities
in Europe. We believe that we have been successful in attracting skilled and
experienced personnel; however, competition for such personnel is intense.
None of our employees are covered by collective bargaining agreements.
ITEM 2. PROPERTIES
We own our administrative offices and research facilities, which currently
occupy approximately 156,000 square feet of space in West Chester,
Pennsylvania. We lease approximately 4,950 square feet of office space in
Surrey, England, which serves as our European headquarters. The annual cost of
the lease is approximately $185,000. We also lease offices in France and
Germany at an aggregate annual cost of approximately $36,000. We believe that
our current facilities are adequate for our present purposes.
ITEM 3. LEGAL PROCEEDINGS
In November 1999, we received a federal grand jury subpoena in connection
with an investigation under the supervision of the Office of Consumer
Litigation of the U.S. Department of Justice. The grand jury also issued
subpoenas to certain of our former and current employees. We believe that the
investigation relates to the release of certain lots of MYOTROPHIN used in
clinical trials and related reports filed with the FDA during the period 1994-
96. We have not been identified as a target of the investigation, and we are
cooperating with this inquiry. We cannot predict the outcome of the
investigation.
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<PAGE>
In August 1999, the U.S. District Court for the Eastern District of
Pennsylvania entered a final order approving the settlement of a class action
in which plaintiffs alleged that statements made about the results of certain
clinical studies of MYOTROPHIN were misleading. A related complaint has been
filed with the Court by a small number of plaintiffs who decided not to
participate in the settlement. This related complaint alleges that we are
liable under common law for misrepresentations concerning the results of the
MYOTROPHIN clinical trials, and that we and certain of our current and former
officers and directors are liable for the actions of persons who allegedly
traded in our 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, we do not believe it
will have a material negative effect on our financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to the vote of security holders during the
fourth quarter of fiscal 1999.
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the NASDAQ National Market under the symbol
"CEPH." The following table sets forth the range of high and low sale prices
for the common stock as reported on the NASDAQ National Market for the periods
indicated below.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
1998
First Quarter.................................................. 15.00 9.50
Second Quarter................................................. 16.13 6.75
Third Quarter.................................................. 8.31 3.86
Fourth Quarter................................................. 10.36 4.50
1999
First Quarter.................................................. 11.00 7.25
Second Quarter................................................. 17.75 9.94
Third Quarter.................................................. 22.13 15.13
Fourth Quarter................................................. 37.13 14.00
</TABLE>
As of March 21, 2000 there were 633 holders of record of our common stock.
On March 21, 2000, the last reported sale price of our common stock as
reported on the NASDAQ National Market was $41.31 per share.
In August 1999, we issued and sold 2,500,000 shares of convertible
exchangeable preferred stock, par value $.01 per share to certain initial
purchasers. The aggregate purchase price was $125,000,000, of which $4,375,000
constituted the underwriting discounts and commissions. The initial purchasers
were BancBoston Robertson Stephens Inc., SG Cowen Securities Corporation,
Hambrecht & Quist LLC and U.S. Bancorp Piper Jaffey.
The preferred stock was issued and sold in transactions exempt from the
registration requirements of the Securities Act of 1933, as amended, to
persons reasonably believed by the managers who placed the Preferred Stock,
the initial purchasers, to be qualified institutional buyers (as defined in
Rule 144A under the Securities Act).
Dividends on the 2,500,000 shares of the preferred stock are cumulative from
the date of original issue and are payable quarterly, commencing November 15,
1999 and payable each February 15, May 15, August 15 and November 15
thereafter, at the annual rate of $3.625 per share of preferred stock. Prior
to August 17, 2001, we may not redeem the preferred stock. Thereafter the
preferred stock is redeemable at our option, in whole or in part, at declining
redemption prices, together with accrued dividends. The preferred stock has a
liquidation preference of $50 per share, plus accrued and unpaid dividends.
The preferred stock is exchangeable, in whole but not in part, at our option
on any dividend payment date beginning August 15, 2000 for our 7.25%
convertible subordinated debentures at the rate of $50 principal amount of
debentures for each share of preferred stock. The debentures, if issued, will
mature on the tenth anniversary of the exchange date and will contain
conversion and optional redemption provisions substantially identical to those
of the preferred stock.
Holders of the preferred stock are entitled at any time, subject to prior
redemption or repurchase, to convert any of the preferred stock or portions
thereof into common stock, at an initial conversion rate of 2.79 shares of
common stock for each share of preferred stock, subject to certain
adjustments.
On October 14, 1999, we filed a registration statement on Form S-3 to
register the 2,500,000 shares of the preferred stock, the $125,000,000
debentures and 6,975,447 shares of common stock, issuable upon conversion of
the preferred stock or upon conversion of the debentures, if the preferred
stock is exchanged for debentures. The effective date of such registration
statement was December 22, 1999.
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<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data have been derived from
the consolidated financial statements of Cephalon, Inc. as of and for each of
the five years in the period ended December 31, 1999 which have been audited
by Arthur Andersen LLP, independent public accountants. This data should be
read in conjunction with the Company's consolidated financial statements,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Product sales--
PROVIGIL.............. $ 25,370,000 $ 728,000 $ -- $ -- $ --
Other revenues......... 19,549,000 14,927,000 23,140,000 21,366,000 46,999,000
------------- ------------- ------------- ------------- -------------
44,919,000 15,655,000 23,140,000 21,366,000 46,999,000
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Cost of product sales--
PROVIGIL.............. 3,250,000 -- -- -- --
Research and
development........... 46,420,000 43,649,000 51,587,000 62,096,000 73,994,000
Selling, general and
administrative........ 50,992,000 30,947,000 36,744,000 28,605,000 15,762,000
------------- ------------- ------------- ------------- -------------
100,662,000 74,596,000 88,331,000 90,701,000 89,756,000
------------- ------------- ------------- ------------- -------------
Interest (expense)
income, net............ (3,014,000) 3,534,000 4,772,000 6,205,000 9,754,000
Gain on sale of assets.. -- -- -- 9,845,000 --
------------- ------------- ------------- ------------- -------------
Loss before
extraordinary charge... (58,757,000) (55,407,000) (60,419,000) (53,285,000) (33,003,000)
Extraordinary charge for
early extinguishment of
debt................... (11,187,000) -- -- -- --
------------- ------------- ------------- ------------- -------------
Loss.................... (69,944,000) (55,407,000) (60,419,000) (53,285,000) (33,003,000)
Dividends on preferred
stock.................. (3,398,000) -- -- -- --
------------- ------------- ------------- ------------- -------------
Loss applicable to
common shares.......... $ (73,342,000) $ (55,407,000) $ (60,419,000) $ (53,285,000) $ (33,003,000)
============= ============= ============= ============= =============
Basic and diluted loss
per common share:
Loss before
extraordinary charge.. $ (2.10) $ (1.95) $ (2.36) $ (2.60) $ (1.63)
Extraordinary charge... (.38) -- -- -- --
------------- ------------- ------------- ------------- -------------
$ (2.48) $ (1.95) $ (2.36) $ (2.60) $ (1.63)
============= ============= ============= ============= =============
Weighted average number
of shares outstanding.. 29,584,199 28,413,220 25,637,508 24,319,163 20,262,071
<CAPTION>
As of December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and investments........ $ 201,562,000 $ 67,346,000 $ 119,471,000 $ 146,848,000 $ 178,067,000
Total assets............ 234,053,000 94,673,000 151,208,000 177,891,000 221,330,000
Long-term debt.......... 14,034,000 15,096,000 27,587,000 16,974,000 21,668,000
Accumulated deficit..... (347,135,000) (273,793,000) (218,386,000) (157,967,000) (104,682,000)
Stockholders' equity.... 158,357,000 57,602,000 100,338,000 137,326,000 180,205,000
</TABLE>
- --------
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain Risks Related To Our Business
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 this report. Given these
risks and uncertainties, any or all of these forward-looking statements may
prove to be incorrect. Therefore, you should not rely on any such forward-
looking statements. Furthermore, we do not intend (and we are not obligated)
to update publicly any forward-looking statements. This discussion is
permitted by the Private Securities Litigation Reform Act of 1995.
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, and, in February
1999, we commenced selling PROVIGIL in the United States. 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 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 approximately 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. Although some study data has been positive,
we do not know whether all of 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 some
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 our own pharmaceutical products, together
with significant competition, may impact our ability to effectively
market and sell PROVIGIL in the United States.
23
<PAGE>
In the United States and elsewhere, PROVIGIL faces significant competition
in the marketplace. 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 occur which could result in
additional regulatory controls, and reduce sales of PROVIGIL.
Prior to 1999, the use of PROVIGIL had been limited principally 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 or the relatively limited broader use 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 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 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 limit 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 extend the term of this patent until
November 18, 2001. In addition, we own a U.S. patent covering the particle
size of modafinil that issued in 1997 and expires on October 6, 2014. 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.
24
<PAGE>
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 and are qualifying an additional
manufacturer of finished product.
We must comply with all applicable regulatory requirements of the FDA and
foreign authorities, including current Good Manufacturing Practice, or cGMP,
regulations. 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.
A non-active ingredient used in PROVIGIL is no longer manufactured or
commercially available. At anticipated levels of demand, we have several years
supply of this ingredient. We have prepared a new formulation of PROVIGIL that
does not include the now unavailable ingredient; however, the introduction of
any such new formulation requires regulatory approval. If we are unable to
obtain approval for a new formulation, or if demand for the product were to
significantly 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.
We rely on several third parties in the United States to 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 related financial results will fluctuate and these
fluctuations may adversely affect our stock price.
A number of analysts and investors who follow our stock have developed
models to attempt to forecast future PROVIGIL sales and have established
earnings expectations based upon those models. Forecasting revenue is
difficult; especially when there is little commercial history and when the
level of 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 revenues, which may not meet with market
expectations and which may adversely affect our stock price. Other factors
which may cause our financial results to fluctuate include the cost of
PROVIGIL sales, achievement and timing of research and development milestones,
co-promotion and other collaboration revenues, cost and timing of clinical
trials, marketing and other expenses and manufacturing or supply disruption.
We anticipate that we will incur additional losses.
To date, we have not been profitable and our accumulated deficit was
approximately $347 million at December 31, 1999. 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 losses until such time as
product revenue from PROVIGIL or other products and product candidates exceed
expenses of operating our business. We seek to attain profitability, but 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 attain this
objective. We cannot be sure that our collaborators or we will obtain required
regulatory approvals, or successfully develop, commercialize, manufacture and
market any other product candidates.
25
<PAGE>
The results and timing of future clinical trials cannot be predicted and
future setbacks may materially affect our business.
We must demonstrate through preclinical testing and clinical trials that a
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 these 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 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 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 these 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 larger
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
26
<PAGE>
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 agreed with us to
modify the related supply agreement so that we will be responsible for
supplying the compounds under development. We have selected another
manufacturer to produce these compounds and Kyowa Hakko is working with us to
transfer the applicable manufacturing technology to this third party. 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 conduct research, seek patent
protection, and establish collaborative arrangements for product development
in competition with us. 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, 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 also may 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 PTO, 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 legal proceedings that, if adversely adjudicated or
settled, could materially impact our financial condition.
In November 1999, we received a federal grand jury subpoena in connection
with an investigation under the supervision of the Office of Consumer
Litigation of the U.S. Department of Justice. The grand jury also
27
<PAGE>
issued subpoenas to certain of our former and current employees. We believe
that the investigation relates to the release of certain lots of MYOTROPHIN
used in clinical trials and related reports filed with the FDA during the
period 1994-96. We have not been identified as a target of the investigation,
and we are cooperating with this inquiry. We cannot predict the outcome of the
investigation.
In August 1999, the U.S. District Court for the Eastern District of
Pennsylvania entered a final order approving the settlement of a class action
in which plaintiffs alleged that statements made about the results of certain
clinical studies of MYOTROPHIN were misleading. A related complaint has been
filed with the Court by a small number of plaintiffs who decided not to
participate in the settlement. This related complaint alleges that we are
liable under common law for misrepresentations concerning the results of the
MYOTROPHIN clinical trials, and that we and certain of our current and former
officers and directors are liable for the actions of persons who allegedly
traded in our 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, we do not believe it
will have a material negative 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.
The prospects for regulatory approval of MYOTROPHIN continue to be very
uncertain in the United States. We do not believe that the conditions for
regulatory approval imposed by the FDA can be met without conducting an
additional Phase III study, and we do not intend to conduct such a study. Even
if we chose to conduct an additional study, the results of a new study may not
be sufficient to obtain regulatory approval. If MYOTROPHIN is not approved for
the treatment of ALS, then it is not likely that we would pursue approval for
the use of MYOTROPHIN to treat other indications. Additionally, if we do not
obtain approval of MYOTROPHIN for ALS or pursue approval for other
indications, rights to the product may revert back to CCP.
The price of our common stock has been and may continue to be highly volatile.
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 period January 1, 1999 through March 21, 2000,
our common stock traded at a high closing price of $72.31 and a low closing
price of $7.50. Negative announcements (such as adverse regulatory decisions,
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, external events, such as news
concerning our competitors, changes in government regulations that may impact
the biotechnology or pharmaceutical industries or flows of investor funds into
or out of our industry, also are likely to 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
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<PAGE>
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 do not
maintain "key man" life insurance on any of our employees.
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 our safety procedures for handling and disposing of these
materials comply with federal, state and local laws and regulations, but the
risk of accidental injury or contamination from these materials cannot be
eliminated. In the event of an accident, we could be held liable for any
resulting damages.
Anti-takeover provisions may deter a third party from acquiring us, limiting
our stockholders' ability to profit from such a transaction.
Our Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock, $0.01 par value, of which 1,000,000 have been reserved for
issuance in connection with our stockholder rights plan, and to determine the
price, rights, preferences and privileges of those shares without any further
vote or action by our stockholders. Our stockholder rights plan could have the
effect of making it more difficult for a third party to acquire a majority of
our outstanding voting stock.
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.
Liquidity and Capital Resources
Cash, cash equivalents and investments at December 31, 1999 were
$201,562,000, representing 86% of total assets, and at December 31, 1998 were
$67,346,000, representing 71% of total assets.
The following is a summary of selected cash flow information for each of the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Net cash used for operating
activities........................ $ (58,588,000) $(50,164,000) $(54,677,000)
Net cash (used for) provided by
investing activities.............. (128,321,000) 21,348,000 53,361,000
Net cash provided by (used for)
financing activities.............. 192,377,000 (1,351,000) 28,123,000
</TABLE>
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<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 each of the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
PROVIGIL sales............................ $26,614,000 $ 727,000 $ --
TAP Holdings Inc.......................... 7,063,000 8,059,000 6,957,000
H. Lundbeck A/S........................... 5,531,000 -- --
Schwarz Pharma AG......................... 2,000,000 -- --
Bristol-Myers Squibb Company.............. 1,008,000 2,005,000 4,682,000
Chiron Corporation........................ -- 1,962,000 5,242,000
Interest.................................. 4,437,000 4,734,000 8,260,000
</TABLE>
Sales of PROVIGIL commenced in the United Kingdom in March 1998 and in the
United States and the Republic of Ireland in February 1999. In June 1999, we
began promoting and marketing PROVIGIL in Austria.
We have a licensing and research and development collaboration with TAP
Holdings Inc. to develop and commercialize certain compounds, including CEP-
701, for the treatment of prostate disorders and other cancers 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 including reimbursement of certain external costs. At December 31,
1999, $2,691,000 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.
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. Included in the payments received from Lundbeck in 1999 is a
non-refundable license fee of $2,400,000 and reimbursement of research and
development costs of $3,131,000. At December 31, 1999, $898,000 was receivable
from Lundbeck.
In December 1999, we entered into a development and licensing agreement with
Schwarz Pharma AG to develop and commercialize certain compounds, including
CEP-701, for the treatment of prostate disorders and other cancers in Europe
and several other territories outside the United States. Under the agreement,
we will receive reimbursement of research activities and clinical supplies,
milestone payments and royalty payments on net sales. The $2,000,000 payment
received in 1999 from Schwarz Pharma represents a non-refundable license fee
paid upon execution of the agreement.
We market STADOL NS(R) (butorphanol tartrate) Nasal Spray for Bristol-Myers
Squibb to neurologists in the United States. Pursuant to the 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 BMS in 1999
as compared to 1998 and in 1998 as compared to 1997 is due to a reduction in
the total amount of STADOL NS sales from the prior comparable period. At
December 31, 1999, $607,000 was receivable from BMS.
Cephalon has been developing MYOTROPHIN in collaboration with Chiron
Corporation for the treatment of ALS and other neurological disorders. The
amounts we received 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.
--Operating Cash Outflows
Operating cash outflows increased in 1999 as compared to 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
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<PAGE>
PROVIGIL and our collaboration with Abbott to market GABITRIL. Additionally,
cash outflows increased from the prior year because of other expenditures
associated with PROVIGIL, including the commercial launch of PROVIGIL in the
United States, clinical studies of PROVIGIL and the purchase of PROVIGIL
inventories.
Operating cash outflows decreased in 1998 as compared to 1997 due to a
decrease in the selling, general and administrative costs associated with the
MYOTROPHIN program and decreases in external administrative expenses. Research
and development funding decreased in 1998 as compared to 1997 primarily
because of a decrease in staffing levels, license fees, expenditures
associated with the MYOTROPHIN program and other research activities. These
reductions offset increased expenditures associated with the PROVIGIL program.
--Cash and Funding Requirements Outlook
During 1999, we received net proceeds of approximately $196,381,000 through
private placements of preferred and common stock, and the exercise of common
stock options and warrants. Due to this inflow of funds, we believe that our
cash and investment balance as of December 31, 1999 will be adequate to fund
our current expected 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, that sales from PROVIGIL generate cash inflows in
excess of the level of cash outflows from operations. Factors such as the
degree of market acceptance of PROVIGIL, 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 difficult to predict 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
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.
We expect to increase our funding of 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.
During 1999 we issued $30,000,000 of revenue-sharing notes in a private
placement. We announced in December 1999 that the notes had been restructured
resulting in their retirement in the first quarter of 2000 for an aggregate
cash payment of $35,500,000.
Additionally, we also will require substantial funds to:
. expand and renovate our West Chester facility;
. pay quarterly preferred stock dividends; and
. obtain additional product rights through licensing or acquisition.
Net Cash (Used for) Provided by Investing Activities
A summary of net cash (used for) provided by investing activities for each
of the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
Purchases of property and equipment.. $ (381,000) $ (576,000) $ (823,000)
(Purchases) sales and maturities of
investments, net.................... (127,940,000) 21,924,000 54,184,000
------------- ----------- -----------
Net cash (used for) provided by
investing activities................ $(128,321,000) $21,348,000 $53,361,000
============= =========== ===========
</TABLE>
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<PAGE>
Net Cash Provided by (Used for) Financing Activities
A summary of net cash provided by (used for) financing activities for each
of the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Proceeds from issuance of preferred stock.. $120,028,000 $ -- $ --
Proceeds from issuance of common stock..... 12,000,000 -- --
Proceeds from exercises of common stock
options and warrants...................... 34,353,000 410,000 3,458,000
Proceeds from issuance of long-term debt... 30,000,000 -- 30,000,000
Preferred dividends paid................... (2,265,000) -- --
Principal payments on long-term debt....... (1,739,000) (1,761,000) (5,335,000)
------------ ----------- -----------
Net cash provided by (used for) financing
activities................................ $192,377,000 $(1,351,000) $28,123,000
============ =========== ===========
</TABLE>
During 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 are cumulative at the annual rate of $3.625 per share and
are payable quarterly.
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 and
general financial market conditions, as well as the exercise prices and
expiration dates of the warrants and options. During 1999, investors in
Cephalon Clinical Partners, L.P., or CCP, exercised warrants to purchase
approximately 1,958,000 shares of common stock. Proceeds associated with these
exercises totaled $26,984,000. All outstanding warrants associated with CCP
expired on August 31, 1999.
During 1999 we issued $30,000,000 of revenue-sharing notes in a private
placement. We announced in December 1999 that the notes had been extinguished
resulting in their retirement in the first quarter of 2000 for an aggregate
cash payment of $35,500,000. In 1997, proceeds from the issuance of long-term
debt consist of a $30,000,000 private placement of senior convertible notes.
As of December 31, 1998, the principal on the senior convertible notes had
been fully converted into 3,148,000 shares of Cephalon's common stock.
For all periods presented, principal payments on long-term debt include
payments on mortgage loans and payments on capital lease obligations.
Additionally, in 1997, we repaid in full the $3,750,000 balance due on an
unsecured bank loan.
Commitments and Contingencies
--Related Party
In August 1992, we exclusively licensed our rights to MYOTROPHIN for human
therapeutic use within the United States, Canada and Europe to CCP. We perform
any development and clinical testing of MYOTROPHIN on behalf of CCP under a
research and development agreement with CCP.
CCP has granted us an exclusive license to manufacture and market MYOTROPHIN
for human therapeutic use within the United States, Canada and Europe in
return for royalty payments equal to a percentage of product sales and a
milestone payment of approximately $16,000,000 that will be made if MYOTROPHIN
receives regulatory approval.
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<PAGE>
We have a contractual option to purchase all of the limited partnership
interests of CCP. To exercise this 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 common stock or a combination thereof. The purchase option will
become exercisable upon the occurrence of certain events once sales activity
commences. Should we discontinue development of MYOTROPHIN or if we do not
exercise the purchase option, our license will terminate and all rights to
manufacture or market MYOTROPHIN in the United States, Canada and Europe will
revert to CCP, which may then commercialize MYOTROPHIN itself or license or
assign its rights to a third party. In that event, we would not receive any
benefits from such commercialization, license or assignment of rights.
--Legal Proceedings
In November 1999, we received a federal grand jury subpoena in connection
with an investigation which we believe relates to the release of certain lots
of MYOTROPHIN used in clinical trials and related reports filed with the FDA
during the period 1994-96. 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. We have
filed a motion to dismiss these claims which is pending with the Court. 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."
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 of
PROVIGIL 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 purchased from external, independent sources,
including NDC Health Information, IMS Health and several pharmaceutical
wholesalers, which provide prescription data, wholesale stocking levels and
wholesale 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.
This methodology 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 PROVIGIL's
approved use is limited to a relatively small patient base and, as a result,
market penetration has been limited; 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.
Year ended December 31, 1999 compared to year ended December 31, 1998
For the year ended December 31, 1999, shipments of PROVIGIL to customers
were $31,488,000 of which $6,118,000 was recorded as a reserve for returns and
allowances, resulting in product sales of $25,370,000.
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<PAGE>
Other revenues increased in the 1999 period from the 1998 period due
primarily to revenue recognized from the receipt of non-refundable license
fees related to the initiation of collaborative agreements with Lundbeck in
May 1999 for $2,400,000 and with Schwarz Pharma in December 1999 for
$2,000,000.
For the year ended December 31, 1999, cost of product sales was 13% 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 year ended December
31, 1999, approximately $3,769,000 of inventory costs were excluded from cost
of product sales. As of December 31, 1999, we maintained approximately
$354,000 of inventory on hand that was previously charged to research and
development expense. We anticipate that this remaining material will be sold
during the first quarter of 2000. Once this inventory has been sold, we expect
cost of product sales to be between 21% and 26% of sales.
For the year ended December 31, 1999, research and development expenses
increased from the same 1998 period due to increased expenditures on our
clinical program for PROVIGIL and other research programs associated with our
collaborative arrangements. These increases were partially offset by a
decrease in expenses associated with the purchase of bulk modafinil, the
active drug substance in PROVIGIL. Prior to receiving FDA approval to market
PROVIGIL, purchases of modafinil were recorded as research and development
expense.
The increase in the selling, general and administrative area for the year
ended December 31, 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 our collaboration with Abbott to market GABITRIL and the
recording of a $4,300,000 provision related to our securities litigation.
In connection with the restructuring of the revenue sharing notes, we
recorded a loss in 1999 on the extinguishment of the notes of $11,187,000,
which includes the prepayment penalty of $5,500,000 and the write-off of
deferred financing costs and the remaining value of the associated warrants of
$5,267,000. These notes were retired in the first quarter of 2000 for an
aggregate payment of $35,500,000.
The decrease in net interest income is primarily due to an increase in
interest expense associated with the revenue-sharing notes.
Preferred dividends of $3,398,000 were recognized in 1999 in connection with
the August 1999 private offering of 2,500,000 shares of convertible
exchangeable preferred stock.
Year ended December 31, 1998 compared to year ended December 31, 1997
Other revenues decreased in 1998 as compared to 1997 due primarily to the
cessation of both the Schering-Plough and Smith-Kline Beecham research and
development collaborations and because of a decrease in revenues recognized
from Chiron and Kyowa Hakko as a result of the decreased expenditures
associated with the MYOTROPHIN program.
Research and development expenses decreased in 1998 as compared to 1997
primarily because of a decrease in staffing levels, license fees, expenditures
associated with the MYOTROPHIN program and other research activities. These
reductions were partially offset by increased clinical research expenditures
associated with the PROVIGIL program.
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<PAGE>
The decrease in the selling, general and administrative area for 1998 as
compared to the corresponding 1997 period was due primarily to reductions in
expenses associated with the MYOTROPHIN program and our co-promotion agreement
with Laboratoire Aguettant S.A.
Net interest income decreased in 1998 due primarily to lower investment
balances throughout the year as compared to the corresponding 1997 period.
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
periodic review by the parties involved.
We expect to continue to incur significant expenditures associated with the
commercialization of PROVIGIL in the United States, 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 specified levels of marketing and some 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. 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 convertible debentures or 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 changes in the provision for product returns;
. the cost of PROVIGIL sales;
. achievement and timing of research and development milestones;
. co-promotion and other collaboration revenues;
. cost and timing of clinical trials; and
. marketing and other expenses.
In connection with the issuance in December 1999 of Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements," or SAB 101, we
expect that we will be required to defer non-refundable license fees recorded
in 1999 from Lundbeck and Schwarz Pharma and recognize that revenue over
future periods. We also expect to report a change in accounting principles in
accordance with SAB 101, and to record the impact of this change as a
cumulative effect in our statement of operations in 2000.
We do not believe that inflation has had a material impact on the results of
our operations since our inception.
Impact of Year 2000
We are not aware of any material problems resulting from Year 2000 issues,
either with our products under development, our internal systems, or the
products and services of third parties. We will continue to monitor our
mission critical computer applications and those of our suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
35
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not use derivative financial instruments for speculative or trading
purposes. Therefore, our market risk exposure is limited to changes in
interest rates affecting the return on our investments and foreign currency
fluctuations. Our exposure to market risk for a change in interest rates
relates primarily to our investment portfolio. Our investments are classified
as short-term and as "available for sale." We do not believe that short-term
fluctuations in interest rates would materially affect the value of our
securities. Our exposure to market risk for fluctuations in foreign currency
relates primarily to the intercompany balance with our U.K. subsidiary.
Exchange gains and losses related to amounts due from the U.K. subsidiary have
not been material for the periods presented.
36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cephalon, Inc.:
We have audited the accompanying consolidated balance sheets of Cephalon,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cephalon, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
Philadelphia, Pennsylvania
February 17, 2000
37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cephalon, Inc.:
We have audited, in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements for Cephalon, Inc.
and have issued our report thereon dated February 17, 2000. Our audit was made
for the purpose of forming an opinion on the basic financial statements taken
as a whole. The schedule of valuation and qualifying accounts is presented for
purposed of complying with the Securities and Exchange Commissions' rules and
is not part of the basic financial statements. This schedule has been subject
to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Philadelphia, Pennsylvania
February 17, 2000
38
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2).............. $ 13,152,000 $ 7,484,000
Short-term investments (Note 2)................. 188,410,000 59,862,000
Receivables, net................................ 5,578,000 3,887,000
Inventory (Note 3).............................. 4,258,000 38,000
Other........................................... 988,000 1,323,000
------------- -------------
Total current assets........................... 212,386,000 72,594,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $15,192,000 and
$13,439,000 (Note 4)............................ 20,001,000 20,505,000
OTHER............................................ 1,666,000 1,574,000
------------- -------------
$ 234,053,000 $ 94,673,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 6,221,000 $ 3,558,000
Accrued expenses (Note 5)....................... 19,328,000 13,298,000
Current portion of long-term debt (Note 6)...... 31,906,000 1,624,000
------------- -------------
Total current liabilities...................... 57,455,000 18,480,000
LONG-TERM DEBT (Note 6) 14,034,000 15,096,000
OTHER (Note 7)................................... 4,207,000 3,495,000
------------- -------------
Total liabilities............................ 75,696,000 37,071,000
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY: (Note 9)
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, 32,560,938 and 28,802,323 shares
issued and outstanding......................... 326,000 288,000
Additional paid-in capital...................... 505,702,000 331,673,000
Treasury stock.................................. (1,290,000) (487,000)
Accumulated deficit............................. (347,135,000) (273,793,000)
Accumulated other comprehensive income (loss)... 729,000 (79,000)
------------- -------------
Total stockholders' equity..................... 158,357,000 57,602,000
------------- -------------
$ 234,053,000 $ 94,673,000
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES: (Notes 1 and 10)
Product sales--PROVIGIL............ $ 25,370,000 $ 728,000 $ --
Other revenues..................... 19,549,000 14,927,000 23,140,000
------------ ------------ ------------
44,919,000 15,655,000 23,140,000
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of product sales--PROVIGIL
(Note 3).......................... 3,250,000 -- --
Research and development........... 46,420,000 43,649,000 51,587,000
Selling, general and
administrative.................... 50,992,000 30,947,000 36,744,000
------------ ------------ ------------
100,662,000 74,596,000 88,331,000
------------ ------------ ------------
LOSS FROM OPERATIONS................ (55,743,000) (58,941,000) (65,191,000)
------------ ------------ ------------
INTEREST:
Income............................. 5,239,000 5,408,000 7,973,000
Expense (Note 6)................... (8,253,000) (1,874,000) (3,201,000)
------------ ------------ ------------
(3,014,000) 3,534,000 4,772,000
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY CHARGE.... (58,757,000) (55,407,000) (60,419,000)
EXTRAORDINARY CHARGE FOR EARLY
EXTINGUISHMENT OF DEBT (Note 6).... (11,187,000) -- --
------------ ------------ ------------
LOSS................................ (69,944,000) (55,407,000) (60,419,000)
DIVIDENDS ON PREFERRED STOCK (Note
9)................................. (3,398,000) -- --
------------ ------------ ------------
LOSS APPLICABLE TO COMMON SHARES.... $(73,342,000) $(55,407,000) $(60,419,000)
============ ============ ============
BASIC AND DILUTED LOSS PER COMMON
SHARE:
Loss per common share before
extraordinary charge.............. $ (2.10) $ (1.95) $ (2.36)
Extraordinary charge............... (0.38) -- --
------------ ------------ ------------
$ (2.48) $ (1.95) $ (2.36)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING................. 29,584,199 28,413,220 25,637,508
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Total Other Additional
Comprehensive Accumulated Comprehensive Common Preferred Paid-in Treasury
Loss Total Deficit Income/(Loss) Stock Stock Capital Stock
------------- ------------ ------------- ------------- -------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1997.............. $137,326,000 $(157,967,000) $(43,000) $246,000 $ -- $296,868,000 $(1,778,000)
Loss............... $(60,419,000) (60,419,000) (60,419,000)
Foreign currency
translation....... (1,000)
------------
Other comprehensive
loss.............. (1,000) (1,000) (1,000)
------------
Comprehensive
loss.............. (60,420,000)
============
Stock options and
warrants
exercised......... 3,503,000 -- 3,000 3,500,000 --
Restricted stock
award plan........ 1,684,000 -- 1,000 1,683,000 --
Employee benefit
plan.............. 605,000 -- -- 605,000 --
Conversion of
convertible
debentures........ 17,695,000 -- 20,000 17,675,000 --
Issuance of
warrants in
connection with
convertible
debentures
transactions...... 400,000 -- -- 400,000 --
Expired call
option............ (1,973,000) -- 5,000 (1,978,000) --
Treasury stock
acquired.......... (455,000) -- -- -- (455,000)
Treasury stock
retirement........ 1,973,000 -- (1,000) -- 1,974,000
------------ ------------- -------- -------- ------- ------------ -----------
BALANCE, DECEMBER
31, 1997.......... 100,338,000 (218,386,000) (44,000) 274,000 -- 318,753,000 (259,000)
Loss............... (55,407,000) (55,407,000) (55,407,000)
Foreign currency
translation....... (35,000)
------------
Other comprehensive
loss.............. (35,000) (35,000) (35,000)
------------
Comprehensive
loss.............. (55,442,000)
============
Stock options and
warrants
exercised......... 216,000 -- -- 216,000 --
Restricted stock
award plan........ 1,500,000 -- 1,000 1,499,000 --
Employee benefit
plan.............. 583,000 -- 1,000 582,000 --
Conversion of
convertible
debentures........ 10,635,000 -- 12,000 10,623,000 --
Treasury stock
acquired.......... (228,000) -- -- -- (228,000)
------------ ------------- -------- -------- ------- ------------ -----------
BALANCE, DECEMBER
31, 1998.......... 57,602,000 (273,793,000) (79,000) 288,000 -- 331,673,000 (487,000)
Loss............... (69,944,000) (69,944,000) (69,944,000)
Foreign currency
translation....... 200,000
Unrealized
investment gains.. 608,000
------------
Other comprehensive
loss.............. 808,000 808,000 808,000
------------
Comprehensive
loss.............. $(69,136,000)
============
Stock options and
warrants
exercised......... 45,995,000 -- 36,000 45,959,000 --
Restricted stock
award plan........ 1,023,000 -- 1,000 1,022,000 --
Employee benefit
plan.............. 453,000 -- 1,000 452,000 --
Convertible
preferred stock
issued............ 120,028,000 -- -- 25,000 120,003,000 --
Dividends declared
convertible
preferred......... (3,398,000) (3,398,000) --
Revenue-sharing
notes issued...... 6,593,000 6,593,000
Treasury stock
acquired.......... (803,000) -- -- -- (803,000)
------------ ------------- -------- -------- ------- ------------ -----------
BALANCE, DECEMBER
31, 1999.......... $158,357,000 $(347,135,000) $729,000 $326,000 $25,000 $505,702,000 $(1,290,000)
============ ============= ======== ======== ======= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss................................ $(69,944,000) $(55,407,000) $(60,419,000)
Adjustments to reconcile loss to net
cash used for operating activities:
Depreciation and amortization...... 10,264,000 2,340,000 2,247,000
Non-cash compensation expense...... 381,000 1,854,000 1,811,000
Other.............................. 594,000 47,000 157,000
(Increase) decrease in operating
assets:
Receivables....................... (184,000) 1,152,000 247,000
Inventory......................... (4,220,000) (38,000) --
Other current assets.............. (1,741,000) 1,195,000 (186,000)
Other long-term assets............ (2,010,000) (109,000) (1,656,000)
Increase(decrease) in operating
liabilities:
Accounts payable.................. 2,663,000 874,000 1,086,000
Accrued expenses.................. 4,897,000 (2,817,000) 1,289,000
Other long-term liabilities....... 712,000 745,000 747,000
------------ ------------ ------------
Net cash used for operating
activities....................... (58,588,000) (50,164,000) (54,677,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment.......................... (381,000) (576,000) (823,000)
Sales and maturities (purchases) of
investments, net................... (127,940,000) 21,924,000 54,184,000
------------ ------------ ------------
Net cash (used for) provided by
investing activities............. (128,321,000) 21,348,000 53,361,000
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred
stock.............................. 120,028,000 -- --
Proceeds from issuance of common
stock.............................. 12,000,000 -- --
Proceeds from exercises of common
stock options and warrants......... 34,353,000 410,000 3,458,000
Proceeds from issuance of long-term
debt............................... 30,000,000 -- 30,000,000
Preferred dividends paid............ (2,265,000) -- --
Principal payments on long-term
debt............................... (1,739,000) (1,761,000) (5,335,000)
------------ ------------ ------------
Net cash provided by (used for)
financing activities............. 192,377,000 (1,351,000) 28,123,000
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS........... 200,000 (34,000) --
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... 5,668,000 (30,201,000) 26,807,000
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR............................. 7,484,000 37,685,000 10,878,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF
YEAR................................ $ 13,152,000 $ 7,484,000 $ 37,685,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Cephalon, Inc., headquartered in West Chester, Pennsylvania, 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. In June 1999, we began promoting and marketing
PROVIGIL in Austria. 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 GABITRIL(R) (tiagabine hydrochloride), an
adjunctive treatment for partial seizures associated with 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.
Principles of Consolidation
The consolidated financial statements include the results of operations of
Cephalon and its wholly owned subsidiaries. Intercompany transactions have
been eliminated.
Translation of Foreign Financial Statements
In accordance with SFAS No. 52, "Foreign Currency Translation," assets and
liabilities of our foreign operations are translated at the year-end rate of
exchange and the income statements are translated at the average rate of
exchange for the year. Gains or losses from translating foreign currency
financial statements are accumulated in a separate component of stockholders'
equity. Transaction gains and losses are included in results of operations.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents include investments in liquid securities with original
maturities of three months or less. In accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," we
consider our investments to be "available for sale." We classify these
investments as short-term and carry them at fair market value. The unrealized
gain for the year ended December 31, 1999 has been recorded as a separate
component of stockholders' equity. All realized gains and losses on our
available for sale securities are recognized in results of operations.
Inventory
Inventory is stated at the lower of cost or market value using the first-in,
first-out, or FIFO, method.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, which
range from three to forty years. Property and equipment under capital leases
are depreciated or amortized over the shorter of the lease term or the
expected useful life of the assets. Expenditures for maintenance and repairs
are charged to expense as incurred, while major renewals and betterments are
43
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
capitalized. Our assets are reviewed and adjusted for impairment whenever
events or circumstances have occured that indicate that the remaining useful
lives of the assets should be revised or that the remaining balance of such
assets may not be recoverable based upon expectations of future undiscounted
cash flows. No such adjustments were required as of December 31, 1999.
Fair Value of Financial Instruments
The book values of cash, cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued expenses are considered to
approximate their respective fair values. None of our debt instruments that
were outstanding as of December 31, 1999 have readily ascertainable market
values; however, the carrying values approximate their respective fair values.
Revenue Recognition
Product sales of PROVIGIL 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 purchased from external, independent
sources, including NDC Health Information Services, IMS Health and several
pharmaceutical wholesalers, which provide prescription data, wholesale
stocking levels and wholesale 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.
This methodology 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 PROVIGIL's
approved use is limited to a relatively small patient base and, as a result,
market penetration has been limited; 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.
On contracts in which we receive payments based upon the level of our
related research and development expenses, revenues are recognized as the
related expenses are incurred. On contracts which provide for the receipt of
milestone payments, revenues are recognized when the payor confirms that the
milestone has been achieved. On contracts which provide for payments based
upon pre-determined rates for personnel working on the contract and
reimbursement of third-party expenses, revenues are recognized as the work is
performed and the third-party expenses are incurred. Payments received that
relate to future performance are deferred and recognized as revenue over the
specified future performance periods. Under our co-promotion agreements,
revenue is recognized upon the achievement of the stipulated sales activity
and performance targets.
Under agreements in which we supply product to third parties for clinical
trials, we recognize revenue upon product shipment.
Research and Development
All research and development costs are charged to expense as incurred.
44
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loss Per Common Share
Basic loss per share is computed by dividing net loss by the weighted-
average number of common shares outstanding during the period. For the years
ended December 31, 1999, 1998 and 1997, diluted loss per common share is the
same as basic loss per common share since the calculation of diluted loss per
share excludes stock options, restricted stock awards, warrants and the
conversion of convertible notes because their inclusion would be antidilutive.
Stock-based Compensation
We account for stock-based compensation in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost is not
required to be recognized on options granted. Disclosures required with
respect to alternative fair value measurement and recognition methods
prescribed by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," are presented in Note 9.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with the current year presentation.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101)
which is effective for fiscal years beginning after December 15, 1999. The
bulletin draws on existing accounting rules and provides specific guidance on
how those accounting rules should be applied, and specifically addresses
revenue recognition for non-refundable technology access fees in the
biotechnology industry. We expect that we will be required to defer non-
refundable technology fees and recognize revenue over future periods. We also
expect to report a change in accounting principle in accordance with SAB 101,
and to record the impact of this change as a cumulative effect in our
statement of operations in 2000. (See Note 10 Revenues--Research and
development collaborations).
2. CASH, CASH EQUIVALENTS AND INVESTMENTS
At December 31, cash, cash equivalents and investments consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Cash and cash equivalents.......................... $ 13,152,000 $ 7,484,000
------------ -----------
Short-term investments:
U.S. treasury securities......................... -- 30,108,000
U.S. government agency obligations............... 91,115,000 19,722,000
Commercial paper................................. 66,346,000 10,032,000
Asset backed securities.......................... 29,699,000 --
Corporate bonds.................................. 1,250,000 --
------------ -----------
188,410,000 59,862,000
------------ -----------
$201,562,000 $67,346,000
============ ===========
</TABLE>
45
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The contractual maturities of our investments in debt securities at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Maturity
--------
<S> <C>
Less than one year........................................... $117,927,000
Greater than one year but less than two years................ 53,725,000
Greater than two years but less than three years............. 16,758,000
------------
$188,410,000
============
</TABLE>
Some of our lease agreements contain covenants that obligate us to maintain
minimum cash and investment balances (see Note 6).
3. INVENTORY
At December 31, inventory consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------- -------
<S> <C> <C>
Raw material............................................ $1,570,000 $ --
Work-in-process......................................... 1,616,000 --
Finished goods.......................................... 1,072,000 38,000
---------- -------
$4,258,000 $38,000
========== =======
</TABLE>
All of the PROVIGIL sold in the United States during 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 December 31, 1999, we maintained approximately $354,000 of
inventory on hand that was previously charged to research and development
expense. We expect that this remaining expensed material will be sold during
the first quarter of 2000 and, as a result, we anticipate that our cost of
sales expressed as a percentage of sales will approximately double from the
levels recorded in 1999. Cost of product sales through December 31, 1999
consisted primarily of royalties due to Laboratoire L. Lafon.
4. PROPERTY AND EQUIPMENT
At December 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land and buildings............................. $ 20,101,000 $ 20,046,000
Laboratory and office equipment................ 15,092,000 13,898,000
------------ ------------
35,193,000 33,944,000
Less allowances for depreciation and
amortization.................................. (15,192,000) (13,439,000)
------------ ------------
$ 20,001,000 $ 20,505,000
============ ============
</TABLE>
46
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. ACCRUED EXPENSES
At December 31, accrued expenses consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Accrued premium on early extinguishment of
revenue sharing notes........................... $ 5,500,000 $ --
Accrued compensation and benefits................ 3,668,000 876,000
Accrued professional and consulting fees......... 3,422,000 2,556,000
Accrued clinical trial fees and related
expenses........................................ 1,619,000 2,177,000
Accrued license fees and royalties............... 2,249,000 2,096,000
Accrued litigation-related costs................. -- 4,838,000
Accrued preferred dividends...................... 1,133,000 --
Other accrued expenses........................... 1,737,000 755,000
----------- -----------
$19,328,000 $13,298,000
=========== ===========
</TABLE>
6. LONG-TERM DEBT
At December 31, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Capital lease obligations.......................... $ 1,608,000 $ 1,335,000
Mortgage loans..................................... 14,332,000 15,385,000
Revenue sharing notes.............................. 30,000,000 --
----------- -----------
45,940,000 16,720,000
Less current portion............................... (31,906,000) (1,624,000)
----------- -----------
$14,034,000 $15,096,000
=========== ===========
</TABLE>
Aggregate maturities of long-term debt for the next five years are as
follows: 2000--$31,906,000; 2001--$1,650,000; 2002--$1,423,000; 2003--
$1,336,000; 2004--$1,320,000; 2005 and thereafter--$8,305,000. The current
portion of long-term debt consists of payments due on the capital lease
obligations, mortgage loans and the early extinguishment of the revenue
sharing notes. We paid interest related to debt instruments of $6,885,000,
$1,170,000, and $2,242,000 in 1999, 1998 and 1997, respectively.
Revenue Sharing Notes
In February 1999, we completed a private placement of $30,000,000 of revenue
sharing notes. The notes are secured by our rights to PROVIGIL in the United
States and bear an annual interest rate of 11%. In connection with the notes,
we issued warrants to purchase 1,920,000 shares of common stock at an exercise
price of $10.08. The estimated fair value of the warrants of $6,236,000 was
recorded as a discount to the notes for amortization over the term of the
notes. In December 1999, the notes were restructured whereby the maturity of
these notes was accelerated and holders of the notes will receive a payment of
6% of net sales of PROVIGIL in the United States through December 31, 2001,
versus 2003 in the original agreements. The notes were retired in the first
quarter of 2000 for an aggregate cash payment of $35,500,000. In connection
with the restructuring, we recorded a loss in 1999 on the extinguishment of
the notes of $11,187,000, which includes the prepayment penalty of $5,500,000
and the write-off of deferred financing costs and the remaining value of the
warrants of $5,267,000.
Capital Lease Obligations
We currently lease laboratory, production and computer equipment with a cost
of $4,282,000 under lease agreements. Under the terms of the agreements, we
must maintain a minimum balance in unrestricted cash and
47
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 equipment
leased under the agreements. At December 31, 1999, the balance due under the
lease agreements was $1,608,000. Our lease agreements provide us with an
option to purchase the leased equipment at the conclusion of the lease.
Mortgage Loans
In March 1995, we purchased the buildings housing our administrative offices
and research facilities in West Chester, Pennsylvania for $11,000,000. We
financed the purchase through the assumption of an existing $6,900,000 first
mortgage and from $11,600,000 in state funding provided by the Commonwealth of
Pennsylvania. The first mortgage has a 15-year term with an annual interest
rate of 9 5/8%. The state funding has a 15-year term with an annual interest
rate of 2%. The 2% interest rate may be increased to prime plus 2% because we
failed to hire a specified number of new employees in Chester County,
Pennsylvania by the end of 1999. We are discussing modifications to the
agreement with the State. The loans require annual aggregate principal and
interest payments of $1,800,000. The loans are secured by the buildings and
fixtures therein and a portion of the state funding also is secured by all our
equipment located in Pennsylvania that is otherwise unsecured.
7. OTHER LIABILITIES
At December 31, other liabilities consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Accrued interest (See Note 6)......................... $4,009,000 $3,210,000
Deferred compensation................................. 198,000 285,000
---------- ----------
$4,207,000 $3,495,000
========== ==========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Leases
We lease certain of our offices and automobiles under operating leases. We
do not consider our future annual minimum payments under these leases to be
material. Lease expense under all operating leases totaled $416,000, $866,000,
and $725,000 in 1999, 1998, and 1997, respectively.
Related Party
In August 1992, we exclusively licensed our rights to MYOTROPHIN for human
therapeutic use within the United States, Canada and Europe to Cephalon
Clinical Partners, L.P., or CCP. We perform any development and clinical
testing of MYOTROPHIN on behalf of CCP under a research and development
agreement with CCP.
CCP has granted us an exclusive license to manufacture and market MYOTROPHIN
for human therapeutic use within the United States, Canada and Europe in
return for royalty payments equal to a percentage of product sales and a
milestone payment of approximately $16,000,000 that will be made if MYOTROPHIN
receives regulatory approval.
48
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We have a contractual option to purchase all of the limited partnership
interests of CCP. To exercise this 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 common stock or a combination thereof. The purchase option will
become exercisable upon the occurrence of certain events once sales activity
commences. Should we discontinue development of MYOTROPHIN or if we do not
exercise the purchase option, our license will terminate and all rights to
manufacture or market MYOTROPHIN in the United States, Canada and Europe will
revert to CCP, which may then commercialize MYOTROPHIN itself or license or
assign its rights to a third party. In that event, we would not receive any
benefits from such commercialization, license or assignment of rights.
Legal Proceedings
In November 1999, we received a federal grand jury subpoena in connection
with an investigation under the supervision of the Office of Consumer
Litigation of the U.S. Department of Justice. The grand jury also issued
subpoenas to certain of our former and current employees. We believe that the
investigation relates to the release of certain lots of MYOTROPHIN used in
clinical trials and related reports filed with the FDA during the period 1994-
1996. We have not been identified as a target of the investigation, and we are
cooperating with the inquiry. We cannot predict the outcome of the
investigation.
In August 1999, the U.S. District Court for the Eastern District of
Pennsylvania entered a final order approving the settlement of a class action
alleging that statements made about the results of certain clinical studies of
MYOTROPHIN were misleading. Of the $17,000,000 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. Of the $9,500,000 that we paid,
$4,300,000 was recognized as expense in 1999 and the remainder was recognized
in prior periods. A related complaint has been filed with the Court by a small
number of plaintiffs who decided not to participate in the settlement. This
related complaint alleges that we are liable under common law for
misrepresentations concerning the results of the MYOTROPHIN clinical trials,
and that we and certain of our current and former officers and directors are
liable for the actions of persons who allegedly traded in our 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, we do not believe it will have a material negative
effect on our financial condition or results of operations.
9. STOCKHOLDERS' EQUITY
Convertible Exchangeable Preferred Stock
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 $120,028,000. Dividends on the preferred stock are payable
quarterly as of November 15, 1999 and are cumulative at the annual rate of
$3.625 per share. We recognized $3,398,000 of preferred dividends during 1999.
The preferred stock is convertible into an aggregate of approximately
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
also are convertible into shares of our common stock. We may redeem the
preferred stock and the debentures at declining redemption prices commencing
in August 2001.
Equity Compensation Plans
Cephalon has established the Stock Option Plan and the Equity Compensation
Plan for its employees, directors and certain other individuals. All grants
and terms are authorized by the Compensation Committee of
49
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cephalon's Board of Directors. We may grant either non-qualified or incentive
stock options under both plans, and also may grant restricted stock awards
under the Equity Compensation Plan. The options and restricted stock awards
generally become exercisable or vested ratably over four years from the grant
date and the options must be exercised within ten years of the grant date.
The following tables summarize the aggregate option activity under both
plans:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1,..... 4,034,299 $12.42 3,518,258 $13.96 3,181,020 $14.07
Granted................... 788,000 24.51 1,009,000 8.18 873,520 12.94
Exercised................. (668,622) 10.49 (57,379) 10.21 (223,493) 8.27
Canceled.................. (340,536) 13.59 (435,580) 16.20 (312,789) 19.16
--------- ------ --------- ------ --------- ------
Outstanding, December 31,... 3,813,141 $15.17 4,034,299 $12.42 3,518,258 $13.96
========= ====== ========= ====== ========= ======
Exercisable at end of year.. 2,033,784 $13.88 2,279,718 $13.31 1,961,945 $12.93
Weighted average fair value
of options granted during
the year................... $14.45 $ 4.75 $ 7.67
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Exercise Price Options Contractual Life Exercise Price Options Exercise Price
----------------------- --------- ---------------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$.80--$10.00 1,267,497 7.2 years $ 7.89 $ 673,925 $ 7.98
$10.01--$20.00 1,586,169 5.7 $13.56 1,119,608 $14.05
$20.01--$31.00 959,475 8.8 $27.43 240,251 $29.68
--------- --- ------ ---------- ------
3,813,141 7.0 $15.17 2,033,784 $13.88
========= === ====== ========== ======
</TABLE>
In May 1999, the Equity Compensation Plan was amended to increase the number
of shares subject to the annual grants awarded under the plan by 1,200,000
shares. At December 31, 1999, 975,543 shares were available for future grants
under the plans.
During 1999, 1998 and 1997, we received proceeds of $7,369,000, $410,000 and
$2,205,000, respectively, from the exercise of stock options.
The following table summarizes restricted stock award activity for the years
ended December 31:
<TABLE>
<CAPTION>
Restricted Stock Awards
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Outstanding, January 1,.................. $ 280,425 $ 237,825 $ 190,700
Granted................................ 355,550 142,450 113,450
Vested................................. (83,300) (75,725) (54,325)
Canceled............................... (55,975) (24,125) (12,000)
---------- ---------- ----------
Outstanding, December 31,................ 496,700 280,425 237,825
---------- ---------- ----------
Compensation expense recognized.......... $1,023,000 $1,450,000 $1,684,000
========== ========== ==========
</TABLE>
50
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
If we had elected to recognize compensation cost based on the fair value of
stock options as prescribed by Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation," pro forma loss
and loss per share amounts would have been reflected as set forth below:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
As reported
Loss.............................. $(73,342,000) $(55,407,000) $(60,419,000)
Basic and diluted loss per share.. $ (2.48) $ (1.95) $ (2.36)
Pro forma
Loss.............................. $(79,121,000) $(60,659,000) $(62,315,000)
Basic and diluted loss per share.. $ (2.67) $ (2.13) $ (2.43)
</TABLE>
The fair value of the options granted during 1999, 1998 and 1997 were
estimated on the date of grant using the Black-Scholes option-pricing model
based on the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate........................... 5.89% 5.23% 6.35%
Expected life..................................... 6 years 6 years 6 years
Expected volatility............................... 56% 56% 56%
Expected dividend yield........................... 0% 0% 0%
</TABLE>
Warrants and Other Options
During 1999, investors in Cephalon Clinical Partners, L.P., or CCP,
exercised 1,958,291 warrants to purchase shares of common stock. Proceeds
associated with these exercises totaled $26,984,000. All outstanding warrants
associated with CCP expired on August 31, 1999. During 1998, no warrants were
exercised. In 1997, 102,004 warrants were exercised for an aggregate exercise
price of $1,183,000.
At December 31, 1999, warrants to purchase shares of Cephalon common stock
were outstanding as follows:
<TABLE>
<CAPTION>
Number Of Shares
Issuable Upon Exercise Exercise Price
Of Warrants Expiration Date Per Share
---------------------- --------------- --------------
<S> <C> <C>
1,920,000 March 1, 2004 $10.08
750,000 February 8, 2002 $18.50
84,000 April 7, 2000 $24.77
---------
2,754,000
=========
</TABLE>
The private placement of the revenue-sharing notes 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 estimated aggregate value of the
warrants of $6,593,000 was recorded as a discount to the notes a portion of
this amount was charged to interest expense. In connection with the
restructuring of the revenue sharing notes in 1999, we recorded a loss which
included the remaining value of the warrants (see Note 6).
In February 1994, Chiron was issued a warrant to purchase 750,000 shares of
common stock with an exercise price of $18.50 per share.
In April 1997, we issued warrants to purchase 84,000 shares of Cephalon
common stock at an exercise price of $24.77 per share to the placement agent
in connection with the private placement of senior convertible notes.
51
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Qualified Savings and Investment Plan
We have a profit sharing plan pursuant to section 401(k) of the Internal
Revenue Code, whereby eligible employees may contribute up to 15% of their
annual salary to the plan, subject to statutory maximums. The plan provides
for discretionary matching contributions by Cephalon in cash or a combination
of cash and shares of Cephalon's common stock. Our contribution for the years
1997 through 1999 was 100% of the first 6% of employee salaries contributed in
the ratio of 50% cash and 50% Cephalon stock. We contributed $1,369,000,
$1,155,000, and $1,090,000 in cash and common stock to the plan for the years
1999, 1998, and 1997, respectively.
Proforma Aggregate Conversions or Exercises
At December 31, 1999, the conversion or exercise of outstanding options,
warrants and convertible exchangeable preferred stock into shares of Cephalon
common stock in accordance with their terms would increase the outstanding
number of shares of common stock by approximately 13,543,000 shares, or 42%.
Preferred Share Purchase Rights
In November 1993, the Board of Directors of Cephalon declared a dividend
distribution of one right for each outstanding share of common stock. In
addition, a right attaches to and trades with each new issue of Cephalon's
common stock. Each right entitles each registered holder, upon the occurrence
of certain events, to purchase from Cephalon a unit consisting of one one-
hundredth of a share of the Series A Junior Participating Preferred Stock of
Cephalon, or a combination of securities and assets of equivalent value, at a
purchase price of $90.00 per Unit, subject to adjustment.
10. REVENUES
At December 31, revenues consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Product sales--PROVIGIL.............. $25,370,000 $ 728,000 $ --
Commercial collaborations............ 2,751,000 5,598,000 5,228,000
Research and development
collaborations...................... 16,793,000 9,085,000 17,912,000
Other................................ 5,000 244,000 --
----------- ----------- -----------
$44,919,000 $15,655,000 $23,140,000
=========== =========== ===========
</TABLE>
Product sales
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. Shipments of
PROVIGIL to customers were $31,488,000 in 1999 and $6,118,000 was recorded for
the reserve for returns and allowances, resulting in product sales of
$25,370,000.
Commercial collaborations
We have entered into several agreements under which our sales organization
markets the proprietary products of third parties. We focus our sales efforts
on neurologists and other neurological specialists. Under these agreements, we
receive payments generally for achievement of the stipulated sales activity
and performance targets, and also may be responsible for payment of fees to
the third party collaborator and funding promotional and clinical trial
activities. In the United States, we are promoting and marketing STADOL NS(R)
(butorphanol tartrate) for Bristol-Myers Squibb Company. We also are
collaborating with Abbott Laboratories, Inc. to market and further develop
GABITRIL(R) (tiagabine hydrochloride) in the United States. In France, we are
promoting and marketing APOKINON(R) (apomorphine hydrochloride) for
Laboratoire Aguettant S.A.
52
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Research and development collaborations
We have entered into several collaborative research and development
agreements under which we are reimbursed generally for our research efforts
and for product supply. In addition, we typically receive development
milestones and license fees.
Under a collaborative agreement with TAP, we perform research and
development for which we are compensated quarterly by TAP for both internal
and external expenses. Under the terms of a collaborative agreement with H.
Lundbeck A/S, Lundbeck is reimbursing us for certain costs related to the CEP-
1347 program. In addition, we are to receive milestone payments and royalties
on net product sales in Europe from Lundbeck. In December 1999, we entered
into a licensing agreement with Schwarz Pharma AG under which we granted our
rights to Schwarz Pharma to develop and market CEP-701 for the treatment of
prostate disorders and other cancers in Europe and several other countries
outside the United States. The agreement provides for Schwarz Pharma to make
milestone payments and to pay royalties on net product sales in the
territories. During 1999, we recognized revenue from the receipt of non-
refundable license fees related to the initiation of the Lundbeck
collaboration in the amount of $2,400,000 and the Schwarz Pharma collaboration
in the amount of $2,000,000. Under collaborative agreements with Kyowa Hakko,
we are reimbursed for our cost to supply MYOTROPHIN in Japanese clinical
trials and certain expenditures related to our signal transduction modulator
research and development program.
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the bases of assets and liabilities recognized for financial reporting
purposes and the tax bases thereon, and operating loss and tax credit
carryforwards. Significant components of our net deferred tax assets as of
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Net operating loss carryforwards............. $ 81,874,000 $ 59,240,000
Capitalized research and development
expenditures................................ 42,920,000 32,357,000
Federal research and development tax
credits..................................... 7,379,000 5,724,000
Other--net................................... 1,205,000 3,576,000
------------- -------------
Total deferred tax assets.................... 133,378,000 100,897,000
Valuation allowance for deferred tax assets.. (133,378,000) (100,897,000)
------------- -------------
Net deferred tax assets...................... $ -- $ --
============= =============
</TABLE>
The deferred tax asset valuation allowance increased by $32,481,000 during
the year. This increase is primarily the result of our analysis of the
likelihood of realizing the future tax benefit of tax loss carryforwards and
additional temporary differences. A valuation allowance was established for
100% of the deferred tax assets, as realization of the tax benefits is not
assured.
At December 31, 1999, we had net operating loss carryforwards for U.S.
federal income tax purposes of approximately $217,754,000 that will begin to
expire in 2003. The net operating loss carryforwards differ from the
accumulated deficit principally due to differences in the recognition of
certain research and development expenses for financial and federal income tax
reporting. Federal research tax credits of $7,379,000 are available to offset
future tax payments, and begin to expire in 2003.
The amount of net operating loss carryforwards which can be utilized in any
one period will be limited by federal income tax regulations since a change in
ownership as defined in Section 382 of the Internal Revenue Code occurred in
the current and prior years. We do not believe that such limitation will have
a material adverse impact on the utilization of our carryforwards.
53
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions held by our directors and executive officers
are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Frank Baldino, Jr.,
Ph.D................... 46 Chairman and Chief Executive Officer
William P. Egan(1)...... 55 Director
Robert J. Feeney,
Ph.D.(2)............... 74 Director
Martyn D. Greenacre(1).. 58 Director
David R. King........... 50 Director
Kevin E. Moley(1)....... 53 Director
Horst Witzel, Dr.-
Ing.(2)................ 72 Director
J. Kevin Buchi.......... 44 Senior Vice President and Chief Financial Officer
Peter E. Grebow, Ph.D... 53 Senior Vice President, Business Development
Earl W. Henry, M.D...... 52 Senior Vice President, Clinical Research and Regulatory Affairs
John E. Osborn.......... 42 Senior Vice President, General Counsel and Secretary
Robert P. Roche, Jr..... 44 Senior Vice President, Sales and Marketing
Carl A. Savini.......... 50 Senior Vice President, Human Resources
Jeffry L. Vaught,
Ph.D................... 49 Senior Vice President and President, Research and Development
</TABLE>
- --------
(1) Members of the Audit Committee of the Board of Directors.
(2) Members of the Stock Option and Compensation Committee of the Board of
Directors.
All directors hold office until our next annual meeting of stockholders and
until their successors are elected and qualified or until their earlier
resignation or removal.
All executive officers are elected annually by the Board of Directors to
serve in their respective capacities until their successors are elected and
qualified or until their earlier resignation or removal.
Dr. Baldino founded Cephalon and has served as Chief Executive Officer and a
director since its inception. He was appointed Chairman of the Board of
Directors in December 1999. Dr. Baldino received his Ph.D. degree from Temple
University and holds several adjunct academic appointments. Dr. Baldino
currently serves as a director of Adolor Corporation, a pharmaceutical
company, Pharmacopeia, Inc., a developer of proprietary technology platforms
for pharmaceutical companies, and ViroPharma, Inc., a biopharmaceutical
company.
Mr. Egan has been a director since 1988. Since 1979, Mr. Egan has served as
President of Burr, Egan, Deleage & Co., a venture capital company. He is also
a general partner of ALTA Communications VI, L.P., and ALTA Communications
VII, L.P. and ALTA Communications VIII, L.P., venture capital firms, and a
director of Cypress Communications, a communications service provider.
Dr. Feeney has been a director since 1988. From October 1987 to August 1997,
Dr. Feeney served as a general partner of Hambrecht & Quist Life Science
Technology Fund, a life sciences venture capital fund affiliated with
Hambrecht & Quist Incorporated. For 37 years prior thereto, Dr. Feeney was
employed at Pfizer Inc., a pharmaceutical company, and last served as its Vice
President of Licensing and Development. Dr. Feeney currently serves as a
director of QLT PhotoTherapeutics Inc., a Canadian biotechnology company.
54
<PAGE>
Mr. Greenacre has been a director since 1992. Mr. Greenacre has been
President, Chief Executive Officer and Director of Delsys Pharmaceutical
Corporation, a formulation and drug delivery system company, since June 1997.
From 1993-96, Mr. Greenacre served with Zynaxis Inc., a biopharmaceutical
company, as President, Chief Executive Officer and a director. From 1989-92,
Mr. Greenacre served as Chairman Europe, SmithKline Beecham Pharmaceuticals.
He joined SmithKline & French, the predecessor to SmithKline Beecham, in 1973
where he held positions of increasing responsibility in commercial operations
and management. Mr. Greenacre currently serves as a director of Creative
Biomolecules, Inc., a biotechnology company, and Genset s.a., a human genome
sciences company.
Mr. King was appointed a director in 1999. Since 1981, Mr. King has been a
partner in the Business and Finance Section of the law firm of Morgan, Lewis &
Bockius LLP, Philadelphia, Pennsylvania. Mr. King's practice focuses on
biotechnology and emerging growth companies and he has extensive experience in
corporate and securities law matters.
Mr. Moley has been a director since 1994. From November 1998 to December
1999, Mr. Moley served as Chairman of the Board of Directors of Patient Care
Dynamics LLC, a provider of computer hardware and software to physicians. From
January 1996 to February 1998, Mr. Moley was President and Chief Executive
Officer of Integrated Medical Systems, Inc., where he served as a director
since 1994. From February 1993 to December 1995, Mr. Moley was Senior Vice
President of PCS Health Systems, a provider of prescription management
services. From 1989-92 Mr. Moley served in the Bush administration as an
Assistant Secretary of the U.S. Department of Health and Human Services
("HHS"), and from 1992-93 as Deputy Secretary of HHS. Mr. Moley also serves as
a director of Innovative Clinical Solutions, Ltd., a site management company,
Merge Technologies, Inc., a medical imaging software company, Perse
Technologies, a medical billing company and ProxyMed, a medical claims
clearing house company.
Dr. Witzel has been a director since 1991. From 1986 until his retirement in
1989, Dr. Witzel served as the Chairman of the Board of Executive Directors of
Schering AG, a German pharmaceutical company and, prior to 1986, was a member
of the Board of Executive Directors in charge of Production and Technology.
Dr. Witzel currently serves as a director of The Liposome Company, Inc., a
biotechnology company.
Mr. Buchi joined Cephalon as Controller in March 1991 and held several
financial positions with the Company prior to being appointed Senior Vice
President and Chief Financial Officer in April 1996. Between 1985 and 1991,
Mr. Buchi served in a number of financial positions with E.I. duPont de
Nemours and Company. Mr. Buchi received his masters of management degree from
the J.L. Kellogg Graduate School of Management, Northwestern University in
1982 and is a Certified Public Accountant.
Dr. Grebow joined Cephalon in January 1991 and was Senior Vice President,
Drug Development prior to his current position as Senior Vice President,
Business Development. From 1988-90, Dr. Grebow served as Vice President of
Drug Development for Rorer Central Research, a division of Rhone-Poulenc Rorer
Pharmaceuticals Inc., a pharmaceutical company. Dr. Grebow received his Ph.D.
degree in Chemistry from the University of California, Santa Barbara.
Dr. Henry joined Cephalon in August 1997 as Vice President, Clinical
Operations, and was appointed Senior Vice President, Clinical Research and
Regulatory Affairs in October 1998. Prior to Cephalon, Dr. Henry served as
Vice President, Clinical Research for Guilford Pharmaceuticals. From 1992-95,
he was Executive Director, Clinical Research at Sandoz, Inc. and spent five
years at Pfizer Central Research. Dr. Henry received his M.D. degree from the
University of Chicago and completed his clinical training in neurology and
neuropathology at Harvard Medical School, where he held a faculty appointment.
Mr. Osborn joined Cephalon in March 1997 and has served as Senior Vice
President, General Counsel and Secretary since January 1999. He was appointed
Senior Vice President in September 1998 and prior to that served as Vice
President, Legal Affairs. From 1992-97, Mr. Osborn was employed by The DuPont
Merck Pharmaceutical Company, most recently as Vice President, Associate
General Counsel and Assistant Secretary.
55
<PAGE>
Prior to that, he served in the Bush administration with the U.S. Department
of State, practiced corporate law with firms in Boston and Philadelphia, and
clerked for a U.S. Court of Appeals judge. Mr. Osborn received his law degree
from the University of Virginia and also holds a masters degree in
international studies from The Johns Hopkins University.
Mr. Roche joined Cephalon in January 1995 as Vice President, Sales and
Marketing and was appointed to his current position in June 1999. Previously,
Mr. Roche was Director and Vice President, Worldwide Strategic Product
Development, for SmithKline Beecham's (SB) central nervous system and
gastrointestinal products business. He also was managing director of SB's
pharmaceutical operations in the Philippines, and held senior marketing
positions in Canada and Spain and product planning responsibility for SB in
Latin America and worked as a U.S. pharmaceutical sales representative. Mr.
Roche graduated from Colgate University and received a master of business
administration degree from The Wharton School, University of Pennsylvania.
Mr. Savini joined Cephalon in June 1993 as Director, Human Resources and has
served as Senior Vice President, Human Resources since January 2000. He was
appointed Vice President, Human Resources in January 1995. From 1983-93, Mr.
Savini was employed by Bristol-Myers Squibb Company, in Human Resources
positions of increasing responsibility, most recently as Director, Staffing
for the Pharmaceutical Group. Prior to joining Bristol-Myers, he was employed
by Johnson & Johnson's McNeil Pharmaceuticals from 1981-83, most recently as
Manager, Organization Development. Mr. Savini graduated from Pennsylvania
State University and received a master of business administration degree from
La Salle College.
Dr. Vaught has headed Cephalon's research operations since joining Cephalon
in August 1991 and currently serves as Senior Vice President and President,
Research and Development. Prior to joining Cephalon, Dr. Vaught served as CNS
Research Assistant Director for the R.W.J. Pharmaceutical Research Institute,
a subsidiary of the pharmaceutical and consumer products company Johnson &
Johnson, and CNS Therapeutic Team Leader for Johnson & Johnson sector
management from 1990-91. Dr. Vaught received his Ph.D. degree from the
University of Minnesota.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
information under the caption "Compensation of Executive Officers and
Directors" in our definitive proxy statement for the 2000 annual meeting of
stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" in our definitive proxy statement for the 2000 annual meeting
of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
in our definitive proxy statement for the 2000 annual meeting of stockholders.
56
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
The following is a list of our consolidated financial statements and our
subsidiaries and supplementary data included in this report under Item 8:
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Schedules, other than those listed above, are omitted because they are not
applicable or are not required, or because the required information is
included in the consolidated financial statements or notes thereto.
Reports on Form 8-K
During the fiscal quarter ended December 31, 1999, we filed a Current Report
on Form 8-K on December 14, 1999 announcing that we are responding to a
federal grand jury subpoena in connection with an investigation under the
supervision of the Office of Consumer Litigation of the U.S. Department of
Justice.
Exhibits
The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated by footnote, exhibits which were previously
filed are incorporated by reference. For exhibits incorporated by reference,
the location of the exhibit in the previous filing is indicated in
parenthesis.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1 Restated Certificate of Incorporation, as amended. (Exhibit 3.1)
(19).
3.2 Bylaws of the Registrant, as amended. (Exhibit 3.1) (19).
4.1 Specimen copy of stock certificate for shares of Common Stock of the
Registrant. (Exhibit 4.1) (10).
4.2 Amended and Restated Rights Agreement, dated as of January 1, 1999,
between Cephalon, Inc. and StockTrans, Inc. as Rights Agent. (Exhibit
1) (27).
4.3(a) Form of Note Purchase Agreement dated as of February 24, 1999 by and
between Cephalon and Investor. (Exhibit 4.3(a)) (20).
4.3(b) Form of Revenue Sharing Senior Secured Note due 2002 dated March 1,
1999. (Exhibit 4.3(b)) (25).
4.3(c) Form of Class A Warrant. (Exhibit 4.3(c)) (20).
4.3(d) Form of Class B Warrant. (Exhibit 4.3(d)) (20).
4.3(e) Security Agreement dated March 1, 1999 between Cephalon, Inc. and
Delta Opportunity Fund, Ltd., as collateral agent. (Exhibit 4.3(e))
(20).
4.3(f) Patent and Trademark Agreement dated March 1,1999 between Cephalon,
Inc. and Delta Opportunity Fund, Ltd., as collateral agent. (Exhibit
4.3(f)) (20).
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
4.4(a) Specimen Preferred Stock Certificate of Cephalon, Inc. (Exhibit 4.1)
(24).
4.4(b) Certificate of the Powers, Designations, Preferences and Rights of
the $3.625 Convertible Exchangeable Preferred Stock filed August 17,
1999. (Exhibit 4.2) (24).
4.4(c) Indenture, dated as of August 18, 1999, between Cephalon, Inc. and
State Street Bank and Trust Company, as Trustee. (Exhibit 4.3) (24).
4.4(d) Form of Series A Warrant to purchasers of Units including a limited
partnership interest in Cephalon Clinical Partners, L.P. (Exhibit
10.4) (6).
4.4(e) Form of Series B Warrant to purchasers of Units including a limited
partnership interest in Cephalon Clinical Partners, L.P. (Exhibit
10.5) (6).
4.4(f) Incentive Warrant to purchase 115,050 shares of Common Stock of
Cephalon, Inc. issued to PaineWebber Incorporated. (Exhibit 10.6)
(6).
4.4(g) Fund Warrant to purchase 19,950 shares of Common Stock of Cephalon,
Inc. issued to PaineWebber R&D Partners III, L.P. (Exhibit 10.7) (6).
10.1 Letter agreement dated March 22, 1995, between Cephalon, Inc. and the
Salk Institute for Biotechnology Industrial Associates, Inc. (Exhibit
99.1) (15).
10.2 Deliberately omitted.
10.3 Stock Purchase Agreement dated July 28, 1995, between Cephalon, Inc.
and Kyowa Hakko Kogyo Co., Ltd. (Exhibit 99.3) (16).
10.4(a) License Agreement, dated May 15, 1992, between Cephalon, Inc. and
Kyowa Hakko Kogyo Co., Ltd. (Exhibit 10.6) (4) (25).
10.4(b) Letter agreement dated March 6, 1995 amending the License Agreement
between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd. (Exhibit
10.4(b)) (14) (25).
*10.4(c) Letter agreement dated May 11, 1999 amending the License Agreement
between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd. (26).
10.5(a) Supply Agreement, dated January 20, 1993, between Cephalon, Inc. and
Laboratoire L. Lafon. (Exhibit 10.5(a)) (22).
10.5(b) License Agreement, dated January 20, 1993, between Cephalon, Inc. and
Laboratoire L. Lafon. (Exhibit 10.5(b)) (22).
10.5(c) Trademark Agreement, dated January 20, 1993, between Cephalon, Inc.
and Genelco S.A. (Exhibit 10.5(c)) (22).
10.5(d) Amendment to License Agreement and Supply Agreement, dated July 21,
1993, between Cephalon, Inc. and Laboratoire L. Lafon. (Exhibit
10.5(d)) (22).
10.5(e) Amendment to Trademark Agreement, dated July 21, 1993, between
Cephalon, Inc. and Genelco S.A. (Exhibit 10.5(e)) (22).
10.5(f) Amendment No. 2 to License Agreement dated January 3, 1994 between
Cephalon, Inc. and Laboratoire L. Lafon. (Exhibit 99.1) (21).
10.5(g) Amendment No. 2 to Trademark Agreement dated August 23, 1995 between
Cephalon, Inc. and Genelco S.A. (Exhibit 99.2) (21).
10.5(h) Amendment No. 3 to License Agreement dated June 8, 1995, between
Cephalon, Inc. and Laboratoire L. Lafon. (Exhibit 99.2) (15).
10.5(i) Amendment No. 4 to License Agreement and Supply Agreement dated
August 23, 1995, between Cephalon, Inc. and Laboratoire L. Lafon.
(Exhibit 10.5(g)) (22).
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.5(j) Amendment No. 5 to License Agreement and Supply Agreement dated
January 21, 1998 between Cephalon, Inc. and Laboratoire L. Lafon.
(Exhibit 10.5(h)) (20) (25).
10.5(k) Amendment No. 6 to License Agreement and Supply Agreement dated
February 2, 1998 between Cephalon, Inc. and Laboratoire L. Lafon.
(Exhibit 10.5(i)) (20) (25).
10.5(l) Amendment No. 3 to Trademark Agreement dated January 21, 1998
between Cephalon, Inc. and Genelco S.A. (Exhibit 10.5(j)) (20) (25).
10.5(m) Amendment No. 4 to Trademark Agreement dated February 9, 1998
between Cephalon, Inc. and Genelco S.A. (Exhibit 10.5(k)) (20) (25).
+10.6(a) Cephalon, Inc. Amended and Restated 1987 Stock Option Plan. (Exhibit
10.7) (4).
+10.6(b) Cephalon, Inc. Equity Compensation Plan. (Exhibit 10.6(b)) (17).
+10.6(c) Cephalon, Inc. Non-Qualified Deferred Compensation Plan. (Exhibit
10.6(c)) (10).
10.7 Form of Note Purchase Agreement, dated as of January 15, 1997,
between Cephalon, Inc. and the several purchasers of Cephalon's
Senior Convertible Notes, without exhibits. (Exhibit 10.1) (18).
10.8(a) Amended and Restated Agreement of Limited Partnership, dated as of
June 22, 1992, by and among Cephalon Development Corporation, as
general partner, and each of the limited partners of Cephalon
Clinical Partners, L.P. (Exhibit 10.1) (6).
10.8(b) Amended and Restated Product Development Agreement, dated as of
August 11, 1992, by and between Cephalon, Inc. and Cephalon Clinical
Partners, L.P. (Exhibit 10.2) (6) (25).
10.8(c) Purchase Agreement, dated as of August 11, 1992, by and between
Cephalon, Inc. and each of the limited partners of Cephalon Clinical
Partners, L.P. (Exhibit 10.3) (6) (25).
10.8(d) Pledge Agreement, dated as of August 11, 1992, by and between
Cephalon Clinical Partners, L.P. and Cephalon, Inc. (Exhibit 10.8)
(6).
10.8(e) Promissory Note, dated as of August 11, 1992, issued by Cephalon
Clinical Partners, L.P. to Cephalon, Inc. (Exhibit 10.9) (6).
10.8(f) Form of Promissory Note, issued by each of the limited partners of
Cephalon Clinical Partners, L.P. to Cephalon Clinical Partners, L.P.
(Exhibit 10.10) (6).
10.9 Supply, Distribution and License Agreement, dated as of July 27,
1993, by and between Kyowa Hakko Kogyo Co., Ltd. and Cephalon, Inc.
(Exhibit 10.3) (11) (25).
10.10(a) Agreement between Cephalon, Inc. and Chiron Corporation dated as of
January 7, 1994. (Exhibit 10.1) (12) (25).
10.10(b) Letter agreement dated January 13, 1995 amending Agreement between
Cephalon, Inc. and Chiron Corporation. (Exhibit 10.12(b)) (14) (25).
10.10(c) Letter agreement dated May 23, 1995 amending Agreement between
Cephalon, Inc. and Chiron Corporation. (Exhibit 10.12(c)) (17) (25).
10.11(a) Agreement between Cephalon, Inc. and TAP Holdings Inc. (formerly TAP
Pharmaceuticals Inc.) dated as of May 17, 1994. (Exhibit 99.2) (13)
(25).
10.11(b) Amendment dated June 28, 1996 amending Agreement between Cephalon,
Inc. and TAP Holdings Inc. (Exhibit 10.13(b)) (19) (25).
10.12 Toll Manufacturing and Packaging Agreement dated February 24, 1998
between Cephalon, Inc. and Circa Pharmaceuticals, Inc. (Exhibit
10.12) (20) (25).
10.13 Marketing and Development Collaboration Agreement between Cephalon,
Inc. and Abbott Laboratories Inc., dated June 10, 1999. (Exhibit
10.13) (22) (26).
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.14 Joint Research, Development and License Agreement between Cephalon,
Inc. and H. Lundbeck A/S, dated May 28 1999. (Exhibit 10.14) (22)
(26).
10.15 Amended and Restated Copromotion Agreement between Cephalon, Inc. and
Bristol Myers Squibb Company, dated January 1, 1999. (Exhibit 10.15)
(22) (26).
*10.16 Development and License Agreement between Schwarz Pharma AG and
Cephalon, Inc., dated December 15, 1999. (26).
*21 Subsidiaries of Cephalon, Inc.
*23.1 Consent of Arthur Andersen LLP.
*24 Power of Attorney (included on the signature page to this Form 10-K
Report).
*27 Financial Data Schedule.
</TABLE>
- --------
* Filed herewith.
+ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to the Registration Statement on Form S-1 filed on
March 15, 1991.
(2) Filed as an Exhibit to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1 (Registration No. 33-39413) filed on April 19,
1991.
(3) Filed as an Exhibit to Pre-Effective Amendment No. 2 to the Registration
Statement on Form S-1 (Registration No. 33-39413) filed on April 22,
1991.
(4) Filed as an Exhibit to the Transition Report on Form 10-K for transition
period from January 1, 1991 to December 31, 1991, as amended by Amendment
No. 1 filed on September 4, 1992 on Form 8.
(5) Filed as an Exhibit to the Company's Current Report on Form 8-K filed on
December 31, 1992.
(6) Filed as an Exhibit to the Registration Statement on Form S-3
(Registration No. 33-56816) filed on January 7, 1993.
(7) Filed as an Exhibit to the Registration Statement on Form S-3
(Registration No. 33-58006) filed on February 8, 1993.
(8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.
(9) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
June 8, 1993.
(10) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
(11) Filed as an Exhibit to the Registration Statement on Form S-3
(Registration No. 33-73896) filed on January 10, 1994.
(12) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
January 10, 1994.
(13) Filed as an Exhibit to the Company's Current Report on Form 8-K dated May
17, 1994.
(14) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
(15) Filed as an Exhibit to the Registration Statement on Amendment No. 1 to
Form S-3 (Registration No. 33-93964) filed on June 30, 1995.
(16) Filed as an Exhibit to the Registration Statement on Amendment No. 2 to
Form S-3 (Registration No. 33-93964) filed on July 31, 1995.
(17) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
(18) Filed as an Exhibit to the Registration Statement on Form S-3
(Registration No. 333-20321) filed on January 24, 1997.
(19) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
60
<PAGE>
(20) Filed as an Exhibit to the Company's Annual report on Form 10-K for the
fiscal year ended December 31, 1998.
(21) Filed as an Exhibit to the Company's Current Report on Form 8-K filed
August 3, 1999.
(22) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the period ending June 30, 1999.
(23) Filed as an Exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-87421) filed September 20, 1999.
(24) Filed as an Exhibit to the Company's Registration Statement on Form S-3
(Registration No. 333-88985) filed October 14, 1999.
(25) Portions of the Exhibit have been omitted and have been filed separately
pursuant to an application for confidential treatment granted by the
Securities and Exchange Commission.
(26) Portions of the Exhibit have been omitted and have been filed separately
pursuant to an application for confidential treatment filed with the
Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
(27) Filed as an Exhibit to the Company's Form 8-A/A (12G) filed on January
20, 1999.
61
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Balance at
Beginning of End of the
Year Ended December 31, the Year Additions(1) Deductions Year
- ----------------------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Reserve for returns and allowances:
1999............................. $-- $6,607,000 $658,000 $5,949,000
</TABLE>
- --------
(1) Amounts represent charges and reductions to expenses and revenue.
62
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2000
Cephalon, Inc.
/s/ Frank Baldino, Jr., Ph.D.
By: _________________________________
Frank Baldino, Jr., Ph.D.
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Frank
Baldino, Jr. his true and lawful attorney-in-fact, with full power of
substitution, to execute and cause to be filed with the Securities and
Exchange Commission any or all amendments to this report.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Frank Baldino, Jr., Ph.D. Chairman and Chief March 29, 2000
______________________________________ Executive Officer
Frank Baldino, Jr., Ph.D (Principal executive
officer)
/s/ J. Kevin Buchi Sr. Vice President and March 29, 2000
______________________________________ Chief Financial Officer
J. Kevin Buchi (Principal financial and
accounting officer)
/s/ William P. Egan Director March 29, 2000
______________________________________
William P. Egan
/s/ Robert J. Feeney, Ph.D. Director March 29, 2000
______________________________________
Robert J. Feeney, Ph.D.
/s/ Martyn D. Greenacre Director March 29, 2000
______________________________________
Martyn D. Greenacre
/s/ David R. King Director March 29, 2000
______________________________________
David R. King
/s/ Kevin E. Moley Director March 29, 2000
______________________________________
Kevin E. Moley
/s/ Horst Witzel, Dr.-Ing. Director March 29, 2000
______________________________________
Horst Witzel, Dr.-Ing.
</TABLE>
63
<PAGE>
May 11, 1999
Via facsimile
- -------------
Kyowa Hakko Kogyo Co., Ltd.
Attn: George Goto, Licensing & Business Development
1-6-1 Ohtemachi
Chiyoda-ku
Tokyo 100-8185 JAPAN
Gentlemen:
Reference is made to that certain License Agreement between Cephalon, Inc.
("CEPHALON") and Kyowa Hakko Kogyo Co., Ltd. ("KYOWA") dated as of May 12, 1992,
as amended (the "License Agreement"), and further reference is made to that
certain Supply Agreement between CEPHALON and KYOWA dated as of August 1, 1994,
as amended (the "Supply Agreement"). All capitalized terms not otherwise
defined herein shall have the respective meanings ascribed to them in the
License Agreement and the Supply Agreement, as may be applicable.
Insofar as the parties now have determined that Cephalon is in a better
position to assume responsibility for the manufacture and supply of the
Substance(s), and insofar as Cephalon has agreed to assume the risk and
responsibility the parties hereby amend the License Agreement as follows:
1. The third sentence of Section 2.1 of the License Agreement relating to
the retention by KYOWA of all manufacturing rights is hereby deleted, and the
following terms are hereby added in lieu thereof: In connection with this grant
of right and license to CEPHALON, KYOWA hereby grants to CEPHALON the exclusive
right to manufacture the Substance(s) (except that KYOWA shall retain the right
to manufacture the Substance(s) for use and sale in those areas where KYOWA has
retained exclusive rights to commercialize the Pharmaceutical(s)). KYOWA hereby
further agrees to provide to CEPHALON certain Know-How relating to the
manufacture of the Substance(s) as may be necessary or advisable to facilitate
the efficient manufacture of the Substance(s) and further to provide additional
or updated Know-How from time to time to reflect developments (if any) in the
manufacturing process. KYOWA acknowledges that, in the course of engaging a
third party to serve as contract manufacturer of Substance(s), that CEPHALON
necessarily will disclose to such third party Know-How and other confidential
information. KYOWA hereby consents to such disclosure on the condition that any
such disclosure will be made pursuant to the terms of Article 9 of this License
Agreement, and further that CEPHALON will
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The emitted
portions have been filed separately with the Commission.
1
<PAGE>
require that any such third party agree to be bound by such terms. Moreover,
during the term hereof KYOWA hereby agrees to consult free of charge with
CEPHALON (and with a third party manufacturer to be designated by CEPHALON) with
respect to the KNOW HOW and to any technical issues relating to the
manufacturing of Substance(s).
2. Section 4.2 of the License Agreement is hereby deleted, and the
following terms are hereby inserted in substitution therefor: In consideration
of the rights granted to CEPHALON thereunder, CEPHALON shall pay KYOWA an amount
equal to [**] percent [**] of the Net Selling Price of the corresponding
Pharmaceutical(s) in the Territory. For purposes of clarification, the parties
acknowledge that this new provision shall be in lieu of the terms set forth in
Section E(1)(b) of the Supply Agreement and that the new supply agreement to be
negotiated and agreed upon by the parties shall not contain any similar
provision.
3. The entirety of Article 7 of the License Agreement relating to the
supply of Substance(s) by KYOWA is hereby deleted, and the following terms are
hereby inserted in substitution therefor: CEPHALON shall make available to
KYOWA Substance(s) on such terms and conditions as may be agreed upon by the
parties in a new supply agreement that will be substantially similar to those
set forth in the Supply Agreement (except as otherwise provided herein),
provided that KYOWA shall pay CEPHALON for the Substance(s) an amount equal to
CEPHALON's Cost of Manufacture. For purposes of clarification, the parties
acknowledge that KYOWA shall be responsible for transferring in a timely manner
Know-How relating to the manufacture and formulation of the Substance(s) to
CEPHALON or to a third party manufacturer to be designated by CEPHALON (with the
approval of KYOWA), but that following a period not to exceed one year from the
date of transfer of Know-How CEPHALON shall thereafter have sole responsibility
for managing the manufacturing process.
4. Furthermore, the parties hereby agree to terminate the Supply
Agreement, to be effective as of the effective date of a new supply agreement
between the parties reflecting the terms and conditions of this amendment as set
forth above.
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The emitted
portions have been filed separately with the Commission.
2
<PAGE>
Please indicate your consent and agreement to the aforementioned terms by
signing a copy of this letter in the space provided below.
CEPHALON, INC.
By:__________________________
Peter E. Grebow, Ph.D.
Senior Vice President
Worldwide Business Development
KYOWA HAKKO KOGYO CO., LTD.
By:____________________________
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The emitted
portions have been filed separately with the Commission.
3
<PAGE>
Exhibit 10.16
DEVELOPMENT AND LICENSE AGREEMENT
This Development and License Agreement (the "Agreement") is made and shall be
effective as of December 15, 1999 by and between Cephalon, Inc., a Delaware
corporation with its principal place of business located at 145 Brandywine
Parkway, West Chester, Pennsylvania 19380-4245, U.S.A. ("Cephalon") and Schwarz
Pharma AG, a German corporation with its principal place of business located at
Alfred-Nobel-StraBe 10, Monheim am Rhein, D-40789 Germany ("Schwarz Pharma").
WITNESSETH:
WHEREAS, Kyowa Hakko Kogyo, Co. Ltd. ("Kyowa") granted to Cephalon the right
to make, develop, use and sell pharmaceutical products containing the
Substances, KT5555,KT6587 and KT8391 (each a derivative of K252a), under the
terms and conditions of a license agreement ("Kyowa License") dated May 15,
1992, as amended; said right, including the right to sublicense in certain
territories, including Europe, Mexico, Canada, the Middle East, Africa, Latin
America, South America, Australia and New Zealand;
WHEREAS, Cephalon wishes to grant, and Schwarz Pharma wishes to accept, a
sublicense as described herein of certain of Cephalon's rights under the Kyowa
License, in that certain territory to be defined herein, to product(s) developed
by Cephalon that contain any of KT5555, KT6587 and KT8391, such product(s) to be
known hereinafter respectively as CEP-701, CEP-751 and CEP-2563;
WHEREAS, Cephalon has developed a chemical platform of [**] compounds
believed to have potential efficacy in treating cancers that rely upon the
family of neurotrophin receptors for survival;
WHEREAS, Cephalon wishes to grant, and Schwarz Pharma wishes to accept, an
exclusive option to license, in that certain territory to be defined herein,
certain fused pyrrolocarbazoles as described herein for use as provided herein;
WHEREAS, Cephalon and Schwarz Pharma desire to enter into a collaboration to
develop and commercialize compounds for uses related to cancer therapeutics; and
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
1
<PAGE>
WHEREAS, Cephalon and Schwarz Pharma desire to establish commercial licensing
and supply arrangements under which Cephalon Licensed Products and Kyowa
Licensed Products (as defined below) will be marketed and sold exclusively by
Schwarz Pharma in the Territory (as defined below).
NOW, THEREFORE, for good and valuable consideration, the adequacy of which is
hereby affirmed, the parties hereby agree as follows.
Article 1. Definitions. Terms that are capitalized as defined terms in this
Agreement shall have the meanings set forth below, and defined terms may be used
in their singular and plural sense:
1.1 "Affiliate" shall mean any individual or entity directly or indirectly
controlling, controlled by or under common control with, a Party to this
Agreement. Without limiting the foregoing, the direct or indirect ownership of
fifty percent (50%) or more of the outstanding voting securities of an entity,
or the right to receive fifty percent (50%) or more of the profits or earnings
of an entity, or the right to control the policy decisions of a person or
entity, shall be deemed to constitute control.
1.2 "At Cost" shall mean all direct and indirect expenses incurred which shall
be allocated in a fair and equitable manner in conformance with United States
generally accepted accounting principles ["US GAAP"], consistently applied with
those established with respect to other products, and shall include:
(a) the arms-length transfer price to Cephalon for Compounds and clinical
supplies manufactured by a third party including Cephalon's expenses incurred in
connection with such third party manufacture; such Cephalon expenses include,
but are not limited to, those relating to existing or acquired equipment
(current procedures for such equipment allocations shall be provided within
thirty (30) days of the Effective Date and upon any amendment of such procedures
thereafter), technology transfer, scale-up, validation, quality control and
quality assurance testing, stability testing, storage, regulatory filings,
shipping and import/export services;
(b) all expenses for Compounds and clinical supplies manufactured by
Cephalon including, but not limited to, existing and acquired equipment
(current procedures for such equipment allocations shall be provided within
thirty (30) days of the Effective Date and upon any amendment of such procedures
thereafter), technology transfer, scale-up, validation, quality control and
quality assurance testing, stability testing, storage, regulatory filings,
shipping and import/export services; and
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
2
<PAGE>
(c) all incremental expenses incurred by or on behalf of Cephalon in the
US Program at the written request of Schwarz Pharma which are not otherwise
required for regulatory or commercial purposes under the US Program but which
specifically support Schwarz Pharma's Development Program.
1.3 "Backup Compounds" shall mean the fused pyrrolocarbazoles known as CEP-
4416, CEP-4715, and CEP-4574 or any other fused pyrrolocarbazoles owned by
Cephalon which inhibit the Target(s) and are selected under the US Program for
clinical development in the Field.
1.4 "Cephalon Licensed Products" shall mean all pharmaceutical products that
contain Backup Compounds.
1.5 "Cephalon Technology" shall mean collectively, Patent Rights, Know-How and
Improvements, including but not limited to technology and data obtained or
licensed from TAP through the US Program, but excluding Kyowa Technology. For
purposes of clarification, the term Cephalon Technology expressly excludes any
Patent Rights and Know-How that Cephalon may license from a third party after
the Effective Date of this Agreement, unless (i) Cephalon is permitted to grant
a sublicense or other rights thereunder to Schwarz Pharma; and (ii) Schwarz
Pharma shall have executed and delivered a sublicense or other agreement in a
form reasonably required in connection therewith. Cephalon Technology includes
the drug development dossier related to the filing of an investigational new
drug application by or on behalf of Cephalon that supports clinical studies of a
Compound; as well as any Patent Rights, Improvements and Know-How to the extent
that it relates to the composition, manufacture, use, and commercialization of
the Compounds in the Field or Licensed Products.
1.6 "Compounds" shall mean the Lead Compound (as defined herein), CEP-751, CEP-
2563 and the Backup Compounds.
1.7 "Development Program" shall mean a program including, but not limited to,
preclinical, clinical and regulatory development of a Compound conducted by
Schwarz Pharma pursuant to this Agreement primarily with the intent, and for the
purpose, of generating data for submission to regulatory authorities in support
of an application for governmental approval necessary to permit the
commercialization of a Licensed Product in the Field within the Territory.
1.8 "Effective Date" shall mean the date hereof.
1.9 "Field" shall mean the treatment of cancer, including but not limited to
prostate cancer and
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
3
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pancreatic cancer.
1.10 "Improvements" shall have the meaning set forth in Section 11.1.
1.11 "Know-How" shall mean know-how, trade secrets, Targets, technical
information , formulae, processes, expert opinions, data, and other confidential
and proprietary information, other than Kyowa Technology, concerning or relating
to the composition, manufacture, use or commercialization of Compounds or
Licensed Products, including, without limitation, CMC, preclinical, clinical,
and other data generated pursuant to the US Program and the Development Program,
which is owned or controlled by a Party to this Agreement.
1.12 "Kyowa Licensed Products" shall mean all pharmaceutical products that
contain the Lead Compound (as defined herein), CEP-751 or CEP-2563.
1.13 "Kyowa Technology" shall mean: the patent rights, including all patent
applications and issued patents owned, licensed or controlled by Kyowa and/or
its Affiliates anywhere in the world that contain a Valid Claim covering the
composition, manufacture or use of the Lead Compound, CEP-751 or CEP-2563 (as
well as the use of K252a solely in connection with the manufacture of the Lead
Compound, CEP-751 or CEP-2563) including but not limited to any provisionals,
divisionals, continuations, continuations-in-part, reissues, reexaminations,
extensions derived therefrom, as well as all foreign patent applications,
granted foreign patents and all counterparts thereof including, but not limited
to, supplemental protection certificates, administrative protection certificates
(or other governmental actions) which provide exclusive rights to the patent
holders in the patented subject matter; manufacturing rights; and know-how,
trade secrets and technical information relating to K252a and the Lead Compound,
CEP-751 and CEP-2563 only to the extent that such patent rights, manufacturing
rights, know-how, trade secrets or technical information have been granted to
Cephalon pursuant to the Kyowa License. A copy of the Kyowa License, as
amended, is attached hereto as Exhibit D.
1.14 "Lead Compound" shall mean CEP-701. The chemical formula of CEP-701 is
set forth on Exhibit B.
1.15 "Licensed Products" shall mean Cephalon Licensed Products and Kyowa
Licensed Products.
1.16 "Marketing Authorization Application" or "MAA" shall mean an application
seeking the approval of the competent regulatory authority in any country in the
Territory (including, without limitation, the European Medicines Evaluation
Agency or "EMEA") to enable Schwarz Pharma
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
4
<PAGE>
(or an Affiliate or assignee thereof) to market a Licensed Product(s).
1.17 "Net Sales" shall mean the gross receipts derived in arms-length
transactions from the sale of Licensed Products in the Territory by Schwarz
Pharma (or by its Affiliates, sublicensees), to independent third parties in the
Territory, less the sum of the following items:
a) Import, export, excise and sales taxes and custom duties paid or
allowed by the selling party and any other governmental charges
imposed upon the production, importation, use or sale of Licensed
Products by Schwarz and/or its Affiliates;
b) Credit for returns, refunds, rebates and allowances, or trades to
customers for returned or recalled Licensed Product;
c) Trade, quantity and cash discounts actually allowed;
d) Transportation, freight and insurance allowances; and
e) Rebates actually granted to wholesalers, administrative fees in
lieu of rebates paid to managed care and other similar institutions,
chargebacks and retroactive price adjustments and any other similar
allowances which effectively reduce the net selling price.
Gross and Net Sales shall be calculated according to US GAAP. Sales or
transfers between or among a party to this Agreement and its Affiliates or
sublicensees shall be excluded from the computation of Net Sales except where
such Affiliates or sublicensees are end users, but Net Sales shall include the
subsequent final sales to third parties by such Affiliates or sublicensees.
Where (i) Licensed Products are sold as one of a number of items without a
separate price; or (ii) the consideration for the Licensed Products shall
include any non-cash element; or (iii) the Licensed Products shall be
transferred in any manner other than an invoiced sale, except for Licensed
Products transferred as samples or any other similar transfer for promotional
purposes usually made in the relevant part of the Territory, the gross sales
applicable to any such transaction shall be deemed to be Schwarz Pharma's
average gross sales for the applicable quantity of Licensed Products during the
calendar quarter and in the country in which the transaction occurred. If there
are no independent gross sales of Licensed Products in the country at that time,
then Schwarz Pharma and Cephalon shall mutually agree on a surrogate measure to
be used in lieu thereof.
1.18 "Party" or "Parties" shall mean Cephalon and/or Schwarz Pharma, as the
case may be.
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
5
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1.19 "Patent Rights" shall mean all patent rights, including but not limited
to, U.S. patent applications (whether in preparation or filed) and issued
patents, owned, controlled or licensed (with the right to assign or sublicense)
by Cephalon (and/or an Affiliate thereof) anywhere in the world covering the
assays, Targets, Improvements, processes, composition, manufacture or use of any
Compound (as well as any Know-How that may be patentable), including but not
limited to any provisionals, divisionals, continuations, continuations-in-part,
reissues, reexaminations, extensions derived therefrom, as well as all foreign
patent applications, granted patents and all counterparts thereof including, but
not limited to, substitutions, confirmations, registrations, revalidations,
supplemental protection certificates, administrative protection certificates (or
other governmental actions) which provide exclusive rights to the patent holders
in the patented subject matter. All such Patent Rights in the Territory for
all Compounds and the filing dates of each, in existence as of the Effective
Date shall be as set forth on Exhibit A hereto.
1.20 "Pivotal Trial" shall mean an adequate and well controlled, clinical
study designed to demonstrate sufficient efficacy and safety to directly support
a regulatory filing for marketing approval by a competent regulatory authority .
1.21 "Reasonable Business Efforts" shall mean necessary and prudent efforts
applied in a prompt, commercially reasonable manner, to the maximum extent
feasible consistent with the exercise of good business judgment for the
attainment of the goals and purposes of this Agreement consistent with current
industry standards and practice.
1.22 "TAP" shall refer to Takeda Abbott Pharmaceutical Holdings Inc., a
Delaware corporation headquartered at 2355 Waukegan Road, Deerfield, Illinois
60015.
1.23 "TAP Agreement" means that certain collaborative research, development and
licensing agreement dated May 17, 1994 between Cephalon and TAP as amended. A
copy of the TAP Agreement, as amended as of the date of this Agreement, is
attached hereto as Exhibit C. Any additional amendments to the TAP Agreement
during the term of this Agreement (including any amendments referred to in
Section 16.3 (h)(iv) of this Agreement) will be provided to Schwarz Pharma
promptly and added to Exhibit C.
1.24 "Target" or "Targets" shall mean the [**]
1.25 "Territory" shall mean generally the regions of Europe, Mexico, Canada,
the Middle East, Africa, Latin America and South America (including
specifically, without limitation, the countries within those regions listed in
Exhibit F hereto), as well as the countries of Australia
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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<PAGE>
and New Zealand.
1.26 "US Program" shall refer to the research and development program through
which TAP, as a licensee and collaborator of Cephalon, bears the primary
responsibility and expenses of preclinical, clinical, regulatory and commercial
development of certain Compounds in the United States, including, the Lead
Compound, CEP-751, CEP-2563 and the Backup Compounds.
1.27 "Valid Claim" shall mean a claim of an issued or granted patent that has
not lapsed or become abandoned or been declared invalid or unenforceable by a
court or agency of competent jurisdiction from which no appeal can be or is
taken.
Article 2. Development Program
2.1 Responsibilities of Schwarz Pharma.
(a) Schwarz Pharma agrees to conduct a Development Program using
Reasonable Business Efforts as to the Lead Compound (or as to CEP-751 or CEP-
2563, or as to one or more Backup Compounds should Schwarz Pharma exercise its
option hereunder), to treat diseases in the Field. Schwarz Pharma shall fund and
conduct all necessary clinical trials of Compounds in the Field within the
Territory and any additional preclinical trials (other than those performed by
Cephalon and TAP in support of regulatory filings outside of the Territory)
required for regulatory purposes in the Field in the Territory. All Know-How
developed solely by or on behalf of Schwarz Pharma resulting from the conduct of
the Development Program will be owned by Schwarz Pharma and made available to
Cephalon as set forth in Article 8. All Know-How developed jointly by or on
behalf of Schwarz Pharma and Cephalon resulting from the conduct of the
Development Program will be jointly owned by Schwarz Pharma and Cephalon and
made available to Cephalon as set forth in Article 8. All Know-How developed by
or on behalf of Schwarz Pharma and a third party will be made available to
Cephalon as set forth in Article 8.
(b) Promptly, but in any event not more than ninety (90) days following
the execution of this Agreement, Schwarz Pharma shall submit to Cephalon a
written plan describing the overall strategy and objectives of the Development
Program to the extent such plan has been formulated (the "Development Plan").
The Development Plan shall take full advantage of the expertise of Schwarz
Pharma with respect to drug development, regulatory practices and
commercialization of such Compounds in the Field. The Development Plan will
define, at a minimum, the following items (to the extent possible consistent
with the current stage of clinical development of any Compound):
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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<PAGE>
(i) the labeling Schwarz Pharma will seek in the Territory;
(ii) the preclinical and clinical studies reasonably expected to be
necessary to support such labeling;
(iii) an estimate of the schedule of planned preclinical and clinical
studies; and
(iv) synopses of critical clinical studies ( e.g., proof-of-principle
and Pivotal Trials). Such study synopses shall include information that
is appropriate and customary in the industry, including but not limited
to, study design and duration of treatment, the primary endpoints of such
studies, patient numbers, the criteria for selection and exclusion of
such patients, and the power calculations for determining numbers of such
study participants and the estimated primary and secondary analyses.
The Development Plan shall also account for the reasonable expectation of
Schwarz Pharma for receipt of primary data and analyses of the same from time-
sensitive preclinical and clinical studies conducted by or on behalf of TAP
and/or Cephalon in the US Program. It shall be the primary responsibility of
Schwarz Pharma to identify and conduct any preclinical and clinical studies
necessary, in addition to those supplied by Cephalon to Schwarz Pharma from the
US Program, for approval of an MAA and commercialization of a Licensed Product
in the Field in the Territory. Subject to the prior written consent of Cephalon
with respect to the material items in the Development Plan, which consent shall
not be unreasonably withheld or delayed, Schwarz Pharma shall finalize the
Development Plan. Cephalon shall be deemed to have provided its consent if it
has not responded to the material items in such Development Plan within ten (10)
business days of its receipt of the Development Plan from Schwarz Pharma. The
final Development Plan shall be attached to this Agreement as Exhibit E.
(c) Concurrent with its submission of the Development Plan, Schwarz Pharma
shall provide to Cephalon an estimate of its overall budget for implementation
of the Development Plan (the "Development Budget"). The Development Budget will
include fully burdened expenses and will detail the allocation of resources by
Schwarz Pharma necessary for the preclinical and clinical activities performed
by or on behalf of Schwarz Pharma as distributed over each calendar year before
the anticipated first commercial sale of Licensed Product in the Territory. The
Development Budget shall also account for Schwarz Pharma's sole responsibility
for all incremental expenses incurred by or on behalf of Cephalon or TAP that
may be needed for the Development Program, but which are not similarly needed
for the US Program, such
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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<PAGE>
incremental expenses including, but not limited to, different formulations,
additional studies, study arms or study analyses conducted under the US Program
by or on behalf of Cephalon or TAP. The fully burdened expenses of Schwarz
Pharma to implement and complete the Development Program defined in the
Development Plan will be consistent with a minimum investment by Schwarz Pharma
of [**] dollars [**]. The Development Budget will be treated as Confidential
Information of Schwarz Pharma and shall not be disclosed by Cephalon to any
third party without the consent of Schwarz Pharma.
(d) Schwarz Pharma shall implement the Development Plan consistent with
the Development Budget not later than ninety (90) days following receipt by
Schwarz Pharma of Cephalon's written consent described in Section 2.1(b) and
all required regulatory approvals or expiration of required waiting periods.
Subject to its obligations set forth in Section 5.2, Section 2.3, Section 16.3
and those set forth herein to update and meet with Cephalon, and further subject
to Cephalon's right to consent to material modifications to the Development Plan
and Development Budget pursuant to Section 2.1(e), Schwarz Pharma will manage
and coordinate all development activities undertaken pursuant to the Development
Program, including scheduling preclinical studies and clinical trials for
Compounds; establishing milestones for the completion of Development Program
objectives, including without limitation those relating to anticipated filing
dates for a clinical trial authorization (or its equivalent) filing and an MAA
filing; determining to end the development of a Compound in the Field, within
the Territory; and generally exercising its Reasonable Business Efforts to
undertake and complete in a timely manner the Development Program with respect
to each Compound.
(e) Schwarz Pharma shall periodically review, and modify as may be
necessary and advisable, the preclinical, clinical and commercial objectives of
its Development Program for each Compound. On or before October 1st of each
year following the Effective Date (and for so long as the Development Program
continues), Schwarz Pharma shall provide to Cephalon a written update of the
Development Plan accounting for any proposed modifications in the Development
Program, including but not limited to, alterations in schedule of studies,
design and objectives of studies, and timing of analysis or final reporting of
studies or of regulatory filings in the Territory for the Lead Compound and
plans for clinical development of other Compounds, if appropriate. Any material
modification to the Development Plan shall be subject to the prior written
consent of Cephalon, which consent shall not be unreasonably withheld or
delayed, prior to Schwarz Pharma's implementation of such material
modification. Cephalon shall be deemed to have provided its consent if it has
not responded to such material modifications to the Development Plan within ten
(10) business days of its receipt of such material modifications from Schwarz
Pharma.
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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<PAGE>
2.2 Primary Responsibilities of Cephalon.
(a) Under the terms and conditions of the TAP Agreement, as amended,
Cephalon and TAP collaborate in the conduct of research, preclinical and
clinical studies, regulatory and commercialization strategies for the Lead
Compound, and, potentially, CEP-751, CEP 2563 or Backup Compounds, in the Field
in the United States. Under terms and conditions of an existing Confidential
Disclosure Agreement by and between Cephalon and Schwarz Pharma dated July 13,
1998 as amended on November 6, 1998, Schwarz Pharma has received the necessary
protocols, plans, results, analyses and reports regarding the US Program in
order to determine, using its Reasonable Business Efforts, those additional
requirements that may be needed for development of Compounds within the Field
and commercialization of a Licensed Product in the Territory. Accordingly, all
Know-How resulting from the conduct of the US Program, whether developed by
Cephalon or TAP or jointly by Cephalon and TAP will be provided to Schwarz
Pharma as described in Article 8.
(b) For purposes of generating preclinical and clinical data that will be
mutually acceptable by the regulatory authorities responsible for approving a
Compound under the US Program and under the Development Program, Cephalon shall
facilitate the coordination of the US Program and the Development Program as
follows. Thirty (30) days following receipt of the Development Plan from Schwarz
Pharma or as soon thereafter as practicable, Cephalon shall host the first
meeting of governing members of both the US Program and the Development Program
at a mutually agreeable location. The purpose of such meeting will be to
determine the optimal manner in which Cephalon can coordinate the development of
Compounds in the respective territories. Cephalon's efforts shall include the
following: coordinating the objective of utilizing all preclinical and
clinical trial data for both the US Food and Drug Administration ("FDA") and
EMEA approvals; coordinating the design, primary or secondary endpoints,
treatment regimens, dosing, and indications in proof-of-principle and Pivotal
Trials, and minimizing replication of such preclinical and clinical studies by
TAP and Cephalon in the US Program and by Schwarz Pharma in the Development
Program. In no case, however, shall either Party be required to conduct studies
in its respective Program which would otherwise conflict with its reasonable
business judgment. Cephalon shall be responsible for producing minutes of this
meeting and shall distribute the meeting minutes to Schwarz Pharma as well as to
TAP within thirty (30) days after the meeting.
(c) After the first meeting described above, Cephalon shall continue to
use its Reasonable Business Efforts under the TAP Agreement and under this
Agreement to coordinate and, if possible, and if appropriate, economize the
development efforts and expenditures by TAP
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
10
<PAGE>
and Cephalon and by Schwarz Pharma in their respective programs. In order to
achieve this objective, Cephalon will ensure that appropriate representatives of
Schwarz Pharma (not more than three [3] individuals per meeting) shall be
invited as non-voting participants to regular meetings (not less frequently than
once every six [6] months) of the development committee jointly representing
Cephalon and TAP in the US Program and at consultant or investigator meetings
convened to support a Compound under the US Program; conversely, Schwarz Pharma
will ensure that appropriate representatives of TAP and Cephalon (not more than
three [3] individuals per company per meeting) shall be invited to regular
meetings (not less frequently than once every six [6] months) of Schwarz
Pharma's management team for any Compound under the Development Program and at
consultant or investigator meetings convened to support a Compound under the
Development Program. Regardless of the number of individual members of Schwarz
Pharma that may attend and participate in any given meeting or proceeding
organized by TAP and/or Cephalon relating to a Compound, Schwarz Pharma shall
not be entitled to vote on matters relating to the US Program, provided,
however, that Cephalon shall consult with Schwarz Pharma with respect to
critical decisions relating to the development of Compounds under the US Program
and shall give due consideration to the experience and perspective of Schwarz
Pharma. Regardless of the number of individual members of TAP that may attend
and participate in any given meeting or proceeding organized by Schwarz Pharma
relating to a Compound, TAP shall not be entitled to vote on matters relating to
the Development Program. Written minutes of all such meetings shall be prepared
by the host of the meeting and approved by authorized signature of the parties
to the respective agreements only, and copies of these minutes shall be
distributed to the General Counsel of Cephalon, Schwarz Pharma and TAP not later
than thirty (30) days after any such meeting(s). Schwarz Pharma shall have the
right to review and comment upon design and protocols for preclinical and
clinical studies to be conducted in the US Program. Notwithstanding such review
and comment by Schwarz Pharma, but subject to Cephalon's covenants in Section
16.2 (h) and 2.3 of this Agreement, Cephalon and TAP shall have the final
authority on design and implementation of such protocols for the US Program.
2.3 General Responsibilities of the Parties The Parties agree to cooperate
with each other in good faith to work toward the success of the Development
Program. No less frequently than once every six (6) months, the Parties shall
meet at mutually agreed locations (or via videoconference) to update one another
on the progress and any modifications, including Material Modifications, of the
Development Program and the US Program. Each Party agrees that it will not
conduct or allow to be conducted any development activities in its territory
which in its reasonable business judgment would jeopardize regulatory approval
of Licensed Products worldwide. The Parties agree to use Reasonable Business
Efforts to perform their obligations pursuant to this Agreement, including
without limitation the diligence requirements set forth in
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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Section 5.2. However, nothing in this Agreement shall give either Party the
authority to control or direct the activities of any employees or agents of the
other Party.
2.4 Term of the Development Program. The Development Program shall continue
for so long as Schwarz Pharma continues development and seeks marketing approval
for not less than one Compound.
2.5 Use of Compounds and Technology. The Parties agree that all compositions,
biological materials and animals used in the Development Program shall be used
in compliance with all applicable laws and regulations. Neither Party shall
provide Lead Compound (or CEP-751, CEP-2563 if under development by Schwarz
Pharma, or Backup Compounds if Schwarz Pharma has exercised its option to the
Backup Compounds) to any third party in the Territory without the prior written
consent of the other Party, which consent shall not be unreasonably withheld or
delayed.
ARTICLE 3. GRANT OF RIGHTS
3.1 SUBLICENSE TO KYOWA LICENSED PRODUCTS. Subject to the terms and conditions
set forth herein, and pursuant to the Kyowa License, Cephalon hereby grants to
Schwarz Pharma its rights under the Kyowa License, except the right to
sublicense, solely to (a) use the Kyowa Technology for development of the Lead
Compound, CEP-751 or CEP-2563 within the Field, and (b) use and sell the
Kyowa Licensed Products in the Territory. Cephalon additionally hereby grants to
Schwarz Pharma the exclusive right in the Territory, without the right to
sublicense, to use the Cephalon Technology solely for the purposes of
development, marketing and sale of Kyowa Licensed Products within the Field.
Schwarz Pharma acknowledges that the rights of Cephalon with regard to Kyowa
Licensed Products under the Kyowa License are exclusive in Europe, Mexico and
Canada, and semi-exclusive as to Kyowa in the remainder of the Territory and,
therefore, that the rights granted hereunder to Schwarz Pharma also are
exclusive in Europe, Mexico and Canada and semi-exclusive as to Kyowa in all
other parts of the Territory. Moreover, Schwarz Pharma hereby agrees to
cooperate with Cephalon so as to ensure continued satisfaction of all those
terms and conditions of the Kyowa License, a copy of which Kyowa License is
attached hereto as Exhibit D. In the event that Cephalon determines to directly
manufacture any of Lead Compound, CEP-751 or CEP-2563 rather than have such
compounds manufactured by a third party manufacturer, then, if that compound is
currently under development by Schwarz Pharma, Cephalon shall promptly notify
Schwarz Pharma and, upon the request of Schwarz Pharma, the Parties shall
discuss the possibility of Cephalon granting manufacturing rights to Schwarz
Pharma to make Compounds for use in the Field within the
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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Territory.
3.2 Marketing and Distribution Rights to Kyowa Licensed Products. Subject to
the terms and conditions set forth herein, Schwarz Pharma may market and
distribute Kyowa Licensed Products developed hereunder through the channels
normally used for the Schwarz Pharma product portfolio, including but not
limited to, Affiliates, agents, distributors, joint venture partners and co-
promotion and co-marketing partners (even if any such commercial contract
between Schwarz Pharma and the applicable third party is formally described or
structured as a license). Subject to the written consent of Cephalon, which
consent shall not be unreasonably withheld, Schwarz Pharma may grant rights to
other authorized third parties to market, promote, sell and distribute Kyowa
Licensed Products in any country in the Territory where Schwarz Pharma does not
itself or through its then existing ordinary channels, wish to market Kyowa
Licensed Products. Cephalon shall be deemed to have provided consent if it has
not responded to the suggested authorized third party(ies) within ten (10)
business days after receiving the name of such authorized third parties from
Schwarz Pharma. If Cephalon has established a commercial operation in any of
the following countries: [**] and Schwarz Pharma is not then marketing,
promoting, selling and distributing directly or through an Affiliate or other
channel normally used for the Schwarz Pharma product portfolio in such
countries, then prior to entering into any agreement with any other third party
for such marketing, promotion, selling or distribution rights in such country,
Schwarz Pharma hereby agrees to negotiate in good faith for a period not to
exceed sixty (60) days to grant such rights to Cephalon under terms and
conditions to be mutually agreed upon. If Schwarz Pharma and Cephalon fail to
so reach agreement within such period, then Schwarz Pharma may discuss terms and
conditions with such other third parties but it shall not, within twelve (12)
months of the expiration of the sixty (60) day negotiation period, enter into
any such agreement with a third party on terms and conditions more favorable in
the aggregate to such third party than those offered to Cephalon without first
offering such more favorable terms to Cephalon in accordance with the procedures
set forth herein. If, after complying with the terms of this paragraph, Schwarz
Pharma thereafter enters into such an agreement with a third party, with
Cephalon's consent as described above in this Section 3.2, then such agreement
shall contain terms and conditions customary in the pharmaceutical industry with
respect to such commercial arrangements, including without limitation those
relating to the prompt disclosure of adverse drug experiences, any adverse
regulatory or other governmental actions, or Know-How relating to the Kyowa
Licensed Products.
3.3 Option to Backup Compounds. Subject to the terms and conditions set forth
herein, including payment of all upfront license payments in Section 4.1,
Cephalon hereby grants to Schwarz Pharma a time-limited option to license
exclusively (exclusive even as to Cephalon) under the Cephalon Technology (a)
the right to use and develop the Backup Compounds in the
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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Field in the Territory; (b) the right to use and sell Cephalon Licensed Products
in the Territory. The option must be exercised, if at all, in accordance with
the terms and conditions of Section 3.4.
3.4 Option Exercise for Backup Compounds. Subject to the terms and conditions
set forth herein, to exercise the option granted by Cephalon in section 3.3 for
any Backup Compound: (a) Schwarz Pharma must, by the latter of the second
anniversary of the Effective Date or one hundred eighty (180) days after the
filing of an Investigational New Drug Application ("IND") for such Backup
Compound provided such IND is filed on or before the second anniversary of the
Effective Date: (i) give Cephalon not less than thirty (30) days written notice
that it is exercising its option and (ii) provided Cephalon has filed patent
applications for all Backup Compounds no later than thirty (30) days from
receipt of such notice, pay Cephalon [**] dollars [**] within thirty (30) days
of such notice, OR, in the alternative (b) Schwarz Pharma must (i) give Cephalon
not less than thirty (30) days written notice on or before the second
anniversary of the Effective Date that it is extending the time to exercise its
option until the latter to occur of the fourth anniversary of the Effective Date
or sixty (60) days after the filing of an IND for such Backup Compound, (ii)
provided Cephalon has filed patent applications for all Backup Compounds no
later than thirty (30) days from receipt of such notice, pay Cephalon an option
period extension fee of [**] Dollars [**] within thirty days of such notice, and
(iii) if Schwarz Pharma desires to exercise its option, Schwarz Pharma shall
notify Cephalon in writing before the expiration of the extended option period
that it is exercising its option and shall pay Cephalon [**] dollars [**] within
thirty (30) days of such notice. If Schwarz Pharma does not exercise its option
for any Backup Compound within the relevant time periods set forth above, then
such option shall expire and shall be of no further force and effect.
3.5 Marketing and Distribution Rights to Cephalon Licensed Products. From and
after the time Schwarz Pharma exercises its option to take an exclusive license
to the Backup Compounds pursuant to Section 3.4, and subject to the terms and
conditions set forth herein, Schwarz Pharma may market and distribute Cephalon
Licensed Products developed hereunder in the Territory through the channels
normally used for the Schwarz Pharma product portfolio including, but not
limited to, Affiliates, agents, distributors, joint venture partners and co-
promotion and co-marketing partners (even if any such commercial contract
between Schwarz Pharma and the applicable third party is formally described or
structured as a license). Subject to the written consent of Cephalon, which
consent shall not be unreasonably withheld, Schwarz Pharma may grant rights to
other authorized third parties to market, promote, sell and distribute Cephalon
Licensed Products in any country in the Territory, where Schwarz Pharma does not
itself or through its then-existing ordinary channels, wish to market Cephalon
Licensed Products. Cephalon shall be deemed to have provided consent if it has
not responded to the suggested
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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<PAGE>
authorized third party(ies) within ten (10) business days after receiving the
names of such authorized third parties from Schwarz Pharma. If Cephalon has
established a commercial operation in any of the following countries: [**] and
Schwarz Pharma is not marketing, promoting, selling and distributing directly or
through an Affiliate or other channel normally used for the Schwarz Pharma
product portfolio in such countries, then prior to entering into any agreement
with any other third party for such marketing, promotion, selling or
distribution rights in such country, Schwarz Pharma hereby agrees to negotiate
in good faith for a period not to exceed sixty (60) days to grant such rights to
Cephalon under terms and conditions to be mutually agreed upon. If Schwarz
Pharma and Cephalon fail to so reach agreement within such period, then Schwarz
Pharma may discuss terms and conditions with such other third parties but it
shall not, within twelve (12) months of the expiration of the sixty (60) day
negotiation period, enter into any such agreement with a third party on terms
and conditions more favorable in the aggregate to such third party than those
offered to Cephalon without first offering such more favorable terms to Cephalon
in accordance with the procedures set forth herein. If , after complying with
the terms of this paragraph, Schwarz Pharma thereafter enters into such an
agreement with a third party, with Cephalon's consent as described above in this
Section 3.5, then such agreement shall contain terms and conditions customary in
the pharmaceutical industry with respect to such commercial arrangements,
including without limitation those relating to the prompt disclosure of adverse
drug experiences, any adverse regulatory or other governmental actions, or Know-
How relating to the Cephalon Licensed Products.
3.6 Licensed Products in the United States. If, during the term of this
Agreement, the TAP Agreement is terminated for any reason, Cephalon shall
immediately (and no later than ten [10] business days thereafter) inform Schwarz
Pharma and, provided that Cephalon does not decide to unilaterally assume all
responsibilities and costs of the US Program, then Cephalon shall grant Schwarz
Pharma an exclusive right, exercisable within ninety (90) days of Cephalon's
notification to Schwarz Pharma that the TAP agreement has terminated, upon the
payment of additional consideration to be negotiated in good faith, to share
responsibilities, costs and commercial opportunities, to be agreed upon, of the
US Program. In any event there shall be no such expansion of the Territory
hereunder unless Schwarz Pharma shall have, within ninety (90) days of said
notification to Schwarz Pharma, successfully negotiated additional terms and
conditions with Cephalon concerning said expansion. If in such negotiation
Schwarz Pharma receives exclusive commercialization rights in the United States
then the additional terms set forth below shall be included in any agreement for
territorial expansion:
(a) negotiation of additional reasonable terms giving due regard to the
stage of development of any Compounds in the US Program;
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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(b) deletion of all references hereunder to the US Program and to TAP;
(c) diligent conduct of a program for registration and commercialization
of Licensed Product in the US;
(d) payment to Cephalon of a transfer price in the amount of between [**]
percent [**] and [**] percent [**] of the annual Net Sales of such Licensed
Product(s) in the United States; and
(e) payment to Cephalon of the following additional milestone payments not
later than 30 days following completion of each milestone:
(i) [**] dollars [**] upon the submission of the first New Drug
Application ("NDA") for a Licensed Product in the United States; and
(ii) [**] dollars [**] upon the approval of the first NDA for a Licensed
Product in the United States.
If Schwarz Pharma and Cephalon fail to so reach agreement within such ninety-day
period, then Cephalon may discuss terms and conditions with third parties but
it shall not, within twelve (12) months of the expiration of the ninety (90) day
negotiation period, enter into any such agreement with a third party on terms
and conditions more favorable in the aggregate to such third party than those
offered to Schwarz Pharma without first offering such more favorable terms to
Schwarz Pharma in accordance with the procedures set forth herein.
Article 4. License fees, Transfer Pricing and Milestone Payments
4.1 Upfront License Fees and Fees for Option to License to Backup Compounds.
In consideration of Cephalon granting Schwarz Pharma the sublicense to the Kyowa
License to Kyowa Licensed Products (as set forth in Section 3.1) and in
consideration of Cephalon granting Schwarz Pharma the option to exercise an
exclusive license to the Backup Compounds (as set forth in Section 3.3), Schwarz
Pharma shall pay Cephalon (i) on the Effective Date, by wire transfer (or as
otherwise agreed upon by the Parties), an amount equal to [**] dollars [**]; and
(ii) on or before the first anniversary of the Effective Date, by wire transfer
(or as otherwise agreed upon by the Parties) an amount equal to [**] dollars
[**].
4.2 TRANSFER PRICING. Schwarz Pharma shall pay the following amounts to
Cephalon as transfer prices on Net Sales:
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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(a) Subject to Section 4.2(e), Schwarz Pharma shall pay to Cephalon (i) a
transfer price in the amount of [**] percent [**] of the annual Net Sales of
Kyowa Licensed Products in the Territory for all annual Net Sales less than [**]
dollars [**]; and (ii) a transfer price in the amount of [**] percent [**] of
the annual Net Sales of Kyowa Licensed Products in the Territory for all annual
Net Sales equal to or greater than [**] dollars [**].
(b) If Schwarz Pharma exercises its option in Section 3.3 to take an
exclusive license to Cephalon Licensed Products in the Territory, subject to
Section 4.2(e), Schwarz Pharma shall pay to Cephalon a transfer price in the
amount of [**] percent [**] of the annual Net Sales of Cephalon Licensed
Products in the Territory.
(c) Notwithstanding the provisions of Sections 4.2(a) and 4.2(b), while
the parties fully expect that the transfer pricing that Cephalon will charge
Schwarz Pharma hereunder for the supply of Licensed Products, which is dependent
upon the price for which Schwarz Pharma will be able to sell Licensed Products
in the Territory, is reasonable and will allow each Party to make an acceptable
return for their efforts, the Parties acknowledge and agree that because the
Licensed Products are still in development and the competitive situation in the
marketplace could change unexpectedly, the transfer pricing hereunder may result
in an undue hardship on one or both of the Parties. Therefore, the parties
agree that if the transfer pricing hereunder results in a situation where
Cephalon is unable to make a fair profit [**] on the sale of Licensed Products
to Schwarz Pharma, and/or in a situation where Schwarz Pharma is unable to make
a fair profit (transfer prices in the ranges set forth in Section 4.2(a), above,
as a percentage of annual Net Sales) on the sale of Licensed Products in the
Territory, the parties agree to renegotiate the transfer price terms in good
faith to allow each party to make an acceptable return.
(d) Schwarz Pharma shall maintain (and shall require its Affiliates,
sublicensees and third party marketers to maintain, if applicable) such records
as it creates in the ordinary course of its business of all sales of Licensed
Products pursuant to the licenses granted hereunder, for a period of not less
than five (5) years from the date of the applicable Net Sales. Cephalon shall
have the right, upon no less than two (2) weeks prior written notice to Schwarz
Pharma, and at its own expense and through a certified public accountant or like
person reasonably acceptable to Schwarz Pharma, to examine such records during
regular business hours during the life of this Agreement and for twelve (12)
months after the later of its termination or the last sale of Licensed Products
by Schwarz Pharma subject to the transfer pricing obligations outlined above;
provided, however, that such examination shall not take place more often than
once a year and shall not cover such records for more than the preceding five
(5) years and provided further that such certified public accountant shall be
subject to the confidentiality provisions of this
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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Agreement, shall not retain or make copies of any Schwarz Pharma records, and
shall report to Cephalon only as to the accuracy of said transfer price
statements and payments.
(e) Upon shipment of Licensed Products to Schwarz Pharma, Cephalon shall
immediately invoice Schwarz Pharma in the amount of a provisional transfer price
for the Licensed Products, which amount shall equal the transfer price as set
forth in Sections 4.2(a) and 4.2(b) based upon Schwarz Pharma's Net Sales during
the immediately preceding calendar quarter. With respect to shipments prior to
the first commercial sale of Licensed Products and during the first two calendar
quarters after such first commercial sale only, the provisional transfer price
shall be based upon Schwarz Pharma's best estimates in accordance with its most
recent sales forecasts. Within six (6) months after the first commercial sale
of said Licensed Products, Schwarz Pharma shall conduct an accounting to
determine the actual Net Sales for the first two calendar quarters, and Schwarz
Pharma shall pay to Cephalon within sixty (60) days any understated amounts, or
Cephalon shall pay to Schwarz Pharma any overstated amounts. Thereafter, within
sixty (60) days after the end of each calendar quarter during the pendency of
this Agreement, Schwarz Pharma shall deliver to Cephalon a true accounting of
all Licensed Products sold by Schwarz Pharma (and by its Affiliates,
sublicensees and third party marketers, if applicable) during such calendar
quarter and shall, at the same time, Schwarz Pharma shall pay all additional
transfer prices in excess of the current provisional transfer price due Cephalon
on the basis of the Net Sales attributable thereto or Cephalon shall, within
thirty days after receiving such accounting pay to Schwarz Pharma any
overpayment and the provisional transfer price shall be adjusted accordingly.
Such accounting shall show sales on a country-by country and Licensed Product-
by-Licensed Product basis, and such accounting shall state the Net Sales subject
to transfer pricing under this Article 4, the calculation of transfer pricing
with respect thereto, and shall separately show the calculation of all
adjustments thereto.
4.3 Milestone Payments.
(a) In consideration of the rights granted pursuant to this Agreement and
for so long as this Agreement has not been terminated, Schwarz Pharma shall pay
to Cephalon those amounts set forth below (subject to Section 4.3(b), Section
4.3(c) and Section 4.4 hereof) by wire transfer (or as otherwise agreed by the
parties) not later than thirty (30) days following the completion of the
milestones set forth below:
(i) [**]
(ii) [**]
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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(iii) [**]
(iv) [**]
(v) [**]
(b) For each of the milestones set forth in Sections 4.3(a)(i)- (v),
above, Cephalon shall receive payment for any one of the Lead Compound, CEP-751
or CEP-2563 which achieves the individual milestone, and any one of the Backup
Compounds which achieves the individual milestone, without regard to whether the
milestone is achieved in the US Program or the Development Program.
(c) With respect to unpaid milestones under 4.3 (a) (ii) and 4.3 (a) (iv)
relating to any Pivotal Trial(s) the design of which was not accepted in writing
by Schwarz Pharma, but for which Schwarz Pharma receives notice from the EMEA
accepting such MAA, such milestones shall be due and payable immediately (and no
later than thirty [30] days subsequent to the notice from the EMEA of the
validation of such MAA).
4.4 Credits Against Milestone Payments. Milestone payments made by Schwarz
Pharma under the terms of Section 4.3 hereof in connection with the Lead
Compound, CEP-751, CEP-2563 or a Backup Compound that subsequently "fails in
development" (as defined below), or for which Schwarz Pharma otherwise fails to
obtain approval of the applicable MAA, and is subsequently replaced by a Backup
Compound that is so designated by Schwarz Pharma for the same indication, shall
be credited against milestone payments for such Backup Compound. Failure in
development shall mean a) any failure to reach the defined success criteria in
the clinical program of the US Program or the Development Program with respect
to safety and/or efficacy, b) any failure to fulfill clinical or preclinical
regulatory requirements established by the EMEA; c) any failure to meet CMC
standards; and/or d) failure of the Compound to demonstrate a sufficient
competitive profile of safety, efficacy or price to support commercialization.
4.5 Development Budget Variances. Schwarz Pharma shall provide to Cephalon,
upon Cephalon's reasonable request, documentation that supports the expenses
incurred by Schwarz Pharma under the Development Budget. Cephalon shall have
the right, at its own expense and through a certified public accountant or like
person reasonably acceptable to Schwarz Pharma, to audit the records supporting
the Development Budget during regular business hours during the life of this
Agreement and for twelve (12) months after the later of its termination or the
last sale of Licensed Products by Schwarz Pharma. If Schwarz Pharma fails to
spend at least [**]of the
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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[**] dollar [**] Development Budget under the Development Plan, then Schwarz
Pharma agrees to pay Cephalon [**] percent [**] of the difference between [**]
dollars [**] and the actual amount Schwarz Pharma spends on the Development
Plan, but in no case more than [**] dollars [**], by the date of the first
commercial sale of Licensed Product. Such payment shall be made by Schwarz
Pharma to Cephalon on or before the date of the first anniversary of the first
commercial sale. If, based on European regulatory requirements or state-of-the-
art medical practice, Schwarz Pharma spends in excess of [**] of the [**] dollar
[**] Development Budget under the Development Plan, then Cephalon agrees to pay
Schwarz Pharma [**] percent [**] of the difference between [**] dollars [**] and
the actual amount Schwarz Pharma spends on the Development Plan, but in no case
more than [**] dollars [**], by the date of the first commercial sale of
Licensed Product, provided, however, that in no event shall Schwarz Pharma
charge any costs to the Development Budget to the extent that such costs were
incurred by Schwarz Pharma because of Schwarz Pharma's gross negligence in the
conduct of the Development Program. Such payment shall be made either as direct
payment or credits against Schwarz Pharma milestone payments, at Schwarz
Pharma's option.
4.6 Taxes. If Schwarz Pharma is required by law to withhold any taxes or
other governmental obligations from the milestone or transfer price obligations
to be paid to Cephalon under the terms of this Article 4, then Schwarz Pharma
shall provide notice to Cephalon of any such requirement. In such event,
Schwarz Pharma may withhold and pay such taxes or obligations on behalf of
Cephalon, provided that Schwarz Pharma sends to Cephalon original receipts of
such payments (or if it is not possible to obtain an original receipt, other
official written confirmation thereof).
4.7 Payments
(a) Currency: All payments due under this agreement shall be payable in
--------
U.S. dollars. Any conversion of Net Sales from local currencies shall be made
at the average rate prevailing for the applicable calendar quarter as published
in The Wall Street Journal.
(b) Other Payments: Cephalon shall invoice Schwarz Pharma for any
--------------
incremental At Cost expenses in the US Program incurred by or on behalf of
Cephalon at Schwarz Pharma's request for support of the Development Program in
the Territory, and such incremental expenses shall be due and payable within
sixty (60) days of invoicing.
(c) Late Payments: Each party agrees to pay interest at the lower of the
-------------
rate of i) one percent (1%) per month compounded daily, or ii) the highest rate
allowable under applicable law, accruing from the due date of such payment, on
any payment due to the other party which is
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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more than thirty (30) days overdue.
Article 5. Regulatory Matters
5.1 Regulatory Approvals. Schwarz Pharma shall be responsible for obtaining
and shall own all necessary regulatory and marketing approvals for the use and
sale of Licensed Products in the Territory, unless otherwise agreed to by the
Parties.
5.2 Diligence in Regulatory Submissions and Product Launch. Schwarz Pharma
agrees to prepare and file MAAs for Licensed Products in the Territory using
resources as if said Licensed Products were of Schwarz Pharma origin and have
the same commercial potential. Unless otherwise agreed upon by the Parties,
Schwarz Pharma agrees to file a MAA with the EMEA (or with a regulatory
authority in one of the following countries: [**] within [**] following
successful completion of the Development Program (including all related
activities) for any Kyowa Licensed Products and Cephalon Licensed Products, and
to launch such Licensed Products in the Territory as soon as practicable
following the date of marketing (and, if applicable, pricing and reimbursement)
approval in each country in the Territory, and in a manner at least consistent
with the launch of other products having the same or similar commercial
potential that are marketed and sold by Schwarz Pharma in such country.
Notwithstanding anything to the contrary in this Section 5.2, Schwarz Pharma
agrees to use Reasonable Business Efforts to:
(a) launch the first clinical study(ies) in the Territory within [**] of
the Effective Date of this Agreement and the fulfillment of all applicable
requirements of a competent regulatory authority in the Territory and in
accordance with the Development Plan;
(b) complete the analysis and report on the first proof-of-principle
clinical study(ies) in the Territory within [**] of the Effective Date;
(c) initiate the first Pivotal Trial within [**] of the Effective Date; and
(d) file a MAA with the EMEA (or with a regulatory authority in one of the
following countries: [**] within [**] after the filing by or on behalf of
Cephalon of a NDA with the US Food and Drug Administration for any Licensed
Products, provided that the US NDA filing meets EMEA regulatory requirements, or
otherwise within [**] after completion by Schwarz Pharma of the Pivotal Trial(s)
required to support an EMEA filing.
5.3 Cooperation. Both Parties hereby agree to: (i) cooperate with each other
and render
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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assistance in connection with the filing of a MAA (or other application for
regulatory approval) with any governmental authority or agency which may be
required, whether in or outside the Territory, to obtain approval to market
Licensed Products or to obtain pricing and reimbursement approval; and (ii)
execute documents, and provide a letter of authorization or other documentation
to the appropriate regulatory authorities or to any other governmental authority
or agency, as necessary or advisable, to enable either Party to file, refer to
or incorporate by reference all technical information including data on file
with any such agency or authority concerning Licensed Products that may be
contained in a drug master file or otherwise. In the event that any such drug
master file is supplemented or modified, each Party agrees to notify the other
Party promptly that supplements or modifications have been made.
5.4 Product Recalls. If (i) any governmental or regulatory authority issues a
request, directive, or order that any Licensed Product be recalled or withdrawn
from the market, (ii) a court of competent jurisdiction in a final,
nonappealable judgment orders a recall or withdrawal of any Licensed Product, or
(iii) following discussion between the Parties, and giving due consideration to
the views of the other Party, the Party holding the MAA (or analogous marketing
application outside the Territory) for the applicable Licensed Product
determines in its sole discretion that said Licensed Product should be recalled
or withdrawn from one or more countries within its respective territory, then
the Parties together shall take all appropriate corrective actions to effect the
recall or withdrawal. The costs and expenses of notification and destruction or
return of the recalled or withdrawn Licensed Product in the Territory shall be
borne by Schwarz Pharma, provided, however, that in the case of recalls due to
latent defects in a manufacturing lot of Licensed Products which Schwarz Pharma
would not have been reasonably able to detect and reject, Cephalon shall bear
such costs and expenses.
Article 6. Manufacture and Supply of Compounds and Licensed Products
6.1 Supply AgreementS.
(a) Definitive Supply Agreements. The Parties agree to negotiate in good
faith the terms of a definitive supply agreement with regard to pre-commercial
and commercial supply of Compounds (and their associated Licensed Products)
under which Cephalon will manufacture and supply Compounds and Licensed Products
to Schwarz Pharma, which supply agreement shall contain terms and conditions
customary in the industry, including without limitation those relating to GMP
compliance, compliance with product specifications, quality control, records,
storage, inspection, product delivery and acceptance, lead times, firm orders,
forecasts, quantity, inventory requirements, and assurance of supply [**], and
audit rights in favor of Schwarz Pharma. The supply agreement will provide that
Schwarz Pharma shall purchase exclusively
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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from Cephalon all of Schwarz Pharma's requirements for Licensed Products during
the term of this Agreement and such supply agreement shall have a term not less
than the term of this Agreement . Schwarz Pharma will be responsible for
packaging and labeling the finished dosage form Licensed Products to be marketed
and sold in the Territory. Schwarz Pharma shall provide to Cephalon samples of
the label, package insert, packaging, advertising and promotional materials for
each Licensed Product, and Cephalon shall, if it has any concerns regarding
compliance of such samples with applicable law as such law relates to Cephalon's
responsibilities as a manufacturer, it shall notify Schwarz Pharma within thirty
(30) days after receipt of the samples.
(b) Preclinical and Clinical Supply. Until the definitive supply agreement
described in Section 6.1(a) has been executed by the parties, Cephalon agrees to
use its Reasonable Business Efforts to supply Schwarz Pharma and Schwarz Pharma
agrees to purchase from Cephalon sufficient quantities of preclinical and
clinical supplies of GMP quality Compounds in order to permit Schwarz Pharma to
conduct the Development Program hereunder. Schwarz Pharma acknowledges that
Cephalon may engage new third party manufacturers (other than those in existence
as of the Effective Date), subject to the prior written approval of Schwarz
Pharma not to be unreasonably withheld or delayed, to produce the Compounds.
Schwarz Pharma shall purchase exclusively from Cephalon all of Schwarz Pharma's
requirements for Compounds during the term of this Agreement. Cephalon shall
provide pre-clinical and clinical supply At Cost. All such supplies shall be
provided in finished dosage form, packaged in bulk containers, ready for final
packaging and labeling. Cephalon shall use its Reasonable Business Efforts to
provide Phase III clinical supplies that either i) consist of final drug product
in the dosage form specified by Schwarz Pharma to be utilized in its applicable
regulatory filing, or, ii) consist of supplies that are bioequivalent to the
final commercial dosage form, provided, however, that if such Phase III clinical
supplies do not consist of final drug product, then Cephalon shall bear any
additional development costs which may be incurred as a result. Cephalon shall
be responsible for timely compliance with all CMC requirements in the Territory,
including, without limitation, development and manufacturing of drug substance
and drug product and qualification and maintenance of manufacturing facilities.
(c) Commercial Supply. Cephalon agrees to use its Reasonable Business
Efforts to supply Schwarz Pharma and Schwarz Pharma agrees to purchase from
Cephalon sufficient quantities of commercial supplies of GMP quality finished
dosage form Licensed Products in the Territory, to be packaged in bulk
containers. Schwarz Pharma acknowledges that Cephalon has engaged and may
engage additional third party manufacturers to produce bulk drug substance
and/or finished dosage form. Schwarz Pharma shall pay Cephalon a transfer price
for finished dosage form as described in Section 4.2. Such finished dosage form
shall in all cases be
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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provided in a product format specified by Schwarz Pharma to meet then current
European regulatory requirements specified by the EMEA. Schwarz Pharma shall
purchase exclusively from Cephalon all of Schwarz Pharma's requirements for the
Licensed Products during the term of this Agreement. Schwarz Pharma hereby
grants to Cephalon a right of first negotiation to obtain from Schwarz Pharma
the right to supply Schwarz Pharma with Licensed Products after the expiration
of the term of this Agreement. In the event Schwarz Pharma requires supply of
Licensed Products after the termination of this Agreement, then not less than
[**] prior to the expiration or termination of this Agreement and prior to
negotiating with any third party manufacturer, or manufacturing itself, Schwarz
Pharma shall notify Cephalon of its supply requirements. Cephalon shall have
thirty (30) days thereafter to notify Schwarz Pharma in writing that it is
interested in supplying Schwarz Pharma. If Cephalon so notifies Schwarz Pharma
then the parties shall proceed in good faith to negotiate a supply agreement for
Licensed Products. If Cephalon notifies Schwarz Pharma that it is not interested
in such a supply arrangement, or fails to notify Schwarz Pharma within such
thirty-day period, or fails to reach agreement with Schwarz Pharma on the terms
of such supply arrangement within ninety (90) days after such notification, then
Schwarz Pharma shall be free to negotiate with any third party for supply. In
the event that Cephalon determines to directly manufacture Licensed Products, or
to contract with a new or additional third party manufacturer for supplies of
Licensed Product at any time, then, if that Licensed Product is either currently
under development or being commercialized by Schwarz Pharma, Cephalon shall
promptly notify Schwarz Pharma and, upon the request of Schwarz Pharma, the
parties shall discuss the possibility of Cephalon granting manufacturing rights
to Schwarz Pharma to make Licensed Product for sale in the Territory.
Article 7. Marketing, Promotion and Sale of Product
7.1 MARKETING. Schwarz Pharma agrees to use its Reasonable Business Efforts
to promote the sale of Kyowa Licensed Products and Cephalon Licensed Products in
the Territory and to maximize the Net Sales thereof. In connection with these
efforts, Schwarz Pharma shall regularly prepare and update a commercialization
plan (the "Marketing Plan") for review by Cephalon not less than once per
calendar year following the filing of the first MAA, which Marketing Plan will
set forth the Licensed Product marketing and selling strategies, and will
include an estimated promotional budget, detailing objectives, planned training
and educational programs for its sales force, upcoming symposia, seminars and
professional relations events in the Territory, and other matters appropriate
and customary in the industry for such a Marketing Plan, all of which shall give
due consideration to the experience and perspective of Cephalon with respect to
optimal marketing and selling practices in the Territory. With respect to
Licensed Products, Schwarz Pharma agrees to provide that level of sales and
promotional support which is, in the aggregate, at a level comparable to that
incurred in the industry for pharmaceutical
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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products of comparable market potential. All Know-How resulting from
implementation of the Marketing Plan will be owned by Schwarz Pharma and made
available to Cephalon as set forth in Article 8 Notwithstanding Cephalon's
review of the Marketing Plan, Schwarz Pharma shall have the final authority to
determine product positioning, pricing [subject to Section 4.2(c)] and all other
marketing and promotional issues, expenditures and activities. If Schwarz Pharma
determines in good faith that it would not be in the mutual best interests of
the Parties for it to commence (or to continue, as the case may be) marketing
and selling Kyowa Licensed Products or Cephalon Licensed Products in any given
country in the Territory for which it has received marketing approval, then it
will promptly notify Cephalon of such determination and the Parties will discuss
appropriate resolution, which may include the forfeiture of territorial rights
in such countries to Cephalon under terms and conditions to be mutually agreed
upon; provided however, that Schwarz Pharma shall be deemed to be marketing and
selling the applicable Licensed Product in all countries of the European Union
if it is marketing and selling said Licensed Product in each of the following
countries: [**].
7.2 Compliance. Schwarz Pharma shall have obtained and shall maintain in
good standing all required permits, licenses and regulatory approvals necessary
or advisable to market, promote, sell and distribute Licensed Products in the
Territory. Schwarz Pharma shall comply with all local laws, rules, regulations,
and reporting requirements in force in the Territory covering, among other
things, the marketing, promotion and sale, and the payment for, the Licensed
Products.
7.3 Sale of Product. Prior to filing the initial MAA for a Licensed Product in
the Territory, Schwarz Pharma will provide to Cephalon in writing its good faith
non-binding forecast of aggregate Net Sales to be obtained in the Territory for
at least the first three calendar years after the first commercial sale
hereunder, and thereafter shall provide to Cephalon its sales forecasts for such
Licensed Product as generated in the ordinary course of its business ("Annual
Sales Forecasts"). In the event that a Licensed Product has more than one
indication, the Annual Sales Forecasts may include separate minimum Annual Sales
Forecasts for each Licensed Product indication. If, despite its Reasonable
Business Efforts, Schwarz Pharma fails to meet its most recent Annual Sales
Forecasts , then the Parties shall meet to discuss whether such shortfall is due
principally to market conditions beyond the control of Schwarz Pharma, or
whether certain marketing and sales initiatives or other actions should be
taken.
Article 8. Rights to Data and Regulatory Compliance
8.1 Sharing of Data. Subject to the license grants set forth in Article 3,
the Parties shall provide to each other and have reciprocal rights to use, in
connection with the development and
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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commercialization of Compounds, all Know-How generated either by or for either
Party, or jointly by or for the Parties, under the Development Program or the US
Program in each of its respective territories. Such Know-How may be used by
Cephalon inside or outside the Territory and inside or outside the Field subject
to the rights of Schwarz Pharma to use all such Know-How set forth herein.
Schwarz Pharma agrees to use Cephalon's Know-How and any other Know-How, to the
extent such Know-How is directly related to Compounds or Licensed Products,
solely for the development of Compounds within the Field and the
commercialization of Licensed Products within the Territory . The Parties shall
agree on a format to be used to enable the Parties to have prompt, electronic
access to all data generated (whether generated jointly or by or on behalf of
either Party separately), subject to appropriate electronic encryption and other
confidentiality requirements to preserve the integrity of each party's
proprietary data.
8.2 Adverse Drug Events. The Parties hereby agree that, not later than sixty
(60) days after the Effective Date, they will establish procedures for the
handling and reporting of adverse events ("AEs"), and that such procedures
shall require that the Parties inform each other in an appropriate and efficient
manner of any such AEs with respect to Compounds and the Licensed Products,
taking into account those procedures used regularly by the Parties and those
requirements of the EMEA, the FDA and other relevant regulatory authorities.
Details of the AE exchange with respect to e.g. form, content, timelines, etc.
will be agreed and documented by the Parties respective drug safety departments.
Notwithstanding the above, Cephalon shall be allowed to retain copies in
electronic or other formats of all information relating to adverse drug events
for any Compound recorded in the Development Program and in the US Program.
8.3 Notice of Governmental Action. During the term of this Agreement, each
Party further agrees to immediately notify the other Party about any information
such Party received regarding any threatened or pending action by a governmental
agency which may involve the safety and efficacy claims of Compounds or Licensed
Products or the continued clinical testing or marketing thereof. Upon receipt
of any such information, Cephalon shall consult with Schwarz Pharma in an effort
to arrive at a mutually acceptable procedure for taking appropriate action;
provided, however, that nothing contained herein shall be construed as
restricting the right of either Party to make a timely report of such matter to
any government agency or take other action that it deems to be appropriate or
required by applicable law or regulation.
Article 9. Limited Liability
OTHER THAN THOSE WARRANTIES SET FORTH IN SECTION 16 BELOW, CEPHALON MAKES NO
WARRANTY (EXPRESS OR IMPLIED) AS TO THE
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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COMPOUNDS OR THE LICENSED PRODUCTS. EXCEPT AS OTHERWISE PROVIDED HEREIN, THE
SOLE AND EXCLUSIVE REMEDY OF SCHWARZ PHARMA FOR ANY LIABILITY OF ANY KIND,
INCLUDING LIABILITY BASED ON WARRANTY FOR COMPOUND SUPPLIED TO SCHWARZ PHARMA BY
CEPHALON (EXPRESS OR IMPLIED, WHETHER CONTAINED HEREIN OR ELSEWHERE),
NEGLIGENCE, STRICT LIABILITY, CONTRACT OR OTHERWISE IS LIMITED TO THE
REPLACEMENT OF COMPOUND OR LICENSED PRODUCT (AS THE CASE MAY BE) OR THE REFUND
OF THE SUPPLY PRICE THERFOR. CEPHALON SHALL IN NO CASE BE LIABLE FOR SPECIAL,
INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING LOST PROFITS.
Article 10. Trademark for Licensed Products
10.1 Selection of Trademarks. The Parties acknowledge that it may be in their
mutual best interests to attempt to develop a single trademark for use within
and outside the Territory for a given Licensed Product, and agree to discuss the
choice and selection of the trademark at an appropriate time prior to commercial
launch. Any single trademark for use within the Territory and within the United
States for a given Licensed Product shall be made in accordance with Section 4.3
of the TAP Agreement. In the event that such trademark is licensed by TAP to
Cephalon, then Cephalon shall grant to Schwarz Pharma a royalty-free, exclusive
sublicense to such trademark for use with the Licensed Products in the
Territory for the term of this Agreement. All other such trademarks in the
Territory shall be owned by, and registered in the name of Schwarz Pharma.
Cephalon agrees that Cephalon will select for its own marketed products
trademarks not confusingly similar to the trademarks chosen for the Licensed
Products.
Article 11. Inventions
11.1 Disclosure of Inventions. During the pendency of this Agreement, the
Parties agree to disclose to each other any and all inventions, discoveries and
improvements that may be conceived, reduced to practice, or made by either Party
while engaged in the performance of this Agreement and that are within the scope
of the licenses granted under Article 3 hereof,]whether patentable or
unpatentable including without limitation any new compositions, formulations,
uses, dosages, methods of formulating, processes, methods of manufacture or the
administration thereof (collectively, "Improvements"). The Parties further
agree to exchange any Know-How related to or covered by the Improvements that is
reasonably necessary in order to utilize such Improvements.
11.2 Inventorship. Inventorship and ownership with respect to all patentable
Improvements
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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shall be determined in accordance with U.S. patent law.
11.3 Ownership. All Improvements to the extent directly related to the
Compounds, whether discovered or developed by Cephalon, by Schwarz Pharma or
jointly by Cephalon and Schwarz Pharma in collaboration hereunder, shall be
owned by Cephalon. Cephalon shall grant Schwarz Pharma an option for an
exclusive, royalty-free license to use and sell such Improvements in the
Territory, but only to use and sell Compounds in the Field or Licensed Products
in the Territory. All Improvements discovered or developed solely by Schwarz
Pharma during the performance of this Agreement to the extent that they are not
directly related to the Compounds, shall be owned by Schwarz Pharma. Schwarz
Pharma shall grant Cephalon an option for an exclusive, royalty-free license to
such Improvements outside the Territory , but only to make, have made, use and
sell Compounds or Licensed Products outside the Territory. All Improvements
discovered or developed jointly by Cephalon and Schwarz Pharma during the
performance of this Agreement that are not directly related to the Compounds,
shall be owned jointly by Cephalon and Schwarz Pharma. Each party shall grant
to the other party an option for an exclusive, royalty-free license to such
jointly owned Improvements that are not directly related to the Compounds,
outside the Territory as to Cephalon, and in the Territory as to Schwarz Pharma,
but in each case only to make, have made, use and sell Compounds and Licensed
Products.
Article 12. Patent Rights. Each Party, at its own expense, shall prepare, file,
prosecute and maintain all patents and patent applications for Improvements that
it owns. Each Party shall keep the other Party fully advised of the status of
all such patents and patent applications. In addition, each party shall make
Reasonable Business Efforts to send the other Party advance drafts of any papers
to be filed relating to such patents and patent applications and shall consider
the suggestions of the other Party and its patent counsel with respect to the
prosecution and maintenance of such patents and patent applications. If a Party
fails to prepare, file, prosecute or maintain such patents and patent
applications as required by this Agreement, it shall immediately notify the
other Party and the other Party shall have the right to assume responsibility
and control at its own expense for said preparation, filing, prosecution and
maintenance of such patents and patent applications in the name and on the
account of the original party. Each Party shall cooperate reasonably with the
other upon request in promptly executing any and all such patent applications,
or other instruments deemed necessary or useful by either or both Parties in
connection with the application prosecution or maintenance of such patents or
patent applications.
Cephalon, at its own expense, shall prepare, file, prosecute and maintain
all Patent Rights for Cephalon Technology in the Territory. Cephalon shall keep
Schwarz Pharma fully advised of
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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the status of all Patent Rights. In addition, Cephalon shall make commercially
reasonable efforts to send Schwarz Pharma advance drafts of any papers to be
filed relating to Patent Rights in the Territory and shall consider the
suggestions of Schwarz Pharma and its patent counsel with respect to the
prosecution and maintenance of Patent Rights in the Territory. If Cephalon fails
to prepare, file, prosecute or maintain Patent Rights in the Territory as
required by this Agreement, it shall immediately notify Schwarz Pharma and then
Schwarz Pharma shall have the right to assume responsibility and control at its
own expense for said preparation, filing, prosecution and maintenance of any
such Patent Rights in the name and on the account of Cephalon. Each Party shall
cooperate reasonably with the other upon request in promptly executing any and
all patent applications, or other instruments deemed necessary or useful by
either or both Parties in connection with the application, prosecution or
maintenance of Patent Rights in the Territory.
Article 13. Infringement
13.1 Notice Regarding and Authority to Take Action Against Infringers. Each
Party shall promptly notify the other Party of any identified infringement by
third parties of the proprietary rights of either Party with regard to Compounds
and Licensed Products. If any of the Patent Rights are infringed in the any of
the following countries[**], then Cephalon shall have the obligation to
commence appropriate legal action to enjoin such infringement at its sole
expense, and Schwarz Pharma shall provide its complete cooperation to Cephalon
in doing so, at Schwarz Pharma's expense. If any of the Patent Rights are
infringed in any of the remaining countries in the Territory, Cephalon shall
have the right but not the obligation to commence appropriate legal action to
enjoin such infringement at its sole expense, and Schwarz Pharma shall provide
its complete cooperation to Cephalon in doing so, at Schwarz Pharma's expense.
If, in the latter case, Cephalon fails to initiate such action within ninety
(90) days after being notified of the infringement, Schwarz Pharma shall have
the right, but not the obligation, to undertake such action at its own expense,
in the name of Cephalon, and Cephalon agrees to provide its complete
cooperation to Schwarz Pharma, at Cephalon's expense. Any damages or awards
resulting from the prosecution of such claim shall be applied first, to
reimburse the parties pro-rata for their costs and expenses, with any balance to
be shared by the Parties in proportion to their respective economic losses from
such infringement. Notwithstanding the foregoing, the Parties acknowledge that
the Kyowa License, which is attached hereto as Exhibit D, establishes all
applicable procedures and responsibilities for enforcement of rights relating to
the Kyowa Technology.
13.2 Notice of Infringement of Third Party Proprietary Rights. Each Party shall
promptly notify the other Party of any notification received or claim against it
asserting infringement of third party proprietary rights by Licensed Products,
Compounds, Know-How or Improvements.
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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13.3 Infringement of Third Party Proprietary Rights. If a claim alleging
infringement of third party proprietary rights in the Territory is made against
Schwarz Pharma, then Cephalon may elect to defend against such a claim on behalf
of Schwarz Pharma at the cost and expense (including, without limitation,
attorneys fees) of Cephalon, but Schwarz Pharma may be represented in such event
by legal counsel in an advisory capacity at its own expense. However, if
Cephalon does not elect to defend against such a claim within one hundred twenty
(120) days after receiving notice (whether from Schwarz Pharma or otherwise) of
such claim, Schwarz Pharma has the right, but not the obligation, to defend
against such claim at its own expense. The Party assuming said defense shall
keep the other Party informed of the status of the case. If the Party assuming
said defense determines to file a counterclaim against the third party claiming
infringement, and subsequently prevails in obtaining damages or awards, then
such award or damages shall be divided on the same basis as set forth in Section
13.1, above. Regardless of which Party assumes the defense of any such claim,
if damages are awarded based upon said claim, then the Parties shall allocate
the responsibility for paying said damages in proportion to their respective
economic interests in the country or countries within the Territory as to which
such damage award is based. Notwithstanding the foregoing, the Parties
acknowledge that the Kyowa License, which is attached hereto as Exhibit D,
establishes all applicable procedures and responsibilities for the defense of
infringement claims raised with respect to Kyowa Licensed Products.
Article 14. Term and Termination
14.1 Term of the Agreement. This Agreement shall commence as of the Effective
Date, and will terminate by mutual agreement of the Parties, or otherwise in
accordance with the provisions of this Article 14. The parties obligations with
respect to Sections 4.2 and 4.6 and Article 6 shall expire upon the last to
occur of (i) the expiration date of the last to expire of Valid Claims of Patent
Rights to any Licensed Product; (ii) the end of any period of market exclusivity
under any MAA for any Licensed Product (or under the terms of applicable laws
and regulations); or (iii) that date which is the tenth (10th) anniversary of
the first commercial sale of a Licensed Product by Schwarz Pharma in the
Territory.
14.2 Termination of Development Program for a Compound. All rights to any
Compounds for which development has been discontinued in its entirety by Schwarz
Pharma, including any rights of use to Kyowa Technology and Cephalon Technology
related to such Compound, automatically shall revert to Cephalon, subject to the
terms of this Agreement..
14.3 Termination for Breach by Either Party. Upon breach of any material
provision of
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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this Agreement, the breaching Party will be given written notice and ninety (90)
days within which to remedy such breach. Failure to remedy any such breach
within this time period (or if the breach is not capable of remedy in such time
period, to undertake continuous and diligent efforts to remedy such breach) will
constitute sufficient grounds for termination by the other Party without any
further notice. Upon termination of this Agreement due to unremedied breach by
either Party, the breaching Party shall have no liability to the other Party (or
to any third party)for any damages, losses, indemnity, compensation, costs or
expenses of any kind for lost profits or prospective sales, investments made or
expenses incurred in connection with the establishment, development or
maintenance of its business, markets or customers, fees for transferring
Compounds, product registrations, or any similar claims, damages, fees or
payments.
14.4 Termination by Schwarz Pharma. Schwarz Pharma shall have the right to
terminate this Agreement at any time upon no less than (i) six (6) months prior
written notice to Cephalon up until commercial launch of the first Licensed
Product in the Territory or upon (ii) twelve (12) months prior written notice to
Cephalon at any time thereafter.
14.5 Termination for Product Failure. Either Party shall have the right to
terminate this Agreement with respect to a particular Compound or Licensed
Product upon thirty (30) days written notice if nonclinical or clinical evidence
about that Licensed Product demonstrates a sufficiently serious adverse
risk/benefit profile that further development or commercialization of such
Compound or Licensed Products permanently suspended a regulatory authority or
other authority of competent jurisdiction in any Major Country of the Territory.
14.6 Effects of Termination. Upon termination of this Agreement due to
unremedied breach by Schwarz Pharma, unilateral termination by Schwarz Pharma,
or upon termination of this Agreement by the mutual agreement of the Parties,
the following provisions shall apply:
(a) Schwarz Pharma acknowledges that except as provided herein, upon any
such termination it shall have no further rights with respect to the Cephalon
Technology, the Kyowa Technology, the Compounds and the Licensed Products. All
rights granted to Schwarz Pharma under this Agreement shall immediately revert
to Cephalon, except as provided below, and Schwarz Pharma shall immediately
cease its use of Cephalon Technology and Kyowa Technology. To the extent
necessary or advisable, at the request of Cephalon Schwarz Pharma immediately
will grant to Cephalon a perpetual, exclusive (exclusive even as to Schwarz
Pharma), fully-paid, royalty-free license under any Patent Rights, Know-How,
Improvements, trademarks or any other proprietary rights whatsoever held by
Schwarz Pharma necessary to enable Cephalon to make, have made, use and sell
Licensed Products in the Territory, and Schwarz Pharma will execute any
documents necessary to facilitate the intent of this paragraph;
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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(b) Any outstanding unpaid invoices shall become due and payable
immediately in lieu of any payment terms previously agreed upon by the Parties;
(c) Schwarz Pharma shall cease use of all Compounds in the Territory, and
shall cease all marketing, sales and distribution of Licensed Products in the
Territory; provided, however, that Schwarz Pharma shall have the right to sell
in accordance with the terms of this Agreement all unsold inventories of any
such Licensed Products in its possession unless Cephalon, at its sole
discretion, shall exercise the option, by written notice to Schwarz Pharma on or
before the effective date of such expiration or termination, to repurchase all
remaining inventory then held by Schwarz Pharma at a purchase price equal to the
cost of Products of such inventory; and
(d) Schwarz Pharma will provide Cephalon with all copies of any MAA (or its
equivalent outside the Territory) for Compounds or Licensed Product and any
accompanying documentation (including without limitation all regulatory agency
correspondence) in its possession or, if such registration application has not
yet been filed in the Territory prior to the date of said termination or
expiration, with all Know-How relating to all Compounds in its possession on
such date. At the request of Cephalon, Schwarz Pharma shall take all steps as
may be required by applicable law to transfer any such registration for
Licensed Products to Cephalon, or otherwise to enable Cephalon to market and
sell Licensed Products in the Territory, and also shall provide full support
to Cephalon to facilitate the prompt execution of such legal transfer. In no
event shall Cephalon be obligated to pay any fee or to make any other payment to
Schwarz Pharma, to the local government in the Territory, or to any third party,
to effect such legal transfer. Except for termination due to unremedied breach
by Schwarz Pharma, the costs incurred in connection with such transfer or
enabling activities shall be shared equally between Schwarz Pharma and Cephalon.
14.7 Bankruptcy. All rights and licenses granted under or pursuant to this
Agreement by Cephalon to Schwarz Pharma, or by Schwarz Pharma to Cephalon are,
and shall otherwise be deemed to be, for purposes of Section 365(n) of the
Bankruptcy Code, licenses of rights to "intellectual property" as defined under
Section 101(52) of the Bankruptcy Code. The parties agree that each of them, as
licensees of such rights under this Agreement, shall retain and may fully
exercise all of its rights and elections under the Bankruptcy Code. The parties
further agree that, in the event of the commencement of a bankruptcy proceeding
by or against either party under the Bankruptcy Code, the party not in
bankruptcy shall be entitled to a complete duplicate of, or complete access to,
as appropriate, any such intellectual property and all embodiments of such
intellectual property, and same, if not already in its possession, shall be
promptly delivered to such party not in bankruptcy (i) upon any such
commencement of a bankruptcy proceeding
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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upon written request therefore by the party not in bankruptcy , unless the party
in bankruptcy elects to continue to perform all of its obligations under this
Agreement, or (ii) if not delivered under (i) above, upon the rejection of this
Agreement by or on behalf of the party in bankruptcy upon written request
therefore by the party not in bankruptcy
14.9 Survival of Obligations. All terms and conditions of this Agreement
which the Parties intend to survive the expiration or termination hereof shall
so survive, and shall include without limitation, those terms and conditions
relating to confidentiality, indemnification, intellectual property rights
generally, and rights to payment. More specifically, the termination of this
Agreement shall not relieve the Parties of any obligations accruing prior to
such termination, and any such termination shall be without prejudice to the
rights of either Party against the other, including without limitation the
obligation to pay for Compounds purchased, or transfer prices for Licensed
Products sold prior to said termination.
Article 15. Confidentiality.
15.1 Confidential Information. During the term of this Agreement, and for ten
(10) years after its termination or expiration, each Party shall maintain in
confidence any information concerning the subject matter hereof provided by the
other Party (the "Providing Party"), and that is considered to be confidential
by the Providing Party, regardless of whether provided prior to or after the
Effective Date. Such information, collectively the "Confidential Information"
shall be in writing and includes but is not limited to Know-How, Patent Rights,
Improvements, Cephalon Technology and Kyowa Technology, documentation, business
plans, cost and operational information, whether or not related to Compounds or
Licensed Products. Confidential Information shall not be used or disclosed to
others except for carrying out the purpose of this Agreement. The foregoing
obligation of confidentiality shall not apply to any portion of the Confidential
Information that a Party ("Receiving Party") can demonstrate by written
documentation:
(a) was already known to the Receiving Party;
(b) was generally available to the public or otherwise part of the public
domain at the time of its disclosure;
(c) became generally available to the public or otherwise part of the
public domain after its disclosure to the Receiving Party, other than through
any act or omission of the Receiving Party in breach of this Agreement;
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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(d) was subsequently lawfully disclosed to the Receiving Party by a third
party; or
(e) the Receiving Party was compelled to disclose by governmental
administrative agency or judicial requirements; provided however, that any
disclosure under this subsection 15.1(e) shall neither relieve the Receiving
Party from attempting to impose confidentiality obligations on the governmental
administrative agency or judicial body, to the extent feasible, nor shall it
relieve the Receiving Party from maintaining the confidentiality of the
Confidential Information with respect to third parties other than the agency or
body as to which such compelled disclosure has been made.
15.2 Protection of Confidential Information. The Parties shall take all
reasonable steps to eliminate the risk of disclosure of Confidential
Information, including, without limitation, ensuring that only employees,
agents, consultants, and representatives with a need to know the Confidential
Information have access thereto. The Parties acknowledge by the signing of this
Agreement that such employees, agents, and representatives are to be bound by
substantially similar obligations of confidentiality as are established under
this Article 15.
15.3 Presumptive Confidentiality of Information Exchanged. All information
exchanged by the Parties under the terms and conditions of this Agreement shall
be considered Confidential Information and treated as such unless otherwise
specified and agreed upon by the Parties.
15.4 Use for Development Purposes and Following Termination For Breach. During
the term of this Agreement or in the event that this Agreement is terminated for
breach under the terms of Article 14, nothing herein shall be construed so as to
preclude a party (during the Agreement term) or the non-breaching Party (after
termination) from disclosing to a competent regulatory authority or to a third
party, under appropriate confidentiality provisions, any, Know-How,
Improvements or other Confidential Information, that it may deem necessary or
advisable in order to support the further development or commercialization of
Compounds or Licensed Products.
Article 16. Representations, Warranties and Covenants
16.1 General Representations. Each Party hereby represents and warrants to the
other as follows:
(a) Duly Organized. It is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation, is
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction in which the conduct of its business or
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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the ownership of its properties requires such qualification and has all
requisite power and authority, corporate or otherwise, to conduct its business
as now being conducted, to own, lease and operate its properties and to execute,
deliver and perform this Agreement;
(b) Due Execution. The execution, delivery and performance by it of this
Agreement have been duly authorized by all necessary corporate action and do not
and will not (i) require any consent or approval of its stockholders, (ii)
violate any provision of any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to it or any provision of its charter or by-laws, or (iii) result
in a breach of or constitute a default under any agreement, mortgage, lease,
license, permit, patent or other instrument or obligation to which it is a Party
or by which it or its assets may be bound or affected;
(c) No Third Party Approval. No authorization, consent, approval, license,
exemption of, or filing or registration with, any court or governmental
authority or regulatory body is required for the due execution, delivery or
performance by it of this Agreement;
(d) Binding Agreement. This Agreement is a legal, valid and binding
obligation of such Party, enforceable against it in accordance with its terms
and conditions, except as may be limited by bankruptcy laws or other laws
affecting the rights of creditors generally, and rules of law governing
equitable remedies. Each is not under any obligation to any person, contractual
or otherwise, that is conflicting or inconsistent in any respect with the terms
of this Agreement or that would impede the diligent and complete fulfillment of
its obligations hereunder;
(e) Inventions. It will take all steps reasonably necessary to ensure that
its employees, agents, consultants and representatives convey to it all rights
in and to any and all Improvements, trademark rights or any other proprietary
rights that may be conceived or reduced to practice by said employees, agents,
consultants and representatives;
(f) Debarment. It is not debarred or suspended from receiving contracts
from the United States or German government or other governmental authority or
agency;
(g) Full Disclosure. It has disclosed in good faith any and all material
information related to the subject matter hereof and to the performance of its
obligations hereunder.
16.2 Cephalon Representations, Warranties and Covenants. Cephalon hereby
represents, warrants and covenants to Schwarz Pharma that, as of the Effective
Date:
(a) Cephalon is the sole owner of the entire right, title and interest in
and to those Patent
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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Rights which include a Valid Claim for Compounds and the same are free of any
liens, encumbrances, restrictions, licenses and other legal or equitable claims
of any kind or nature;
(b) Cephalon is the sole licensee of the entire right, title and interest
in the part of the Kyowa Technology, which is sublicensed to Schwarz Pharma
under this Agreement and the same are free of any liens, encumbrances,
restrictions, licenses and other legal or equitable claims of any kind or
nature;
(c) It has the right to grant to Schwarz Pharma the licenses provided for
in this Agreement;
(d) To the best of its knowledge and belief, there are no third Party
rights, licenses or patents, other than those granted to Schwarz Pharma
hereunder, which are necessary for Schwarz Pharma's use and enjoyment of the
licenses granted to Schwarz Pharma;
(e) Cephalon has not received any notices from any third party alleging
that Licensed Products or Compounds infringe or would infringe any third party
rights within the Territory. To the best of Cephalon's knowledge, the
manufacture, use and sale of Licensed Product in the Territory will not infringe
any such third party rights;
(f) If Schwarz Pharma has exercised its option to a Backup Compound, and
provided Schwarz Pharma is not in breach of the terms of this Agreement, for the
term of this Agreement, Cephalon shall not [**]. If Schwarz Pharma does not
exercise its option to the Backup Compounds under Section 3.4 herein, and
provided Schwarz Pharma is not in breach of the terms of this Agreement, for a
period of [**], Cephalon shall [**], Cephalon shall [**];
(g) For so long as Schwarz Pharma is undertaking the Development Program
or commercializing a Licensed Product, Cephalon shall [**]; and,
(h) It shall use its Reasonable Business Efforts to:
(i) Conduct outside of the Territory at least one Pivotal Trial with
the Lead Compound (or CEP-751 or CEP-2563 if such Compounds are under
development by Schwarz Pharma in the Territory) in either hormone-dependent
or hormone-independent prostate cancer, the design and execution of which
shall be coordinated with Schwarz Pharma such that the results of such
Pivotal Trials may be used to support marketing approval of an EMEA
regulatory approval under the Development Program;.
(ii) Not conduct or allow to be conducted any development activities
outside the
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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Territory which in its reasonable business judgment would jeopardize
regulatory approval of Licensed Products worldwide;
(iii) Install electronic encryption and other confidentiality
requirements to preserve the integrity of Schwarz Pharma's proprietary
data; and
(iv) Amend the TAP Agreement to include the representations set forth
in 16.2(h)(i), (ii) and (iii), above, and to provide to Schwarz Pharma, no
later than the Effective Date of this Agreement, a copy of such amendment.
16.3 Schwarz Pharma Representations and Covenants. Schwarz Pharma hereby
represents and covenants to Cephalon that:
(a) Schwarz Pharma is acknowledged by the authorities in parts of the
Territory as an approved manufacturer and marketer of drugs, and is as such
under the inspection of the competent authorities;
(b) During the term of this Agreement, it will not [**].
(c) It shall use its Reasonable Business Efforts in the Territory to
conduct at least one Pivotal Trial with the Lead Compound (or CEP-751 or CEP-
2563 if such Compounds are under development by Schwarz Pharma in the Territory)
in either hormone-dependent or hormone-independent prostate cancer, the design
and execution of which shall be coordinated with Cephalon and TAP such that the
results of such Pivotal Trials may be used to support marketing approval of an
NDA under the US Program.
16.4 Warranty Disclaimers. Nothing in this Agreement shall be construed as:
(a) a warranty or representation by Cephalon as to the validity or scope of
the Cephalon Technology, other than as specifically provided to the contrary
herein;
(b) a warranty or representation that anything made, used, sold or
otherwise disposed of under this Agreement is or will be free from infringement
of patents, copyrights and trademarks of third Parties;
(c) an obligation to bring or prosecute actions or suits against third
parties for infringement, except as set forth in Section 13.1;
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
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(d) except as otherwise provided herein, conferring rights to use in
advertising, publicity or otherwise any trademark or the name of Cephalon or
Schwarz Pharma;
(e) any representation by either Party, express or implied, other than as
specifically set forth herein, including representations of merchantability or
fitness for a particular purpose, or that the use, manufacture, sale or
distribution of Licensed Products will not infringe upon any third party patent,
copyright, trademark or other rights.
Article 17. Indemnification
17.1 Schwarz Pharma Indemnitees. Cephalon shall indemnify and hold Schwarz
Pharma, its parent companies, Affiliates and subsidiaries, and the officers,
directors and employees of each of them (the "Schwarz Pharma Indemnitees")
harmless from any and all liability, loss, damages, costs or expenses (including
reasonable attorneys' fees) stemming from third party claims or actions (or the
threat thereof) that are based upon (i) the breach of any material covenant,
representation or warranty of Cephalon contained in this Agreement; (ii) the
manufacture by Cephalon (or any Affiliate, assignee, subcontractor or
sublicensee thereof) of any Compounds or Licensed Products; and (iii) the costs
incurred by Schwarz Pharma in the successful enforcement of its rights under
this Section 17.1. Notwithstanding anything to the contrary herein, Cephalon
shall have no obligation to so indemnify the Schwarz Pharma Indemnitees to the
extent that such losses, liabilities, obligations, claims, fees or expenses are
based upon the conduct of the Schwarz Pharma Indemnitees.
17.2 Cephalon Indemnitees. Schwarz Pharma shall indemnify and hold Cephalon,
its parent companies, Affiliates and subsidiaries, and the officers, directors
and employees of each of them (the "Cephalon Indemnitees") harmless from any and
all liability, loss, damages, costs or expenses (including reasonable attorneys'
fees) stemming from third party claims or actions (or the threat thereof) that
are based upon (i) the breach of any material covenant, representation or
warranty of Schwarz Pharma contained in this Agreement; (ii) the manufacture,
use, marketing, promotion, sale or distribution by Schwarz Pharma (or any
Affiliate, assignee, subcontractor or sublicensee thereof) of any Compounds or
Licensed Products; (iii) the use by any person of any Licensed Products that
were manufactured, marketed, sold or distributed by Schwarz Pharma (or any
Affiliate, assignee, subcontractor or sublicensee thereof), including without
limitation, any claim that said use resulted in personal injury or death; and
(iv) the costs incurred by Cephalon in the successful enforcement of its rights
under this Section 17.2. Notwithstanding anything to the contrary herein,
Schwarz Pharma shall have no obligation to so indemnify the Cephalon Indemnitees
to the extent that such losses, liabilities, obligations, claims, fees or
expenses are
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
38
<PAGE>
based upon the conduct of the Cephalon Indemnitees.
17.3 Indemnification Procedures. In the event that one Party receives notice of
a claim, lawsuit, or liability for which it is entitled to indemnification by
the other Party, the Party receiving notice shall give prompt notification to
the indemnifying Party. The Party being indemnified shall cooperate fully with
the indemnifying Party throughout the pendency of the claim, lawsuit or
liability, and the indemnifying Party shall have complete control over the
conduct and disposition of the claim, lawsuit, or liability, except that
indemnifying Party shall have no obligation to provide indemnity with respect to
any amounts paid in settlement of any claims if such settlement is effected
without the prior written consent of the indemnifying Party.
Article 18. General.
18.1 Headings. The headings and captions used herein are for the convenience
of the Parties only and are not to be construed to define, limit, or affect the
construction or interpretation thereof.
18.2 Severability. The provisions of this Agreement are separate and
divisible, and the invalidity or unenforceability of any part shall not affect
the validity or enforceability of any remaining part or parts, all of which
shall remain in full force and effect. However, the Parties agree to
substitute, any invalid or unenforceable provision, by a valid and enforceable
provision which maintains, to the greatest extent possible, the respective
interests of the Parties otherwise established hereunder.
18.3 Entire Agreement. This Agreement contains the entire agreement of the
Parties regarding the subject matter hereof and supersedes all prior agreements,
understandings or conditions (whether oral or written) regarding the same. This
Agreement may not be changed, modified, amended or supplemented except by a
written instrument signed by both Parties.
18.4 Assignability and Sublicenses. Except as otherwise provided herein, this
Agreement shall not be assignable, sublicensable or transferable, either in
whole or in part, by either Party without the prior written consent of the
other, except to an Affiliate or in connection with a merger, consolidation or
sale of all or substantially all of the line of business to which this Agreement
relates. In any event, no such assignment, sublicense or transfer shall relieve
any Party of responsibility for the performance of any accrued obligation which
such Party has then hereunder.
18.5 Publications. The Parties to this Agreement are free to make presentations
and
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
39
<PAGE>
publications relating to the results of any activities conducted pursuant to
this Agreement prior to marketing of Cephalon Licensed Product or Kyowa Licensed
Product, but with due regard to the protection of Confidential Information and
proprietary rights and always provided that the other Party has approved the
scientific content of any such presentation or publication. For that purpose,
the Parties agree to provide the other with a copy of any proposed written
presentation, abstract and/or publication relating to the results of such
activities at least thirty (30) days prior to submission thereof for publication
or presentation thereof. Each Party will take due note of any comment by the
other Party and shall respect the response of the other Party. The parties
agree, whenever possible, to mutually develop and adhere to a single uniform
publication policy. In the event that a Party notifies the other Party that it
intends to file patent applications on any of the subject matter of the
presentation or publication, the Party publishing such publication or
presentation shall delay such publication or presentation for a reasonable
period as requested by the notifying party and not to exceed ninety (90) days to
allow the notifying Party to file such applications.
18.6 Public Announcements. Each Party agrees that, except as may be required by
law, it shall not disclose the existence, substance or details of this Agreement
without the prior written consent of the other Party. In cases in which
disclosure is proposed or required by law, the disclosing Party, prior to such
disclosure, will notify the non-disclosing Party of the contents of the proposed
disclosure, provided however, that subsequent disclosure(s) of the same or
substantially similar contents shall not require further consent. The non-
disclosing Party shall have the right to make reasonable changes to the
disclosure to protect its interests. The disclosing Party shall not unreasonably
refuse to include such changes in its disclosure. The parties will agree upon
the text of a joint announcement of this Agreement and, once agreed, the
information contained in that announcement may be used by either party in
subsequent announcements.
18.7 Further Assurances. Each Party hereto agrees to execute, acknowledge and
deliver such further instruments, and to take such other actions, as may be
necessary to appropriate in order to carry out the purposes and intent of this
Agreement.
18.8 Notices and Reports. All notices, consents or approvals required by this
Agreement shall be in writing and sent by courier or by certified or registered
air mail, postage prepaid or by facsimile or courier (confirmed by such
certified or registered mail) to the Parties at the following addresses or such
other addresses as may be designated in writing the respective Parties. Notices
shall be deemed effective on the date of mailing.
If to Cephalon:
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
40
<PAGE>
Senior Vice President & General Counsel
Cephalon, Inc.
145 Brandywine Parkway
West Chester, PA 19380-4245 USA
Telephone: (610) 738-6337
Facsimile (610) 738-6590
If to Schwarz Pharma:
Schwarz Pharma AG
Alfred-Nobel-Str. 10
Monheim am Rhein
D-40789 Germany
Telephone: (02173) 48.13.69
Telefax: (02173) 48.10.64
Attn: Head of Legal Affairs
18.9 Waiver. The waiver by either Party of a breach of any provisions
contained herein shall be effective only if made in writing and shall in no way
be construed as a waiver of any succeeding breach of such provision or the
waiver of the provision itself.
18.10 Dispute Resolution. Any dispute concerning or arising out of this
Agreement or concerning the existence or validity hereof, shall be determined by
the following procedure.
(a) Both Parties understand and appreciate that their long term mutual
interest will be best served by affecting a rapid and fair resolution of any
claims or disputes which may arise out of services performed under this contract
or from any dispute concerning the terms of this Agreement. Therefore, both
Parties agree to use their best efforts to resolve all such disputes as rapidly
as possible on a fair and equitable basis. Toward this end both Parties agree
to develop and follow a process for presenting, rapidly assessing, and settling
claims on a fair and equitable basis which takes into account the precise
subject and nature of the dispute.
(b) If any dispute or claim arising under this Agreement cannot be readily
resolved by the Parties pursuant to the process described above, the Parties
agree to refer the matter to a panel consisting of the Chief Executive Officer
("CEO") of each Party for review and resolution. A copy of the terms of this
Agreement, agreed upon facts (and areas of disagreement), and concise summary of
the basis for the contentions of each Party will be provided to both such CEOs
who shall review the same, confer, and attempt to reach a mutual resolution of
the issue.
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
41
<PAGE>
(c) Any dispute controversy or claim arising out of or relating to the
validity, construction, enforceability or performance of this Agreement,
including disputes relating to an alleged breach or to termination of this
Agreement and including any claim of inducement by fraud or otherwise, but
excluding any dispute, controversy or claim arising out of or relating to the
validity, enforceability, or infringement of any Patent Rights , which cannot be
resolved by good faith negotiation between the parties as set forth in paragraph
18.10(b), above, shall be resolved by arbitration conducted in the English
language in New York, New York before a panel of three arbitrators under the
then current rules and procedures of the International Chamber of Commerce, or
other rules and procedures as the parties may agree. The prevailing party in
any such proceeding shall be entitled to an award of its reasonable attorneys'
fees and other costs, including the fees and expenses of the arbitrators,
provided that the same may be apportioned between the parties by the arbitrators
if they determine that each party has prevailed in part. The arbitral award
shall be binding and conclusive on both parties and may be enforced in any court
of competent jurisdiction. Notwithstanding the foregoing, either party may, on
good cause shown, seek a temporary restraining order and/or a preliminary
injunction from a court of competent jurisdiction, to be effective pending the
institution of the arbitration process and the deliberation and award of the
arbitration panel
(d) This Agreement shall be governed by and construed in accordance with
the substantive laws of the State of New York and of the United States of
America, without regard to the conflicts of laws provision thereof. Judgment
upon any award rendered in such event may be entered in any court having
jurisdiction and the Parties hereby consent to the said jurisdiction and venue,
and further irrevocably waive any objection which either Party may have now or
hereafter to the laying of venue of any proceedings in said courts and to any
claim that such proceedings have been brought in an inconvenient forum, and
further irrevocably agrees that a judgment or order in any such proceedings
shall be conclusive and binding upon the Parties and may be enforced in the
courts of any other jurisdiction thereof.
18.11 Force Majeure. A Party shall not be liable for nonperformance or delay
in performance (other than of obligations regarding any payments or of
confidentiality) caused by any event reasonably beyond the control of such Party
including, without limitation, wars, hostilities, revolutions, riots, civil
disturbances, national emergencies, strikes, lockouts, unavailability of
supplies, epidemics, fires, floods, earthquakes, other forces of nature,
explosions, embargoes, or any other Acts of God, or any laws, proclamations,
regulations, ordinances, or other acts or orders of any court, government or
governmental agency. Any occurrence of Force Majeure shall be reported promptly
to the other Party.
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
42
<PAGE>
IN WITNESS THEREOF, the Parties have executed this Agreement by their duly
authorized representatives, as of the day and year first above written.
SCHWARZ PHARMA AG CEPHALON, INC.
By:__________________________ By:__________________________
Patrick Schwarz-Schutte Peter E. Grebow,Ph.D.
Chairman of the Executive Board Senior Vice President
Worldwide Business Development
By:__________________________
Lars Ekman, M.D., Ph.D.
Member of the Executive Board
Research & Development
**Certain portions of this exhibit have been omitted based upon a request for
confidential treatment that has been filed with the Commission. The omitted
portions have been filed separately with the Commission.
43
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF CEPHALON, INC.
<TABLE>
<CAPTION>
Place of
NAME Incorporation
---- -------------
<S> <C>
Cephalon Development Corporation................................ Delaware
Cephalon International Holdings, Inc............................ Delaware
Cephalon Investments, Inc....................................... Delaware
Cephalon Technology, Inc........................................ Delaware
Cephalon (U.K.) Limited......................................... England and Wales
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-43716, No. 33-71920, No. 33-74320, No.
333-02888, No. 333-20321, No. 333-69591, No. 333-89909, No. 333-75281, No.
333-87421 and No. 333-88985.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CEPHALON,
INC.'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000873364
<NAME> CEPHALON, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,152,000
<SECURITIES> 188,410,000
<RECEIVABLES> 5,578,000
<ALLOWANCES> 0
<INVENTORY> 4,258,000
<CURRENT-ASSETS> 212,386,000
<PP&E> 35,193,000
<DEPRECIATION> 15,192,000
<TOTAL-ASSETS> 234,053,000
<CURRENT-LIABILITIES> 57,455,000
<BONDS> 14,034,000
0
25,000
<COMMON> 326,000
<OTHER-SE> 158,006,000
<TOTAL-LIABILITY-AND-EQUITY> 234,053,000
<SALES> 25,370,000
<TOTAL-REVENUES> 44,919,000
<CGS> 3,250,000
<TOTAL-COSTS> 3,250,000
<OTHER-EXPENSES> 46,420,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,253,000
<INCOME-PRETAX> (58,757,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (58,757,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (11,187,000)
<CHANGES> 0
<NET-INCOME> (73,342,000)
<EPS-BASIC> (2.48)
<EPS-DILUTED> (2.48)
</TABLE>
