FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark one)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 0-16132
CELGENE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2711928
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
7 Powder Horn Drive, Warren, NJ 07059
---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 732-271-1001.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _x__ No ___
At July 31, 2002, 78,587,374 shares of Common Stock par value $.01 per share,
were outstanding.
CELGENE CORPORATION
INDEX TO FORM 10-Q
Page No.
PART I FINANCIAL INFORMATION
Item I Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
as of June 30, 2002 (unaudited)
and December 31, 2001 3
Consolidated Statements of Operations
- Six-Month Period Ended
June 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Operations
- Three-Month Period Ended
June 30, 2002 and 2001 (unaudited) 5
Consolidated Statements of Cash Flows
- Six-Month Period Ended
June 30, 2002 and 2001 (unaudited) 6
Notes to Unaudited Consolidated
Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 20
PART II OTHER INFORMATION 22
Signatures 24
2
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30,2002 December 31, 2001
------------ -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 38,706,948 $ 47,141,291
Marketable securities available for sale 255,083,978 262,900,049
Accounts receivable, net of allowance of $1,054,973 and $998,395
at June 30, 2002 and December 31, 2001, respectively 16,974,083 13,415,101
Inventory 6,908,922 3,603,462
Other current assets 12,426,237 9,362,423
------------- -------------
Total current assets 330,100,168 336,422,326
Plant and equipment, net 12,911,731 10,645,647
Other assets 6,848,350 6,914,445
------------- -------------
Total assets $ 349,860,249 $ 353,982,418
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,870,105 $ 10,831,464
Accrued expenses 12,009,155 13,667,022
Current portion of capital leases and note obligation 179,885 586,731
Current portion of deferred revenue 2,683,225 4,882,668
------------- -------------
Total current liabilities 29,742,371 29,967,885
Long term convertible notes -- 11,713,600
Capitalized leases and note obligation, net of current portion 2,712 46,215
Other non-current liabilities 2,690,786 1,829,251
------------- -------------
Total liabilities 32,435,869 43,556,951
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value per share,
5,000,000 authorized; none outstanding at
June 30, 2002 and December 31, 2001, respectively -- --
Common stock, $.01 par value per share
120,000,000 shares authorized;
issued and outstanding 78,545,087 and 75,574,785 shares
at June 30, 2002 and December 31, 2001, respectively 785,451 755,748
Common stock in treasury, at cost; none at June 30, 2002,
and 282 shares at December 31, 2001 -- (2,804)
Additional paid-in capital 542,786,085 527,023,001
Accumulated deficit (224,904,830) (222,367,088)
Deferred compensation (750,870) (1,592,490)
Notes receivable from stockholders (42,000) (42,000)
Accumulated other comprehensive income(loss) (449,455) 6,651,100
------------- -------------
Total stockholders' equity 317,424,380 310,425,467
------------- -------------
Total liabilities and stockholders' equity $ 349,860,249 $ 353,982,418
============= =============
See accompanying notes to unaudited consolidated financial statements.
3
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Month Period Ended June 30,
-------------------------------
2002 2001
---- ----
Revenue:
Product sales $ 57,997,192 $ 35,689,075
Collaborative agreements 6,317,585 9,367,422
Related-party collaborative agreements -- 1,273,600
------------ ------------
Total revenue 64,314,777 46,330,097
Expenses:
Cost of goods sold 7,774,214 5,534,694
Research and development 36,746,314 28,928,820
Selling, general and administrative 34,694,427 24,391,095
------------ ------------
Total expenses 79,214,955 58,854,609
------------ ------------
Operating loss (14,900,178) (12,524,512)
Other income and expense:
Interest and other income 12,377,604 10,268,157
Interest expense 15,168 50,176
------------ ------------
Net loss $ (2,537,742) $ (2,306,531)
============ ============
Net loss per share of common stock:
Basic and diluted $ (0.03) $ (0.03)
============ ============
Weighted average number of shares of
common stock outstanding 76,003,000 74,778,000
============ ============
See accompanying notes to unaudited consolidated financial statements.
4
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Period Ended June 30,
---------------------------------
2002 2001
---- ----
Revenue:
Product sales $ 30,358,683 $ 18,680,668
Collaborative agreements 3,261,948 4,625,129
Related-party collaborative agreements -- 625,000
------------ ------------
Total revenue 33,620,631 23,930,797
------------ ------------
Expenses:
Cost of goods sold 4,110,074 2,839,727
Research and development 19,222,205 15,724,370
Selling, general and administrative 18,396,573 13,108,181
------------ ------------
Total expenses 41,728,852 31,672,278
------------ ------------
Operating loss (8,108,221) (7,741,481)
Other income and expense:
Interest and other income 6,399,011 5,340,214
Interest expense 5,292 17,771
------------ ------------
Net loss $ (1,714,502) $ (2,419,038)
============ ============
Net loss per share of common stock:
Basic and diluted $ (0.02) $ (0.03)
============ ============
Weighted average number of shares of
common stock outstanding 76,377,000 75,113,000
============ ============
See accompanying notes to unaudited consolidated financial statements.
5
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Month Period Ended June 30,
2002 2001
-------------- --------------
Cash flows from operating activities:
Net loss $ (2,537,742) $ (2,306,531)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of long-term assets 3,421,207 2,230,665
Recovery for accounts receivable allowances (56,371) --
Realized gain on marketable securities available
for sale (2,778,460) (474,675)
Non-cash stock-based compensation 926,524 1,917,488
Amortization of premium/discount on marketable
securities available for sale, net 236,427 146,676
Shares issued for employee benefit plans 965,760 741,509
Change in current assets & liabilities:
Increase in accounts receivable (3,502,611) (1,326,196)
Increase in inventory (3,305,460) (283,140)
(Increase)decrease in other operating assets (3,328,666) 3,974,972
Increase(decrease) in accounts payable and
accrued expenses 3,242,309 (6,490,570)
Decrease in deferred revenue (2,199,443) (8,120,073)
------------- -------------
Net cash used in operating activities (8,916,526) (9,989,875)
------------- -------------
Cash flows from investing activities:
Capital expenditures (4,856,343) (3,536,989)
Increase in notes receivable (500,000) --
Proceeds from sales and maturities of marketable
securities available for sale 43,223,272 89,239,926
Purchases of marketable securities
available for sale (39,965,724) (170,790,979)
------------- -------------
Net cash used in investing activities (2,098,795) (85,088,042)
------------- -------------
Cash flows from financing activities:
Proceeds from exercise of common stock
options and warrants 3,032,874 5,387,957
Repurchase of employee stock options (1,547) --
Repayment of capital lease and note obligation (450,349) (473,240)
------------- -------------
Net cash provided by financing activities 2,580,978 4,914,717
------------- -------------
Net decrease in cash and cash equivalents (8,434,343) (90,163,200)
Cash and cash equivalents at beginning of period 47,141,291 161,393,835
------------- -------------
Cash and cash equivalents at end of period $ 38,706,948 $ 71,230,635
============= =============
See accompanying notes to unaudited consolidated financial statements.
6
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Six Month Period Ended June 30,
2002 2001
------------ ------------
Supplemental schedule of non-cash investing and
financing activity:
Change in net unrealized gain(loss) on
marketable securities available for sale $(7,100,555) $ 546,586
=========== ===========
Deferred compensation relating to stock options $ 51,958 $ --
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 15,168 $ 50,176
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
7
CELGENE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
1. Basis of Presentation
---------------------
The unaudited consolidated financial statements have been prepared
from the books and records of Celgene Corporation and subsidiaries ("Celgene" or
the "Company") in accordance with accounting principles generally accepted in
the United States of America for interim financial information pursuant to Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required for complete annual financial statements.
In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. Interim results may not be indicative of the results that may be
expected for the year. Certain adjustments and reclassifications were made to
conform to the current year presentation.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10K.
2. Earnings per Share
------------------
"Basic" earnings (loss) per common share equals net income (loss)
divided by weighted average common shares outstanding during the period. The
Company's basic and diluted per share amounts for the three and six month
periods ended June 30, 2002 and 2001 are the same since the assumed exercise of
stock options and warrants, and the conversion of convertible notes are all
anti-dilutive because of the loss incurred by the Company during these periods.
The amount of common stock equivalents excluded from the calculation were
9,557,219 at June 30, 2002 and 10,355,247 at June 30, 2001.
3. New Accounting Pronouncement
----------------------------
In July 2002, the Financial Accounting Standards Board ("FASB") issued
FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
This Standard supercedes the accounting guidance provided by Emerging Issues
Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). FAS No. 146 requires companies to recognize
costs associated with exit activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. FAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company is currently evaluating this Standard.
8
4. Research Collaboration and Investment
-------------------------------------
The Company has two collaborative research agreements with Anthrogenesis
Corporation, a privately held biotechnology company focused on stem cell
commercialization and research, designed to evaluate the application of
Celgene's product pipeline in the stem cell therapy field. During the second
quarter, Celgene signed an agreement with Anthrogenesis to invest $6 million in
the form of notes which would be convertible into common stock if the purchase
option agreement is not executed. The investment secures an option for Celgene
to purchase all the outstanding shares of Anthrogenesis Corporation. As of July
31, 2002, $6.5 million in both convertible notes and research funding has been
provided to Anthrogenesis ($1.5 million as of June 30, 2002). Anthrogenesis is
considered a related party as a senior executive of the Company serves on the
Board of Directors of Anthrogenesis.
5. Marketable Securities Available for Sale
----------------------------------------
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value of available for sale securities by major security
type at June 30, 2002 and December 31, 2001 were as follows:
Gross Gross Estimated
June 30, 2002 Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ------------ ------------ ------------
Government agencies $ 48,273,728 $ 177,363 $ -- $ 48,451,091
Government bonds and notes 553,594 11,346 -- 564,940
Corporate debt securities 206,706,111 6,454,144 (7,092,307) 206,067,948
------------ ------------ ------------ ------------
Total $255,533,433 $ 6,642,853 $ (7,092,307) $255,083,979
============ ============ ============ ============
Gross Gross Estimated
December 31, 2001 Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ------------ ------------ ------------
Government agencies $ 24,668,882 $ 318,218 $ -- $ 24,987,100
Government bonds and notes 553,594 15,076 -- 568,670
Corporate debt securities 231,026,473 7,603,951 (1,286,145) 237,344,279
------------ ------------ ------------ ------------
Total $256,248,949 $ 7,937,245 $ (1,286,145) $262,900,049
============ ============ ============ ============
6. Inventory
---------
June 30, December 31,
2002 2001
---------- ----------
Raw materials $2,665,202 $ 763,662
Work in process 1,611,572 1,710,305
Finished goods 2,632,148 1,129,495
---------- ----------
Total $6,908,922 $3,603,462
========== ==========
9
7. Convertible Notes
-----------------
On January 20, 1999, the Company issued to an institutional investor
convertible notes in the amount of $15,000,000. The notes had a five year term
and a coupon rate of 9% with interest payable on a semi-annual basis. The notes
contained a conversion feature that allowed the note holders to convert the
notes into common shares after one year at $6 per share. During 2000,
$13,286,400 of the notes were converted into 2,214,399 common shares. During
June 2002, the remaining notes, having a carrying value of $1,713,600, were
converted into 285,601 common shares.
On July 6, 1999, the Company issued to the same institutional investor
convertible notes in the amount of $15,000,000. The notes had a five year term
and a coupon rate of 9% with interest payable on a semi-annual basis. The notes
contained a conversion feature that allowed the note holders to convert the
notes into common shares after one year at $6.33 per share. During 2000,
$5,000,000 of the notes were converted to 789,474 common shares. During June
2002, the remaining notes, having a carrying value of $10,000,000, were
converted into 1,578,948 common shares.
8. Comprehensive Loss
------------------
Comprehensive loss includes net loss and other comprehensive income
(loss) which refers to those revenues, expenses, gains and losses which are
excluded from net loss. Other comprehensive income (loss) includes net
unrealized gains and losses on marketable securities classified as
available-for-sale.
Six Month Period Ended
--------------------------------------
June 30, 2002 June 30, 2001
----------------- -----------------
Net loss $(2,537,742) $(2,306,531)
Other comprehensive income (loss):
Unrealized holding gains (loss)
arising during the period (4,322,095) 1,021,261
Less: reclassification adjustment
for gains included in net
loss (2,778,460) (474,675)
----------- -----------
Net unrealized gain (loss) on
securities (7,100,555) 546,586
----------- -----------
Total comprehensive loss $(9,638,297) $(1,759,945)
=========== ===========
10
Three Month Period Ended
--------------------------------------
June 30, 2002 June 30, 2001
--------------- ----------------
Net loss $(1,714,502) $(2,419,038)
Other comprehensive income (loss):
Unrealized holding gains (loss)
arising during the period 185,413 (799,223)
Less: reclassification adjustment
for gains included in net
loss (1,623,784) (474,675)
----------- -----------
Net unrealized loss on
securities (1,438,371) (1,273,898)
----------- -----------
Total comprehensive loss $(3,152,873) $(3,692,936)
=========== ===========
9. Stockholders' Equity
--------------------
Warrants to Acquire Common Stock
Under the terms of a private placement of Series B Preferred Stock
entered into on June 9, 1997, the Company was obligated to issue warrants to
acquire a number of shares of common stock. As of December 31, 2001, 967,693
warrants remained outstanding and were exercisable at $2.49 per share. During
the second quarter 2002, all the outstanding warrants were exercised and
converted into common shares.
Deferred Compensation Expense
Prior to the Company's merger with Signal, Signal recorded an
aggregate of approximately $9.4 million of deferred compensation for stock
options granted from 1997 through 2000, representing the difference between the
option exercise price and the estimated fair value of the underlying stock for
financial statement presentation purposes. The deferred compensation is being
amortized over the vesting period of the options. Through June 30, 2002, the
Company has recorded approximately $7.7 million of compensation expense of which
approximately $348,000 and $615,000 was recorded during the three month periods
ended June 30, 2002 and 2001, respectively and approximately $790,000 and $1.3
million was recorded during the six month period ended June 30, 2002 and 2001,
respectively. Upon the termination of certain employees and consultants, the
Company reversed approximately $885,000 of unamortized deferred compensation
relating to their unvested options through June 2002.
The Company recorded compensation expense(income) relating to stock
options and warrants issued to consultants, advisors or financial institutions
and other stock-based compensation of approximately $(58,000) and $451,000 for
the three month periods ended June 30, 2002 and 2001, respectively and
approximately $137,000 and $597,000 for the six month periods ended June 30,2002
and 2001, respectively.
11
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
---------------------
Six month period ended June 30, 2002 vs.
Six month period ended June 30, 2001
------------------------------------
Total revenue: Our total revenue for the six months ended June 30, 2002
increased 39% to $64.3 million compared with $46.3 million in the same period of
2001. Revenue in 2002 consisted of THALOMID(R) sales of $54.5 million,
Focalin(TM) sales of $3.4 million, Ritalin(R) product royalties of $1.4 million
and other collaborative agreements revenue of $4.9 million compared with
THALOMID(R) sales of $35.7 million, collaborative agreements revenue of $9.4
million and related-party revenue of $1.3 million in the same period of 2001.
Increasing use of THALOMID(R) by oncologists in the treatment of various types
of cancer, especially in multiple myeloma, contributed to the 53% growth in
sales. The decrease in collaborative agreements revenue is primarily
attributable to the completion of the amortization in November 2001 of the
up-front payment on a research agreement with Novartis Pharma AG. Related-party
revenue declined in 2002 as a result of the initial term of our agreement with
Axys Inc. ending in October 2001. The agreement has not been extended.
Cost of goods sold: Cost of goods sold during the first six months of
2002 was $7.8 million or 13.4% as a percent of product sales compared with
approximately $5.5 million or 15.5% as a percent of product sales in the
comparable period in 2001. The decrease in cost of goods sold as a percent of
product sales is attributable to more favorable quality control and quality
assurance costs and lower freight costs related to THALOMID sales. Cost of goods
sold for the first half of 2002 relating to Focalin(TM) sales was lower than the
normal cost at standard as some manufacturing costs incurred prior to
Focalin's(TM) approval in November 2001 were expensed as research and
development expenses. This favorability will continue until the cost associated
with the quantity previously expensed is completely sold.
Research and development expenses: Research and development expenses
consist primarily of salaries and benefits, contractor
12
fees, principally with contract research organizations to assist in our clinical
development programs, clinical drug supplies for our clinical and preclinical
programs as well as other consumable research supplies, and allocated facilities
charges such as building rent and utilities. Research and development expenses
increased by 27% for the six months ended June 30, 2002 to $36.7 million from
$28.9 million in the same period in 2001. During the first six months of 2002,
approximately $20.4 million was spent on THALOMID(R) and the IMiDs(R) and
SeLCIDs(TM), primarily for preclinical toxicology, phase I/II and phase III
clinical trials and regulatory expenses. We spent approximately $16.3 million in
our gene regulation, target discovery and agro-chemical programs, primarily for
internal headcount related expenses, laboratory supplies and product development
costs.
As a percent of total revenue, research and development expenses were
approximately 57% and 62% for the six months ended June 30, 2002 and 2001,
respectively. As a result of increasing revenue, research and development
expenses may continue to decrease as a percent of total revenue although the
actual dollar amount will continue to increase as we move our earlier stage
compounds through preclinical and clinical programs. In general, time to
completion of each phase would be as follows:
Phase I ----- 1-2 years
Phase II ---- 2-3 years
Phase III --- 2-3 years
Due to the significant risks and uncertainties inherent in preclinical
tests and clinical trials associated with each of our research and development
projects, the cost to complete such projects is not reasonably estimable. The
data obtained from these tests and trials may be susceptible to varying
interpretation that could delay, limit or prevent a project's advancement
through the various stages of clinical development, which would significantly
impact the costs incurred to bring a project to completion.
Selling, general and administrative expenses: Selling expenses consist
of salaries and benefits for sales and marketing and customer service personnel,
warehousing and distribution costs, and other commercial expenses to support the
sales force and the education and registration efforts underlying the
S.T.E.P.S.(R) program. General and administrative expenses consist primarily of
salaries and benefits, outside services for legal, audit, tax and investor
activities and allocations of facilities costs, principally for rent, utilities
13
and property taxes. Selling, general and administrative expenses increased by
42% for the six months ended June 30, 2002 to $34.7 million from $24.4 million
in the same period in 2001. The increase was due primarily to the expansion of
the sales and marketing organization and related expenses, an increase in
customer service staff as well as expenses related to a new customer service and
enhanced S.T.E.P.S.(R) system (System for Thalidomide Education and Prescribing
Safety). As a percent of total revenue, selling, general and administrative
expenses were approximately 54% and 53% for the six month periods ended June 30,
2002 and 2001, respectively.
Interest and other income and expense: Interest and other income for
the first six months of 2002 increased 20.5% to approximately $12.4 million from
$10.3 in the same period in 2001. The increase was primarily due to a realized
gain of $2.8 million on the sale of several corporate bonds during the first six
months of 2002 compared with a realized gain of $0.5 million during the first
six months of 2001.
Interest expense for the first six months of 2002 decreased to
approximately $15,200 from approximately $50,200 in the same period in 2001. The
decrease was due primarily to the expiration of a three year capital equipment
lease in July, 2001.
Net loss: The net loss for the six month period ended June 30, 2002
increased slightly to $2.5 million from $2.3 million in the same period of 2001.
The increased loss was due to the increase in costs and expenses of
approximately $20.3 million, offset by the increased revenue of $18.0 million
and higher interest and other income of approximately $2.1 million.
Three month period ended June 30, 2002 vs.
Three month period ended June 30, 2001
--------------------------------------
Total revenue: Our total revenue for the three months ended June 30,
2002 increased 40.5% to $33.6 million compared to $23.9 million in the same
period of 2001. Revenue in 2002 consisted of THALOMID(R) sales of $28.4 million,
Focalin(TM) sales of $2.0 million, Ritalin(R) product royalties of $0.7 million,
and other collaborative agreements revenue of $2.6 million compared to
THALOMID(R) sales of $18.7 million, collaborative agreements revenue of $4.6
million and related-party revenue of $0.6 million in the same period of 2001.
Increasing use of THALOMID(R) by oncologists in the treatment of various types
of cancer contributed to the 52% growth in product sales. The decrease in
14
collaborative agreements revenue is primarily attributable to the completion of
the amortization in November 2001 of the up-front payment from Novartis Pharma
AG related to the license agreement on Focalin(TM). Related-party revenue
declined in 2002 as a result of the initial term of our agreement with Axys Inc.
ending in October 2001. The agreement has not been extended.
Cost of goods sold: Cost of goods sold during the three months ended
June 30, 2002 was $4.1 million or 13.5% as a percent of product sales compared
with approximately $2.8 million or 15.2% as a percent of product sales in the
comparable period in 2001. The decrease in cost of goods sold as a percent of
product sales is attributable to more favorable quality control and quality
assurance costs and lower freight costs related to THALOMID sales. Cost of goods
sold for the second quarter of 2002 relating to Focalin(TM) sales was lower than
the normal cost at standard as some manufacturing costs incurred prior to
Focalin's(TM) approval in November 2001 were expensed as research and
development expenses. This favorability will continue until the cost associated
with the quantity previously expensed is completely sold.
Research and development expenses: Research and development expenses
for the second quarter of 2002 increased 22% to $19.2 million from $15.7 million
in 2001. During the second quarter of 2002, approximately $10.9 million was
spent on THALOMID(R) and the IMiDs(R) and SeLCIDs(TM), primarily for preclinical
toxicology, phase I/II and phase III clinical trials and regulatory expenses. We
spent approximately $8.3 million in our gene regulation, target discovery and
agro-chemical programs, primarily for internal headcount related expenses,
laboratory supplies and product development costs.
Selling, general and administrative expenses: Selling, general and
administrative expenses increased by approximately 40% for the three months
ended June 30, 2002 to $18.4 million from $13.1 million in the same period in
2001. The increase was due primarily to the expansion of the sales and marketing
organization and related expenses, and an increase in customer service staff as
well as expenses related to a new customer service and enhanced S.T.E.P.S.(R)
system (System for Thalidomide Education and Prescribing Safety).
Interest and other income and expense: Interest and other income for
the second quarter of 2002 increased approximately
15
20% to approximately $6.4 million from $5.3 million in the same period in 2001.
The increase was primarily due to a realized gain of $1.6 million on the sale of
several securities in the second quarter of 2002 offset by lower interest income
due to lower interest rates.
Interest expense for the second quarter of 2002 decreased to
approximately $5,300 from approximately $18,000 in the same period in 2001. The
decrease was due primarily to the expiration of a three year capital equipment
lease in July, 2001.
Net income (loss): We recorded a net loss of $1.7 million in the three
month period ended June 30, 2002 compared to a loss of $2.4 million in the same
period in 2001. The decreased loss was due to increased revenue of $9.7 million
and higher interest and other income of $1.1 million offset by the increase in
costs and expenses of $10.1.
Liquidity and capital resources: Since inception, we have financed our
working capital requirements primarily through product sales, private and public
sales of our debt and equity securities, income earned on the investment of
proceeds from the sale of such securities and revenue from research contracts
and license and milestone payments. Since our initial product launch in the
third quarter of 1998, we have recorded net product sales totaling approximately
$232.0 million through June 30, 2002. We also received $37.5 million from two
separate research and license agreements during 2000 and 2001.
Our net working capital at June 30, 2002 decreased approximately 2% to
$300.4 million from $306.5 million at December 31, 2001. The decrease in working
capital was primarily due to lower total cash, cash equivalents and marketable
securities offset by higher inventories and accounts receivable.
Cash and cash equivalents decreased to $38.7 million in the first six
months of 2002 from $47.1 million at December 31, 2001 while investments in
marketable debt securities decreased to $255.1 million from $262.9 million in
the same period. Total cash, cash equivalents and marketable securities
decreased by approximately $16.3 million reflecting the increase in research and
development and selling, general and administrative spending during the first
six months of 2002 as well as an unrealized loss on our marketable securities
portfolio of $7.1 million reflecting current market conditions.
16
We expect that our rate of spending will increase as the result of
research and product development spending, increased clinical trial costs,
increased expenses associated with the regulatory approval process and
commercialization of products currently in development, increased costs related
to the commercialization of THALOMID(R) and increased capital investments. On
February 16, 2000, we completed a public offering of 10,350,000 shares of our
common stock. Proceeds to the Company from the transaction, net of expenses,
were approximately $278.0 million. These funds, combined with the increasing
revenue from sales of Thalomid(R) and various research agreements and
collaborations are expected to provide sufficient capital for our operations for
the foreseeable future.
Contractual Obligations
Our major outstanding contractual obligations relate to our operating
(facilities) leases. Our facilities lease expense in future years will increase
over previous years as a result of a new lease arrangement entered into in 2001.
We lease a 44,500-square foot laboratory and office facility in Warren,
New Jersey, under a lease with an unaffiliated party, which has a term ending in
May 2007 with two five-year renewal options, and an adjoining 29,000-square foot
facility which has a term ending in July 2010 with two five-year renewal
options. Monthly rental expenses at this site are approximately $64,000. We also
lease an 18,000-square foot laboratory and office facility in North Brunswick,
New Jersey, under a lease with an unaffiliated party which has a term ending in
December 2009 with two five-year renewal options. Monthly rental expenses for
this facility are approximately $46,000. We believe that our laboratory
facilities are adequate for our research and development activities for at least
the next 12 months.
We also lease offices and research facilities in San Diego, California
under three operating lease agreements for our west coast research operations.
The minimum annual rents are subject to specified annual rental increases. We
also reimburse the lessor for taxes, insurance and operating costs associated
with the leases. Monthly rental expense for these facilities is approximately
$81,000. Under the terms of the lease, we have an outstanding letter of credit
for $150,000 in favor of the lessor, which is fully collateralized by cash. In
December 2001, we entered into a new ten-year lease for a 78,200 square foot
facility to consolidate our west coast research operations into
17
one building. It is anticipated that we will occupy that facility during the
fourth quarter of 2002. Monthly rental expense will be approximately $172,000.
Rental expense will be incurred when we occupy the building. We intend to
sublease the current facilities until the leases expire in 2003.
We have entered into agreements with various contractors to improve the
new facility we are leasing in San Diego, California. Under such agreements, we
have contracted to spend approximately $6.7 million for tenant improvements in
the new research facility and expect to expend funds on this project over the
next seven months. This project will be funded through our current capital
resources.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. While
our significant accounting policies are more fully described in Note 2 to our
consolidated financial statements included in our annual report on form 10K, we
believe the following accounting policy to be critical:
Revenue Recognition. We have formed collaborative research and
development agreements and alliances with several pharmaceutical companies.
These agreements are in the form of research and development and license
agreements. The agreements are for both early and late stage compounds and are
focused on specific disease areas. For the early stage compounds, the agreements
are relatively short term agreements that are renewable depending on the success
of the compounds as they move through preclinical development. The agreements
call for nonrefundable upfront payments, milestone payments on achieving
significant milestone events, and in some cases on going research funding. The
agreements also contemplate royalty payments on sales if and when the compound
receives FDA marketing approval.
18
In accordance with Staff Accounting Bulletin No. 101 ("SAB 101")
Revenue Recognition in Financial Statements, upfront payments are recorded as
deferred revenue and recognized over the estimated service period. If the
estimated service period is subsequently modified, the period over which the
upfront fee is recognized is modified accordingly on a prospective basis.
Revenue from the achievement of research and development milestones, which
represent the achievement of a significant step in the research and development
process, are recognized when and if the specific milestones are achieved.
Continuation of certain contracts is dependent upon our achieving specific
contractual milestones; however, none of the payments received to date are
refundable regardless of the outcome of the project. Research funding is
recorded in the period during which the expenses covered by the funding
occurred.
Certification of Financial Statements
The certifications by the Company's Chief Executive Officer and Chief
Financial Officer of this report on Form 10-Q, as required by section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), have been submitted to the
Securities and Exchange Commission as additional correspondence accompanying
this report.
Cautionary Statements for Forward-Looking Information
The Management's Discussion and Analysis of Financial Condition and
Results of Operations provided above contains certain forward-looking statements
which involve known and unknown risks, delays, uncertainties and other factors
not under our control which may cause actual results, performance and
achievements of Celgene to be materially different from the results, performance
or other expectations implied by these forward-looking statements. These factors
include the results of current or pending clinical trials, actions by the FDA
and other factors detailed herein and in our other filings with the Securities
and Exchange Commission.
19
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Our holdings of financial instruments are comprised of commercial paper and U.S.
government and corporate securities. These financial instruments may be
classified as securities available for sale and carried at fair value or held to
maturity and carried at amortized cost depending upon our intent. Securities
classified as available for sale are held for an indefinite period of time and
are intended to be used to meet the ongoing liquidity needs of the Company.
Unrealized gains and losses (which are deemed to be temporary) on available for
sale securities, if any, are reported as a separate component of stockholders'
equity. The cost of all debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. The amortization, along with realized
gains and losses, is included in interest income and other income. We do not use
financial derivatives for investment or trading purposes. As of June 30, 2002,
all securities have been classified as available for sale.
We have established guidelines relative to diversification and maturities to
maintain safety and liquidity. These guidelines are reviewed periodically and
may be modified depending on market conditions. Although our investments are
subject to credit risk, our Investment Policy specifies credit quality standards
for our investments and limits the amount of credit exposure from any single
issue, issuer or type of investment. Our investments are also subject to
interest rate risk and will decrease in value if market interest rates increase.
Due to the limited number of foreign currency transactions, our foreign exchange
currency risk is minimal.
20
The table below presents the principal amounts and related weighted average
interest rates by year of maturity for our investment portfolio as of June 30,
2002:
2007 and
2002 2003 2004 2005 2006 beyond Total Fair Value
------------------------------------------------------------------------------------------
(in Thousands $)
Fixed Rate $ 38,280 $ 20,650 $-- $ 28,510 $ 64,345 $ 99,775 $251,560 $253,084
Average Interest Rate 5.66% 6.79% -- 7.70% 6.78% 7.09% 6.84%
Variable Rate -- -- -- -- -- $ 2,000 $ 2,000 $ 2,000
Average Interest Rate -- -- -- -- 8.00% 8.00% --
------------------------------------------------------------------------------------------
Total $ 38,280 $ 20,650 $-- $ 28,510 $ 64,345 $101,775 $253,560 $255,084
The fair value of fixed interest rate instruments are affected by changes in
interest rates.
21
PART II - OTHER INFORMATION
Item 1. - None
Item 2. - None
Item 3. - None
Item 4. - Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on June 18, 2002. At this
meeting stockholders of the Company were asked to vote for the election of
directors, and to consider and act upon a proposal to confirm the appointment of
KPMG LLP as the independent certified public accountants of the Company for the
current fiscal year. All nominated directors were elected and the proposal
regarding the appointment of auditors was approved. The election of directors
and the proposal were approved by the following votes:
A. Election of Directors:
Name Number of Shares
----
----------------------------------------------------------------------
For Withheld Abstained
--- -------- ---------
John W. Jackson 61,954,733 5,235,238 --
Sol J. Barer, Ph.D. 61,954,733 5,235,238 --
Robert J. Hugin 61,954,733 5,235,238 --
Jack L. Bowman 67,053,182 136,789 --
Frank T. Cary 67,052,582 137,389 --
Arthur Hull Hayes, Jr.,M.D. 67,053,182 136,789 --
Gilla Kaplan, Ph.D. 67,053,182 136,789 --
Richard C.E. Morgan 67,053,182 136,789 --
Walter L. Robb, Ph.D. 67,053,182 136,789 --
22
Appointment of Auditors:
Number of Shares
--------------------------------------------------
For Against Abstained
--- ------- ---------
66,338,771 771,896 79,304
Item 5.--Other Information:
None
Item 6.--Exhibits
10.1 Amendment to 1998 Long-Term Incentive Plan, effective as of June 18, 2002.
23
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.
CELGENE CORPORATION
DATE August 14, 2002 BY /S/Robert J. Hugin
------------------------- --------------------------------------------
Robert J. Hugin
Senior Vice President
Chief Financial Officer
DATE August 14, 2002 BY /S/James R. Swenson
------------------------- --------------------------------------------
James R. Swenson
Controller
(Chief Accounting Officer)
24
EXHIBIT EXHIBIT DESCRIPTION
NO. -------------------
--
10.1 Amendment to 1998 Long-Term Incentive Plan, effective as of June 18, 2002.