<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
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 0-28386
CELL THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Washington 91-1533912
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
201 Elliott Avenue West, Suite 400, 98119
Seattle, Washington (Zip code)
(Address of principal executive offices)
(206) 282-7100
(Registrant's telephone number, including area code)
Indicate by check [x] whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class October 31, 1998
----- ----------------
Common Stock, no par value (including associated
Preferred Stock Purchase Rights). .................. 15,433,001
===============================================================================
This report on Form 10-Q, including all exhibits, contains 25 pages.
The exhibit index is located on page 14.
1
<PAGE>
CELL THERAPEUTICS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets -- September 30, 1998 and December 31, 1997............... 3
Consolidated Statements of Operations -- Three months and nine months
ended September 30, 1998 and 1997 and the period from September 4,
1991 (date of incorporation) to September 30, 1998.................................... 4
Consolidated Statements of Cash Flows -- Three months and nine months
ended September 30, 1998 and 1997 and the period from September 4,
1991 (date of incorporation) to September 30, 1998.................................... 5
Notes to Financial Statements......................................................... 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................... 8
PART II OTHER INFORMATION..................................................................... 14
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K............................................ 14
SIGNATURES...................................................................................... 15
</TABLE>
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
CELL THERAPEUTICS, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
Assets (UNAUDITED)
Current assets:
Cash and cash equivalents $ 9,924,044 $ 8,876,990
Securities available-for-sale 43,888,186 61,567,384
Collaboration agreement receivables 3,154,491 3,683,031
Prepaid expenses and other current assets 288,404 101,127
------------- ------------
Total current assets 57,255,125 74,228,532
Property and equipment 16,223,537 13,716,342
Accumulated depreciation (9,185,728) (7,811,242)
------------- ------------
Property and equipment, net 7,037,809 5,905,100
Notes receivable from officers,
less current portion 81,195 71,812
Other assets 210,477 228,052
------------- ------------
Total assets $ 64,584,606 $ 80,433,496
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 468,582 $ 162,469
Accrued expenses 4,242,406 4,712,232
Current portion of long-term obligations 1,339,594 1,759,387
------------- ------------
Total current liabilities 6,050,582 6,634,088
Long-term obligations, less current portion 3,501,260 2,039,104
Shareholders' equity:
Common Stock, no par value:
Authorized shares--100,000,000
Issued and outstanding shares--15,433,001 and
15,378,419 at September 30, 1998 and
December 31, 1997, respectively 169,088,126 168,893,074
Deficit accumulated during development stage (114,055,362) (97,132,770)
------------- ------------
Total shareholders' equity 55,032,764 71,760,304
------------- ------------
Total liabilities and shareholders' equity $ 64,584,606 $ 80,433,496
============= ============
</TABLE>
See accompanying notes.
3
<PAGE>
CELL THERAPEUTICS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period From
September 4,
Three Months Ended Nine Months Ended 1991 (Date of
September 30 September 30 Incorporation)
------------------------- ------------------------------- To September 30,
1998 1997 1998 1997 1998
------------ ------------ ------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Collaboration agreements $ 2,529,609 $ 3,629,324 $ 9,945,935 $ 8,896,304 $ 30,998,161
Operating expenses:
Research and development 6,143,804 6,099,485 21,171,699 18,726,776 109,326,894
General and administrative 2,578,244 2,350,861 7,957,535 6,483,265 42,791,067
----------- ----------- ------------ ------------ -------------
8,722,048 8,450,346 29,129,234 25,210,041 152,117,961
----------- ----------- ------------ ------------ -------------
Loss from operations (6,192,439) (4,821,022) (19,183,299) (16,313,737) (121,119,800)
Other income (expense):
Investment income 668,225 654,344 2,445,965 1,836,913 9,314,351
Interest expense (81,127) (90,917) (296,169) (296,820) (2,326,175)
----------- ----------- ------------ ------------ -------------
Net loss $(5,605,341) $(4,257,595) $(17,033,503) $(14,773,644) $(114,131,624)
=========== =========== ============ ============ =============
Net loss per share:
Basic and diluted
net loss per share $ (0.36) $ (0.33) $ (1.11) $ (1.41)
=========== =========== ============ ============
Shares used in computation of
basic and diluted
net loss per share 15,433,001 13,031,064 15,400,404 10,454,081
=========== =========== ============ ============
Pro forma basic and diluted
net loss per share $ (0.36) $ (0.33) $ (1.11) $ (1.23)
=========== =========== ============ ============
Shares used in computation of
pro forma basic and diluted
net loss per share 15,433,001 13,031,064 15,400,404 11,978,161
=========== =========== ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
CELL THERAPEUTICS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period From
Nine Months Ended September 4,
September 30 1991 (Date of
--------------------------- Incorporation)
To September 30,
1998 1997 1998
------------- ------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(17,033,503) $(14,773,644) $(114,131,624)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,374,486 1,291,124 9,584,365
Noncash compensation expense 100,186 100,186
Noncash research and development expense -- -- 1,155,750
Noncash interest expense -- -- 25,918
Noncash rent expense (52,667) 55,582 515,730
Investment premium (discount) amortization 134,342 (119,267) 478,456
Changes in assets and liabilities:
Collaboration agreement receivable 528,540 (3,765,208) (3,154,491)
Prepaid expenses and other current assets (187,277) (60,746) (288,404)
Notes receivable from officers (9,383) 11,505 (176,419)
Other assets 17,575 63,025 (226,478)
Accounts payable 306,113 (545,209) 468,582
Accrued expenses (469,827) 523,267 4,242,405
------------ ------------ -------------
Total adjustments 1,641,902 (2,445,741) 12,725,600
------------ ------------ -------------
Net cash used in operating activities (15,391,601) (17,219,385) (101,406,024)
------------ ------------ -------------
INVESTING ACTIVITIES
Purchases of securities available for-sale (49,502,588) (41,035,377) (211,294,375)
Proceeds from sales of securities available for-sale 23,665,471 1,999,444 40,555,228
Proceeds from maturities of securities available-for-sale 43,492,884 31,013,045 126,437,952
Purchase of property and equipment (2,507,195) (1,741,378) (16,382,929)
Dispositions of property and equipment -- 15,831 167,300
------------ ------------ -------------
Net cash provided by investing activities 15,148,572 (9,748,435) (60,516,824)
FINANCING ACTIVITIES
Sales of common stock to founders -- -- 80,000
Proceeds from borrowings from shareholders -- -- 850,000
Sale of common stock via initial public offering, net of offering costs. -- 26,802,250 26,802,250
Sale of common stock via follow-on public offering, net of offering costs -- -- 34,262,000
Sale of Series A Preferred Stock via private placement, net of offering costs -- -- 47,366,204
Sale of Series B Preferred Stock via private placement, net of offering costs -- -- 4,960,000
Sale of common stock via private placements, net of offering costs -- 3,000,000 52,307,084
Proceeds from the issuance of common stock under Employee Stock Purchase Plan 108,061 -- 108,061
Repurchase of common stock -- -- (2,522)
Proceeds from common stock options exercised 86,992 415,427 760,026
Proceeds from common stock warrants exercised -- -- 305,558
Repayment of long-term obligations (1,350,330) (909,587) (11,048,570)
Proceeds from the issuance of long-term obligations 2,445,360 -- 15,096,800
------------ ------------ -------------
Net cash provided by (used in) financing activities 1,290,083 29,308,090 171,846,891
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents 1,047,054 2,340,270 9,924,044
Cash and cash equivalents at beginning of period. 8,876,990 5,483,515 --
------------ ------------ -------------
Cash and cash equivalents at end of period. $ 9,924,044 $ 7,823,785 $ 9,924,044
============ ============ =============
Supplemental schedule of noncash investing and financing activities:
Acquisition of equipment pursuant to capital lease obligations $ -- $ -- $ 362,425
============ ============ =============
Conversion of convertible debt and related accrued interest into common stock $ -- $ -- $ 875,918
============ ============ =============
Conversion of preferred stock into common stock $ -- $ 52,326,204 $ 52,326,204
============ ============ =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 296,169 $ 296,820 $ 2,218,611
============ ============ =============
</TABLE>
See accompanying notes.
5
<PAGE>
CELL THERAPEUTICS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial information of Cell Therapeutics, Inc.
(the "Company") as of September 30, 1998 and for the three and nine months ended
September 30, 1998 and 1997 has been prepared in accordance with the
instructions to Form 10-Q. In the opinion of management, such financial
information includes all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation of the financial
position at such date and the operating results and cash flows for such periods.
Operating results for the three and nine month periods ended September 30, 1998
are not necessarily indicative of the results that may be expected for the
entire year. These financial statements and the related notes should be read in
conjunction with the Company's audited annual financial statements for the year
ended December 31, 1997 included in the Company's Form 10-K for the year ended
December 31, 1997, and the Company's unaudited financial statements for the
quarters ended March 31, 1998 and June 30, 1998 included in the Company's
quarterly report on Form 10-Q for the quarters ended March 31, 1998 and June 30,
1998, respectively.
Certain prior year balances have been reclassified to conform to the current
year presentation.
(2) SIGNIFICANT AGREEMENTS
In November 1996, cti entered into a Collaboration and License Agreement (the
"Collaboration Agreement") with Ortho Biotech, Inc. and the R.W. Johnson
Pharmaceutical Research Institute (a division of Ortho Pharmaceutical
Corporation) each of which are wholly-owned subsidiaries of Johnson & Johnson
(collectively, "Johnson & Johnson") for the joint development and
commercialization of lisofylline, ("LSF"), to prevent or reduce the toxic side
effects among cancer patients receiving high dose radiation and/or chemotherapy
followed by bone marrow transplantation ("BMT"). Under the terms of the
Collaboration Agreement, Johnson & Johnson agreed, subject to certain
termination rights, to fund up to $12,000,000 of the Company's budgeted BMT
development costs per year for each of 1997 and 1998. In September 1997,
Johnson & Johnson exercised an option under the Collaboration Agreement to
expand its participation in development of LSF to include the treatment of
patients with acute myelogenous leukemia ("AML") undergoing high dose
chemotherapy. On July 15, 1998, the Company and Johnson & Johnson reached an
agreement in principle to revise the Collaboration Agreement. Under the terms of
the revised Collaboration Agreement, Johnson & Johnson will pay the Company
$13.1 million for development cost reimbursements for BMT and AML through
December 31, 1998. Thereafter, the Company will control and be responsible for
costs associated with the development of LSF. Johnson & Johnson may elect to
resume responsibility for the development and commercialization of LSF following
the successful outcome of a Phase III trial subject to certain additional
payments upon resumption of its obligations. If Johnson & Johnson does not
resume development activities, then cti will be free to license LSF to other
third parties. The revised agreement reflects a change in the anticipated
regulatory filing timeline for LSF from late 1998 to late 1999. As of September
30, 1998, the Company had recorded approximately $37.6 million in equity
payments, license and milestone fees, and development cost reimbursements with
Johnson & Johnson.
On January 5, 1998, the Company entered into an agreement with City of Hope
National Medical Center to form a joint venture (Cell City, LLC) to discover and
develop a new class of drugs to treat diabetes and its complications. Under the
terms of the agreement, the Company will fund the first two years of the venture
and provide expertise in drug discovery and technology in oxidized lipid
chemistry. City of Hope will contribute its rights to technology for a human
enzyme, human leukocyte 12-Lipoxygenase ("12-LO"), which it has identified and
partially sequenced. The enzyme is believed to be responsible for generating
oxidized lipids that may be associated with certain immune diseases,
cardiovascular disease and diabetes. City of Hope will also provide expertise
and services in cellular analysis, animal models and clinical trials for
applications in diabetes. The Company holds a 70% interest in the joint
venture and City of Hope holds 30%.
On June 30, 1998, the Company entered into an agreement with PG-TXL Company,
L.P. and scientists at the M.D. Anderson Cancer Center, granting the Company an
exclusive worldwide license to the rights to polyglutamic acid paclitaxel
("PG-TXL"), a water-soluble form of the cancer drug, Taxol(R) and to all
potential uses of PG-TXL's polymer technology. Under the terms of the
6
<PAGE>
agreement, the Company will fund the research, development, manufacture,
marketing and sale of anti-cancer drugs developed using PG-TXL's polymer
technology.
(3) NET LOSS PER SHARE
The Company adopted Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," in 1997.
All per share amounts for all periods have been presented to conform to the SFAS
No 128 requirements. All outstanding preferred stock was converted to common
stock at the closing of the Company's first quarter 1997 initial public
offering. Accordingly, pro forma basic and diluted per share amounts for 1997
are computed on the basis of the average number of common shares outstanding
plus the effect of preferred shares using the "if-converted" method. As of
September 30, 1998, common stock equivalents are considered anti-dilutive and
are excluded from this calculation.
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------------------ ------------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Loss (A) $(5,605,341) $(4,257,595) $(17,033,503) $(14,773,644)
Weighted average outstanding:
Common Stock (B) 15,433,001 13,031,064 15,400,404 10,454,081
Convertible preferred stock -- -- -- 1,524,080
------------- ------------- ------------- -------------
Total weighted average outstanding (C) 15,433,001 13,031,064 15,400,404 11,978,161
Loss per share:
Basic and diluted (A)/(B) $ (0.36) $ (0.33) $ (1.11) $ (1.41)
Pro forma basic and diluted (A)/(C) $ (0.36) $ (0.33) $ (1.11) $ (1.23)
</TABLE>
(4) COMPREHENSIVE INCOME
In 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income,"
which is required to be adopted for periods beginning after December 15, 1997.
The only item of comprehensive income for the Company is net unrealized gains
(losses) on Securities Available-for-Sale. These amounts are $17,932 and
$110,909 for the three and nine month periods ending September 30, 1998,
respectively, and $61,535 and $(24,167) for the three and nine month periods
ending September 30, 1997, respectively.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES.
WHEN USED IN THIS FORM 10-Q, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS,"
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW AS WELL AS THOSE DISCUSSED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 WHICH IS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF
ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
OVERVIEW
Cell Therapeutics, Inc. ("cti" or the "Company") focuses on the discovery,
development and commercialization of small molecule drugs which selectively
regulate the metabolism of oxidized lipids and phospholipids relevant to the
treatment of cancer and inflammatory and immune diseases. Since commencement of
operations in 1992, the Company has been engaged in research and development
activities, including conducting preclinical studies and clinical trials,
recruiting its scientific and management personnel, establishing laboratory
facilities and raising capital. The Company has not received any revenue from
the sale of products to date and does not expect to receive revenues from the
sale of products for at least the next several years.
In the fourth quarter of 1995 the Company began to receive revenue under a
collaboration agreement with BioChem Pharma, Inc. ("BioChem Pharma") and in the
fourth quarter of 1996 the Company began to receive revenue under a
collaboration agreement (the "Collaboration Agreement") with subsidiaries of
Johnson & Johnson ("Johnson & Johnson"). Under the terms of the Collaboration
Agreement, Johnson & Johnson pays 60% of the U.S. development costs in
connection with obtaining regulatory approval of lisofylline ("LSF") for use
with bone marrow transplants ("BMT") and, after exercising its option in 1997,
to expand its participation in the development of LSF to include the treatment
of patients undergoing inductive chemotherapy to treat myelogenous leukemia
("AML"). As of September 30, 1998, the Company had recorded approximately $37.6
million in equity payments, license and milestone fees, and development cost
reimbursements with Johnson & Johnson. On July 15, 1998, the Company and
Johnson & Johnson reached an agreement in principle to revise the Collaboration
Agreement. Under the terms of the revised Collaboration Agreement, Johnson &
Johnson will pay the Company $13.1 million for development cost reimbursements
for BMT and AML through December 31, 1998. Thereafter, the Company will control
and be responsible for costs associated with the development of LSF. Johnson &
Johnson may elect to resume responsibility for the development and
commercialization of LSF following the successful outcome of a Phase III trial
subject to certain additional payments upon resumption of its obligations. If
Johnson & Johnson does not resume development activities, then cti will be free
to license LSF to other third parties. The revised agreement reflects a change
in the anticipated regulatory filing timeline for LSF from late 1998 to late
1999. As of September 30, 1998, the Company had recorded approximately $37.6
million in equity payments, license and milestone fees, and development cost
reimbursements with Johnson & Johnson.
As of September 30, 1998, the Company had incurred aggregate net losses of
approximately $114.1 million since its inception. The Company expects to
continue to incur significant additional operating losses over the next several
years as its research, development and clinical trial efforts expand. Operating
losses may fluctuate from quarter to quarter as a result of differences in the
timing of expenses incurred and revenues recognized. To date, the Company's
operations have been funded primarily from the sale of equity securities, which
have raised aggregate net proceeds of approximately $167.7 million, and from the
Collaboration Agreement with Johnson & Johnson.
8
<PAGE>
RESULTS OF OPERATIONS
Three months ended September 30, 1998 compared with three months ended September
30, 1997.
Revenue for the three months ended September 30, 1998 decreased to approximately
$2.5 million compared to approximately $3.6 million for the three months ended
September 30, 1997. The 1997 period included a $1.0 million milestone payment
from J&J in connection with J&J exercising its option to expand its
participation under the Collaboration Agreement to include the development of
LSF for treatment of patients with newly diagnosed AML undergoing high dose
induction chemotherapy. There were no milestone payments received during the
comparable 1998 period.
Research and development expenses remained consistent at approximately $6.1
million for the three months ended September 30, 1998 and for the three months
ended September 30, 1997. The Company expects that research and development
expenses will increase in future periods as the Company expands its research and
development programs and undertakes additional clinical trials.
General and administrative expenses increased to approximately $2.6 million for
the three months ended September 30, 1998 from approximately $2.4 million for
the three months ended September 30, 1997. The increase is attributable
primarily to an increase in operating expenses associated with supporting the
Company's research, development and clinical activities. General and
administrative expenses are expected to increase in future years to support the
Company's expected increase in research, development and clinical trial efforts.
Investment income principally comprises interest income from investment of the
Company's cash reserves. Interest expense results primarily from the financing
of laboratory and other equipment. Investment income increased slightly to
approximately $668,000 for the three months ended September 30, 1998 compared to
approximately $654,000 for the three months ended September 30, 1997. This
increase was due primarily to higher average cash balances invested in the 1998
period. Interest expense decreased slightly to approximately $81,000 for the
three months ended September 30, 1998 from approximately $91,000 for the three
months ended September 30, 1997. This decrease in interest expense was the
result of a combination of lower average interest rates incurred offsetting
higher average balances of outstanding long-term obligations.
Nine months ended September 30, 1998 compared with nine months ended September
30, 1997.
Revenue increased to approximately $9.9 million for the nine months ended
September 30, 1998 from approximately $8.9 million, for the nine months ended
September 30, 1997. The 1997 period included a $1.0 million milestone payment
from J&J in connection with J&J exercising its option to expand its
participation under the Collaboration Agreement to include the development of
LSF for treatment of patients with newly diagnosed AML undergoing high dose
induction chemotherapy. No milestone payments were received during the 1998
period. This increase in reimbursement revenue was due primarily to expanded
clinical and manufacturing development activities and the recruitment of
additional personnel with respect to the development of LSF.
Research and development expenses increased to approximately $21.2 million for
the nine months ended September 30, 1998 from approximately $18.7 million for
the nine months ended September 30, 1997. This increase was attributable
primarily to expanded preclinical and clinical activities with respect to LSF,
and to and development activities related to collaborations with Cell City, LLC
and PG-TXL Company, Inc. The Company expects that research and development
expenses will increase in future years as the Company expands its research and
development programs and undertakes additional clinical trials.
General and administrative expenses increased to approximately $8.0 million for
the nine months ended September 30, 1998 from approximately $6.5 million for the
nine months ended September 30, 1997. This increase related to increased
operating expenses associated with supporting the Company's research,
development and clinical activities and transaction costs with respect to the
establishment of Cell City, LLC and acquiring the rights to PG-TXL. General and
administrative expenses are expected to increase to support the Company's
expected increase in research, development and clinical trial efforts.
Investment income principally comprises interest income from investment of the
Company's cash reserves. Interest expense results primarily from the financing
of laboratory and other equipment. Investment income increased to approximately
$2.4 million for the nine months ended September 30, 1998 from approximately
$1.8 million for the nine months ended September 30, 1997. This increase was
associated primarily with interest earnings on higher average cash balances on
hand during 1998 due to the proceeds from both the Company's
9
<PAGE>
initial public offering ("IPO") in March 1997 and the Company's follow-on public
offering ("Follow-On Offering") in October 1997. Interest expense decreased
slightly to approximately $296,000 for the nine months ended September 30, 1998
from approximately $297,000 for the nine months ended September 30, 1997. This
decrease in interest expense was the result of a combination of lower average
interest rates incurred offsetting higher average balances of outstanding long-
term obligations.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through the
sale of equity securities and from its collaboration with Johnson & Johnson. As
of September 30, 1998, the Company has raised aggregate net proceeds of
approximately $167.7 million through the sale of equity securities including
public offerings of Common Stock, private placements of Series A and B
Convertible Stock and Common Stock, a bridge loan and the exercise of stock
options and warrants. As of September 30, 1998, the Company had recorded
approximately $37.6 million in equity payments, license fees, milestone payments
and development cost reimbursements from Johnson & Johnson. In addition, the
Company financed the purchase of $15.1 million of property and equipment through
financing agreements of which approximately $4.8 million remained outstanding as
of September 30, 1998.
On July 15, 1998, the Company and Johnson & Johnson reached an agreement in
principle to revise the Collaboration Agreement. Among other things, the
revised Collaboration Agreement reflects a change in the anticipated regulatory
filing timeline for LSF from late 1998 to late 1999.
At September 30, 1998, the Company had $53.8 million in cash, cash equivalents
and short-term investments. The Company invests in U.S. government obligations
and other highly rated liquid debt instruments. The Company intends to use the
substantial portion of its financial resources to fund its research and
development activities with respect to the Company's LSF and CT-2584 programs,
including preclinical testing, clinical trials and process development
activities, and to fund other research and development activities. The amounts
actually expended for research and development activities and the timing of such
expenditures will depend upon numerous factors, including the progress of the
Company's research and development programs, the results of preclinical and
clinical trials, the timing of regulatory submissions and approvals, if any,
technological advances, determinations as to the commercial potential of the
Company's compounds, and the status and timing of competitive products. The
amount of expenditures will also depend upon the potential resumption by Johnson
& Johnson of its obligations under the Collaboration Agreement, the timing and
availability of alternative methods of financing the Company's research and
development activities and preclinical and clinical trials, and the ability of
the Company to establish collaborative agreements with other companies. A
variety of other factors, some of which are beyond the Company's control, could
also affect the application of the proceeds.
The Company also expects to use a portion of its financial resources to add
research and product development programs. On June 30, 1998, the Company entered
into an agreement with PG-TXL Company, L.P. and scientists at the M.D. Anderson
Cancer Center, granting the Company an exclusive worldwide license to the rights
to polyglutamic acid paclitaxel ("PG-TXL"), a water-soluble form of the cancer
drug, Taxol(R) and to all potential uses of PG-TXL's polymer technology. Under
the terms of the agreement, the Company will fund the research, development,
manufacture, marketing and sale of anti-cancer drugs developed using PG-TXL's
polymer technology. The Company's research and development expenditures will
vary as such research and product development programs are added, expanded or
discontinued.
The Company also expects to use portions of its financial resources to improve
facilities, purchase capital equipment and for general corporate purposes. The
Company has not identified precisely the amount it plans to spend on these
specific programs or the timing of such expenditures. Pending such uses, the
Company intends to invest its cash balances in U.S. government obligations and
other highly rated liquid debt instruments. The Company may also from time to
time consider the acquisition of other companies, technologies or products that
complement the business of the Company, although no agreements or understandings
are in effect with respect to any such transactions at this time.
The Company expects that its capital requirements will increase as the Company
expands its research and development programs and undertakes additional clinical
trials. In connection with such expansion, the Company expects to incur
substantial expenditures for hiring additional management, scientific and
administrative personnel, for planned expansion of its facilities, and for the
purchase or lease of additional equipment.
The Company does not expect to generate a positive cash flow from operations for
several years due to substantial additional research and development costs,
including costs related to drug discovery, preclinical testing, clinical trials,
manufacturing costs and operating expenses associated with supporting such
activities. The Company expects that its existing capital resources and the
interest earned thereon, combined with funding from Johnson & Johnson under the
revised Collaboration Agreement through December 31, 1998, will enable the
Company to maintain its current and planned operations at least through the end
of 2000. The Company will need to raise substantial additional capital to fund
its operations beyond such time. The Company's future capital requirements will
depend on, and could increase as a result of, many factors, including the
potential resumption
11
<PAGE>
by Johnson & Johnson's of its obligations under the Collaboration Agreement;
continued scientific progress in the Company's research and development
programs; the terms of any additional collaborative arrangements that the
Company may enter into; the magnitude of such programs; the progress of
preclinical testing and clinical trials; the time and costs involved in
obtaining regulatory approvals; the costs involved in preparing, filing,
prosecuting, maintaining, enforcing and defending patent claims; competing
technological and market developments; changes in collaborative relationships;
the ability of the Company to establish research, development and
commercialization arrangements pertaining to products other than those covered
by existing collaborative arrangements; the cost of establishing manufacturing
facilities; the cost of commercialization activities and the demand for the
Company's products if and when approved.
The Company intends to raise additional funds though additional equity or debt
financings, research and development financings, collaborative relations, or
otherwise. Because of these long-term capital requirements, the Company may
seek to access the public or private equity markets from time to time, even if
it does not have an immediate need for additional capital at that time. There
can be no assurance that additional financing will be available to the Company,
or, if available, that it will be on acceptable terms. If additional funds are
raised by issuing equity securities, further dilution to shareholders may
result. If adequate funds are not available, the Company may be required to
delay, reduce the scope of, or eliminate one or more of its research,
development and clinical activities. If the Company seeks to obtain funds
through arrangements with collaborative partners or others, such partners may
require the Company to relinquish rights to certain of its technologies, product
candidates or products that the Company would otherwise seek to develop or
commercialize itself.
As of September 30, 1998, the Company had available for Federal income tax
purposes net operating loss carryforwards of approximately $110 million and
research and development credit carryforwards of approximately $4 million.
These carryforwards begin to expire in 2007. The Company's ability to utilize
its net operating loss and research and development credit carryforwards is
subject to an annual limitation in future periods pursuant to the "change in
ownership" rules under Section 382 of the Internal Revenue Code of 1986.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number of
risks, some of which are outside of the Company's control. The following
discussion highlights some of these risks and others are discussed elsewhere
herein and in other documents filed by the Company with the Securities and
Exchange Commission.
The time frame for market success for any of the Company's potential products is
long and uncertain. The Company is at an early stage of development and its
technology is unproven. All of the Company's proposed products are in research
or development and will require significant additional research and development
efforts prior to any commercial use, including extensive preclinical and
clinical testing as well as lengthy regulatory approval. There can be no
assurance that the Company's research, development and clinical trial efforts
will be successful, that its lead drug candidate, LSF, or any of its other
proposed products, will prove to be safe and efficacious in clinical trials or
meet applicable regulatory standards, that unforeseen problems will not develop
with the Company's technologies or applications, or that any commercially
successful products will ultimately be developed by the Company. The Company
faces substantial competition from a variety of sources, both direct and
indirect. There can be no assurance that research and discoveries by others
will not render some or all of the Company's programs or products noncompetitive
or obsolete or that the Company will be able to keep pace with technological
developments or other market factors.
The Company's ability to continue the development and commercialization of LSF
as presently planned will depend on its ability to raise additional funds and
establish additional collaborative relationships. There can be no assurance
that the Company will be able to establish effective sales and distribution
capabilities or will be successful in gaining market acceptance for LSF. The
Company's products under development have never been manufactured on a
commercial scale and there can be no assurance that such products can be
manufactured at a cost or in quantities necessary to make them commercially
viable. The Company initiated commercial scale manufacturing of LSF in 1997
with a third-party contract manufacturer, however there can be no assurance that
the contract manufacturer will meet the Company's requirements for quality,
quantity or timeliness. The Company currently has no internal manufacturing
facilities and has no experience in sales, marketing or distribution. If the
Company develops any additional products with commercial potential, it may seek
to enter into collaborative arrangements with other parties which have
established manufacturing, sales, marketing and distribution capabilities or may
need to develop such resources on its own.
The foregoing risks reflect the Company's early stage of development and the
nature of the Company's industry and potential products. Other risk factors
that may affect the Company's future results include competition,
12
<PAGE>
uncertainties regarding protection of patents and proprietary rights, government
regulation and uncertainties regarding pharmaceutical pricing and reimbursement.
The Company could be impacted by the Year 2000 issue, which results from
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company is in the process of assessing its computer systems to determine the
extent of modifications required so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The Company's
systems are all relatively new and PC-based. All of the Company's business
software programs, with the exception of its fixed asset module, have been
evaluated as Year 2000 compliant. The fixed asset module is scheduled for
replacement in the first quarter of 1999. The Company has also initiated an
assessment of its non-IT systems. Critical electro-mechanical instruments
containing software are currently being evaluated for Year 2000 compliance.
This evaluation is expected to be complete in the first quarter of 1999. The
Company has also initiated formal communications with all of its significant
suppliers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remedy their own Year 2000 Issues.
The Company will be following up with these suppliers during the fourth quarter
of 1998 and the first quarter of 1999 to determine the extent of alternative
sources or contingency plans that are required. The Company presently believes
the Year 2000 Issue will not pose significant operational problems for its
computer systems, non-IT systems or third-party relationships.
The Company has been continually upgrading its information technology systems
and critical laboratory instrumentation since inception in 1992. The Company
has not incurred to date, and does not have plans currently to incur material
additional costs to accelerate the replacement of its existing information
technology systems or critical laboratory instrumentation due to Year 2000
issues. The Company does not separately track internal costs incurred for the
Year 2000 project but believes these costs are not material.
If corrections to the Company's Year 2000 issues are not completed, or the
systems of other companies on which the Company's systems rely are not timely
converted, the Year 2000 Issue could have a material impact on the Company's
business, prospects, financial condition, liquidity and results of operations.
These impacts could include, but are not limited to, future revenue delays due
to delayed research, development, clinical trials or agency approvals.
The Company presently believes that the Year 2000 issues can be effectively
avoided, but it intends to develop a contingency plan to allow operations to
continue even if significant issues are experienced. The company has a team
assigned to review all information technology systems, all equipment, and
vendors of equipment and services that may be impacted by Year 2000 issues.
Contingency plans will be developed for each critical activity by the end of the
second quarter of 1999.
13
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
99.1+ Pre-Validation Agreement dated as of October 16, 1998
between the Registrant and ChiRex (Dudley), Ltd.
(b) Reports on Form 8-K
None.
- --------------------
+ Confidential Treatment Requested
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
CELL THERAPEUTICS, INC.
(Registrant)
Dated: November 14, 1998 By: /s/ James A. Bianco, M.D.
-----------------------------------------
James A. Bianco, M.D.
President and Chief Executive
Officer
Dated: November 14, 1998 By: /s/ Louis A. Bianco
----------------------------------------
Louis A. Bianco
Executive Vice President,
Finance and Administration
(Principal Financial Officer,
Chief Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,924,044
<SECURITIES> 43,888,186
<RECEIVABLES> 3,154,491
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 57,255,125
<PP&E> 16,223,537
<DEPRECIATION> 9,185,728
<TOTAL-ASSETS> 64,584,606
<CURRENT-LIABILITIES> 6,050,582
<BONDS> 0
0
0
<COMMON> 169,088,126
<OTHER-SE> (114,055,362)
<TOTAL-LIABILITY-AND-EQUITY> 64,584,606
<SALES> 0
<TOTAL-REVENUES> 3,197,834
<CGS> 0
<TOTAL-COSTS> 8,722,048
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,127
<INCOME-PRETAX> (5,605,341)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,605,341)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
</TABLE>
<PAGE>
EXHIBIT 99.1
Portions of this Exhibit
have been omitted
pursuant to a request
for confidential
treatment. The omitted
portions are marked
***** and have been
filed separately with
the Commission.
PRE-VALIDATION AGREEMENT
This Agreement ("PV Agreement") is made the 16th day of October, 1998 between
CELL THERAPEUTICS, INC., whose registered office is at 201 Elliott Avenue West,
Suite 400, Seattle, Washington, 98119, USA ("Company"), and CHIREX (DUDLEY),
LTD., of Dudley, Cramlington, Northumberland, NE23 7QG, ENGLAND ("Supplier").
RECITALS
WHEREAS, Supplier and Company are parties to a Supply Agreement dated
January 21, 1997 ("Supply Agreement");
WHEREAS, the scope of the Supply Agreement is limited to Pilot, Validation
and Commercial Lots as defined therein;
WHEREAS, in support of Company's clinical and regulatory development
efforts, Company and Supplier desire that Supplier provide additional
manufacturing services not contemplated by the Supply Agreement, specifically,
CCA and Compound Pre-Validation batches (as defined below); and
WHEREAS, Company and Supplier intend that this PV Agreement document the
parties' entire understanding of each party's obligations and rights concerning
the Pre-Validation batches.
AGREEMENTS
NOW THEREFORE, in consideration of the mutual promises hereinafter set
forth, the parties agree as follows:
1. DEFINITIONS:
ACTUAL COST shall mean all of Supplier's Actual Costs (direct and indirect)
- -----------
incurred in preparing CCA and Compound, which shall be deemed to include an
allocation of manufacturing overhead which is calculated based on Supplier's
standard overhead and cost systems in effect upon commencement of Pre-
Validation.
(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
COMPOUND is Company's proprietary compound, lisofylline, having a chemical name,
- --------
*****.
(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
CCA has the chemical name ***** and is the key intermediate for preparation of
- ---
Compound.
Page 1 of 9
<PAGE>
cGMP are current Good Manufacturing Practices, specifically as defined in United
- ----
States Code of Federal Regulations, Title 21, (S) 210 and 211, related FDA
guidelines, and as interpreted by Company.
INTELLECTUAL PROPERTY (IP) includes, but is not limited to, patentable
- ---------------------
inventions, trade secrets and know how.
PRE-VALIDATION PROJECT PLAN (PV PROJECT PLAN) has been prepared by the Company
and agreed to by the Supplier. It is attached hereto as Exhibit A and defines
and delineates specific roles for Company and Supplier for Pre-Validation,
including, without limitation, personnel training and completion of required
quantities of CCA and Compound. The PV Project Plan includes a comprehensive
compilation of the technical specifications and compliance and documentation
requirements that shall govern the manufacture, testing, packaging and labeling
of Pre-Validation lots of CCA and Compound manufactured by Supplier for Company
per this PV Agreement (collectively, the "Pre-Validation Manufacturing
Standards"). The PV Project Plan also sets forth a schedule of activities and
resource utilization for completing the activities scheduled for each batch of
the stages identified in the Project Plan.
SUPPLIER'S FEE is an amount paid by Company to Supplier in accordance with the
- --------------
provisions of Paragraph 10(b).
2. PV AGREEMENT SCOPE: The Pre-Validation batches under this PV Agreement are
designed to confirm the CCA and Compound processes at a commercial manufacturing
scale in Supplier's validated equipment under full cGMP compliance.
Specifically, Supplier will timely produce CCA and Compound Pre-Validation
batches as set forth in the PV Project Plan.
3. TERM: This PV Agreement shall commence upon complete execution by both
parties, and unless terminated sooner, shall remain in effect until the
completion of the Pre-Validation batches set forth in the Project Plan.
4. REPRESENTATIONS AND WARRANTIES:
Company represents and warrants to Supplier:
a) The proprietary manufacturing processes that Company has disclosed to
Supplier and pertaining to the Compound or CCA, except to the extent the
processes incorporate Supplier proprietary technology, are owned by Company,
free and clear of any liens or claims and performance thereof will not infringe
any third party rights.
b) The Project Plan (and all supporting documentation referenced therein) are
complete and accurate and contain all information necessary for Supplier to
manufacture the Compound or CCA, and when followed, will result in finished
products which comply with the Pre-Validation Manufacturing Standards.
c) Compound meeting the Pre-Validation Manufacturing Standards is fit for the
purpose intended by Company.
Page 2 of 9
<PAGE>
d) Company has all requisite power and authority to execute and deliver this PV
Agreement and the other exhibits and instruments to be executed and delivered by
the parties pursuant hereto.
e) This PV Agreement does not conflict with any other agreement, instrument,
obligation, understanding or arrangement Company may have with another party.
Supplier represents and warrants to Company:
a) Supplier will perform all manufacturing for Company in accordance with all
written technical documentation mutually agreed to by the parties, specifically
including the Pre-Validation Manufacturing Standards.
b) For all phases of production, Supplier will comply with all applicable U.S.
governmental regulatory requirements, specifically cGMP, for all phases of
production including, without limitation, maintaining adequate documentation.
c) Supplier has all requisite power and authority to execute and deliver the PV
Agreement and the other exhibits and instruments to be executed and delivered by
the parties pursuant hereto.
d) This PV Agreement does not conflict with any other agreement, instrument,
obligation, understanding or arrangement Supplier may have with another party.
5. COMPOUND RELEASE AND NON-CONFORMANCE: Company is responsible for releasing
both CCA and Compound manufactured by Supplier in accordance with the Pre-
Validation Manufacturing Standards. However, Supplier is responsible for
conducting all required analytical testing on material produced by Supplier for
Company which is set forth in the Pre-Validation Manufacturing Standards (by
inclusion or reference therein). Company reserves the right to repeat tests
conducted by Supplier (at Company's cost) prior to Company's release of material
to confirm that the material meets the Pre-Validation Manufacturing Standards.
Should Company not be able to release CCA or Compound in accordance with the
Pre-Validation Manufacturing Standards, the CCA or Compound shall be deemed non-
conforming.
6. SHIPPING: Company shall notify Supplier of shipment location(s) for
Compound released by Company no more than ninety (90) days after Supplier's
notice to Company that Supplier has completed Compound manufacture. Except as
otherwise provided, all Compound manufactured by Supplier hereunder shall be
delivered to Company ex Dudley. Company shall set forth all shipment,
packaging, labeling and storage requirements in the Pre-Validation Manufacturing
Standards. Supplier shall ship Compound to a location specified in writing by
Company. Supplier will maintain adequate business insurance to cover material
replacement in the event of material loss or damage during Supplier's
manufacture or material storage up to a maximum of the cumulative amounts
invoiced by Supplier for Pre-Validation. If Company fails to notify Supplier of
shipment location(s) for Compound within the aforementioned ninety (90) day
period, Supplier shall ship Compound to Company at the address specified in
Section 9 in accordance with the shipment requirements in the Pre-Validation
Manufacturing Standards.
Page 3 of 9
<PAGE>
7. INDEPENDENT CONTRACTOR AND THIRD PARTY SUBCONTRACTORS: Supplier is an
independent contractor, not an employee or agent of Company, and will be solely
responsible for maintaining its labor force and operations. Supplier shall have
no right to bind Company by contract, otherwise transact any business or make
any representations in Company's name or on Company's behalf.
Supplier shall remain directly responsible for Supplier's performance hereunder,
even though Supplier may utilize third party contractors that it deems have the
requisite expertise and skill to meet Supplier's performance obligations under
this PV Agreement. Should Supplier utilize third party personnel other than
those previously approved by Company, Supplier will provide Company with an
opportunity to review and confirm Supplier's selection.
8. FACILITY ACCESS: Upon giving prior written notice to Supplier, Company (or
its authorized designees) shall have the right to inspect Supplier's facilities
and documentation at normal business hours to ensure compliance with this PV
Agreement, including applicable regulatory and or other governmental
requirements. Company may review or request copies of regulatory or cGMP data
at any time.
Supplier will not unreasonably withhold access by Company to data,
documentation, material, laboratories or facilities, wherever located, if such
access is reasonably required for verification of Supplier's performance
hereunder or is required in connection with government regulatory agency
requests.
9. NOTICES:
-------
a) Inspection: Supplier will immediately notify Company's Director of Quality
Affairs of a duly authorized governmental agency's (federal, state or municipal)
communication, visit, investigation or inquiry relating to Supplier's process or
facilities in connection with manufacture of CCA or Compound (Event).
Supplier's written confirmation of an Event shall not be later than twenty-four
(24) hours from Supplier's first knowledge thereof. Supplier's notice shall
provide Company's Director of Quality Affairs with the following information:
a) The agency;
b) Purpose of communication, visit, investigation or inquiry;
c) Name(s) of inspector(s) and credential number; and
d) A copy of form(s) issued by inspector, if any.
Supplier will handle Confidential and Proprietary Information in accordance with
the provisions of Paragraphs 11 (Confidentiality) and 13 (Publication and
Promotion). Supplier shall obtain Company's approval prior to Supplier
providing to any third party copies of documentation which contain Company
information.
Page 4 of 9
<PAGE>
Company will assist Supplier in responding to the communication, visit,
investigation or inquiry relating to an Event.
b) General: In addition to the foregoing, Supplier will notify Company's
Director of Manufacturing Operations orally and in writing of any interruption
in Supplier's manufacturing activities that relates to or affects Supplier's
performance under this PV Agreement. Supplier's notice shall not be later than
forty-eight (48) hours from Supplier's first knowledge of the manufacturing
interruption.
Unless otherwise specified herein, all notices required or permitted to be given
under this PV Agreement shall be in writing and shall be delivered personally,
sent by secure facsimile or mailed prepaid to the persons named and addresses
set forth below.
If to Company: Director of Manufacturing Operations
Cell Therapeutics, Inc.
201 Elliott Avenue West, Suite 400
Seattle, Washington 98119
Telephone No.: (206) 282-7100
Facsimile No.: (206) 284-6206
If to Supplier: Chief Operating Officer
c/o ChiRex (Dudley) Ltd.
Dudley, Cramlington
Northumberland, NE23 7QG
ENGLAND
Telephone No.: 0191 250 0471
Facsimile No.: 0191 250 1154
with a copy to: General Counsel
ChiRex, Inc.
300 Atlantic Street, Suite 402
Stamford, CT 06901
Telephone No.: (203) 351-2300
Facsimile No.: (203) 425-9996
10. COSTS, INVOICING, FINANCIAL AUDITING AND PAYMENT:
a) Costs: Actual Costs shall be accounted for and billed by Supplier to
-----
Company.
(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
b) Invoicing: Monthly, Supplier shall invoice all Actual Costs incurred in
---------
manufacturing CCA and Compound during the corresponding manufacturing month.
When Supplier invoices Company, Supplier's Invoice (an example of which is
attached hereto as Exhibit B) shall include a Supplier's Fee equal to *****
percent (*****%) of the Actual Costs. Supplier's Invoices will be in US dollars
(US $) and shall comply with specific requirements set forth in the attached
sample Supplier's Invoice.
Page 5 of 9
<PAGE>
Contemporaneously with Supplier's submission of monthly invoices, Supplier shall
deliver to Company a Monthly Report and copies of all Project Timesheets
completed by Supplier personnel during the respective monthly invoice period,
examples of which are attached as Exhibit C. Supplier agrees that it will
collect labor hours by having Supplier's employees record time spent on Pre-
Validation in the appropriate time category(ies) represented on the attached
Project Timesheet.
Company and Supplier agree that British pounds ((Pounds)) will be converted to
US dollars ($) using the applicable closing conversion rate quoted in the Wall
Street Journal(R) three business days prior to the end of every monthly
invoicing period.
c) Financial Auditing: Supplier shall permit Company the right to periodically
audit Supplier's financial records and documentation (including Supplier's
overhead and standard cost systems) giving at least ten (10) business days prior
notice to Supplier.
Company's timely payment of any outstanding invoice due will not waive Company's
right to later dispute any Actual Costs invoiced.
(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
d) Payment: Company shall pay invoiced amounts to Supplier in US dollars, no
later than the twentieth day of the month following the month of the respective
invoice date. Company will pay to Supplier ***** dollars ($*****)(US) as an
advance payment ("Advance Payment") against Actual Costs and Supplier's Fees
which will be incurred by and due to Supplier in the course of Supplier's
performance hereunder; $***** to be paid within ***** days of mutual execution
of this PV Agreement and the remaining $***** to be paid within ***** days of
mutual execution of this PV Agreement. Supplier will apply (in US dollars) *****
percent (*****%) of the advance payment against each of the first five monthly
Supplier's Invoices. In the event that the applied ***** percent (*****%) of the
Advance Payment exceeds any one of the first months' Supplier's Invoices, the
excess shall be carried and applied to the next successive month's Supplier's
Invoice.
On all outstanding balances due (from the date on which said amount is due until
paid), Supplier shall assess interest at a per annum rate equal to two percent
(2%) over the LIBOR rate quoted by Midland Bank on the date payment is overdue.
11. CONFIDENTIALITY: Supplier shall remain bound by the terms and conditions
of the Confidential Disclosure Agreement between Company and Supplier, dated
March 22, 1994, and amended April 25, 1996 (collectively, CDA), which is
incorporated by reference in its entirety.
12. INTELLECTUAL PROPERTY: Supplier agrees that Company shall own all
intellectual property created hereunder and specifically related to manufacture
of CCA and Compound ("IP"), except to the extent that any IP may embody
Supplier's proprietary technology used in Pre-Validation. Supplier agrees to
assist Company and perform all acts reasonably regarded by Company as
Page 6 of 9
<PAGE>
necessary to assist Company in securing, perfecting and enforcing its IP
ownership rights provided herein.
13. PUBLICATION AND PROMOTION: Supplier may not publish details of the
synthesis or manufacture of Compound or CCA without Company's prior written
consent.
Supplier agrees not to use or imply Company's name for advertising, self-
promotion purposes, raising capital, recommending investments, which, inter
alia, implies endorsement by Company, and will only reference Company's name
after obtaining Company's prior written permission. Notwithstanding the
foregoing, Supplier may identify Company as one of its customers in its SEC
filings and Annual Report.
14. INDEMNIFICATION AND LIABILITY: Supplier and Company ("Indemnifying Party")
shall indemnify, defend and hold harmless the other and other's officers,
directors, employees, and agents (collectively the "Indemnified Party") against
any and all liability, obligation, loss or damage (including reasonable
attorney's fees) which result from the Indemnifying Party's breach of its
representations, warranties or obligations hereunder or its negligent act or
omission or willful misconduct.
Supplier and Company agree that each will be liable to the other for damages
resulting from any such party's breach of its respective representations,
warranties or obligations hereunder.
15. APPLICABLE LAW AND JURISDICTION: This PV Agreement shall be construed in
accordance with, and its performance shall be governed by, the laws of the State
of New York, exclusive of choice of law provisions.
16. AMENDMENTS: Any amendments, changes, or revisions to this PV Agreement
must be proposed in writing by either party, and accepted in writing by the
other party before they shall become effective and binding.
17. ASSIGNMENT: This PV Agreement is for specialized manufacturing services.
Supplier shall not assign, transfer or convey this PV Agreement, any
obligations, or any moneys due or to become due hereunder without the prior
written consent of Company. This PV Agreement shall inure to the benefit of
Company, its assigns, subsidiaries or successors in business.
18. ENTIRE AGREEMENT: This PV Agreement (all Exhibits and documents attached
hereto and referenced herein) represents the entire understanding and agreement
between Company and Supplier. In the event that a conflict arises between this
PV Agreement and printed terms and conditions on any subsequently prepared
document concerning performance of the parties under this PV Agreement, the
terms and conditions provided in this PV Agreement shall prevail, unless the
document satisfies the requirements herein for amendments to this PV Agreement.
19. SUPPLY AGREEMENT: Supplier has completed all manufacturing services
required by Company under the Supply Agreement, specifically within the scope of
Paragraphs 2(a) and 12 and relating to the Pilot and Validation Lots of CCA and
Compound. Supplier and Company
Page 7 of 9
<PAGE>
acknowledge that Supplier's manufacture of Commercial Lots under the Supply
Agreement is conditioned upon an amendment of the pricing terms of the Supply
Agreement (including, without limitation, Paragraph 12 thereof).
Page 8 of 9
<PAGE>
IN WITNESS WHEREOF, the parties by their authorized representatives have set
their hands on the day first above written.
CELL THERAPEUTICS, INC. CHIREX (DUDLEY) LTD.
By: /s/ MAURICE J. SCHWARZ By: /s/ BETH P. HECHT
--------------------------------- -------------------------------
Maurice J. Schwarz Beth P. Hecht
Title: EVP, Product Development Title: Director
---------------------------- ----------------------------
Address: 201 Elliott Avenue West Address: Dudley, Cramlington
-------------------------- --------------------------
Seattle, Washington 98119 Northumberland, NE237QG
-------------------------- --------------------------
USA ENGLAND
-------------------------- --------------------------
Page 9 of 9
