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, 2004
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
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(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 (Zip Code)
offices)
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
At August 6, 2004, 82,028,039 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 Statements of Operations -
Three and Six Month Periods Ended June 30, 2004 and 2003 3
Consolidated Balance Sheets -
As of June 30, 2004 and December 31, 2003 4
Consolidated Statements of Cash Flows -
Six Month Periods Ended June 30, 2004 and 2003 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 28
Item 4 Controls and Procedures 30
PART II OTHER INFORMATION 31
Item 6 (a) Exhibits 31
(b) Reports on Form 8-K 32
Signatures 33
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Thousands of dollars, except per share amounts)
Three Month Period Ended Six Month Period Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Revenue:
Net product sales $ 79,010 $ 62,497 $ 155,130 $ 108,301
Collaborative agreements and other revenue 2,895 2,308 5,028 3,387
Royalty revenue 5,848 2,481 10,468 4,687
------------ ------------ ------------ ------------
Total revenue 87,753 67,286 170,626 116,375
------------ ------------ ------------ ------------
Expenses:
Cost of goods sold 14,094 13,874 28,489 20,427
Research and development 38,638 30,517 76,366 55,238
Selling, general and administrative 25,722 23,660 51,658 45,142
------------ ------------ ------------ ------------
Total expenses 78,454 68,051 156,513 120,807
------------ ------------ ------------ ------------
Operating income (loss) 9,299 (765) 14,113 (4,432)
Other income and expense:
Interest and other income 6,688 4,460 13,683 9,215
Interest expense 2,387 591 4,775 592
------------ ------------ ------------ ------------
Income before taxes 13,600 3,104 23,021 4,191
Income tax provision 1,156 210 1,957 345
------------ ------------ ------------ ------------
Net income $ 12,444 $ 2,894 $ 21,064 $ 3,846
============ ============ ============ ============
Net income per common share:
Basic $ 0.15 $ 0.04 $ 0.26 $ 0.05
============ ============ ============ ============
Diluted $ 0.14 $ 0.03 $ 0.24 $ 0.05
============ ============ ============ ============
Weighted average number of shares of
common stock utilized to calculate net
income per common share:
Basic 81,837,000 80,839,000 81,656,000 80,613,000
============ ============ ============ ============
Diluted 88,427,000 85,134,000 87,891,000 84,435,000
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except share and per share amounts)
June 30, 2004 December 31, 2003
------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 174,558 $ 267,453
Marketable securities available for sale 562,016 399,514
Accounts receivable, net of allowance of $2,109 and $1,530
at June 30, 2004 and December 31, 2003, respectively 40,547 35,495
Inventory 12,191 9,696
Other current assets 17,586 17,941
--------- ---------
Total current assets 806,898 730,099
Plant and equipment, net 22,982 22,546
Intangible assets, net 2,540 2,695
Goodwill 3,490 3,490
Other assets 27,306 32,506
--------- ---------
Total assets $ 863,216 $ 791,336
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,696 $ 15,340
Accrued expenses 47,762 55,276
Current portion of deferred revenue 650 589
Current portion of capital leases and note obligation 24 30
Other current liabilities 2,333 559
--------- ---------
Total current liabilities 70,465 71,794
Long term convertible note 400,000 400,000
Deferred revenue, net of current portion 1,283 1,122
Capitalized leases and note obligation, net of current portion 8 16
Other non-current liabilities 11,983 8,350
--------- ---------
Total liabilities 483,739 481,282
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value per share,
5,000,000 authorized; none outstanding at
June 30, 2004 and December 31, 2003 -- --
Common stock, $.01 par value per share
275,000,000 shares authorized;
issued and outstanding 81,982,698 and 81,411,055 shares
at June 30, 2004 and December 31, 2003, respectively 820 814
Common stock in treasury, at cost; none at December 31, 2003,
and 5,282 shares at June 30, 2004 (306) --
Additional paid-in capital 620,212 607,484
Accumulated deficit (287,792) (308,856)
Accumulated other comprehensive income 46,543 10,612
--------- ---------
Total stockholders' equity 379,477 310,054
--------- ---------
Total liabilities and stockholders' equity $ 863,216 $ 791,336
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of dollars)
Six Month Period Ended
June 30,
2004 2003
--------- ---------
Cash flows from operating activities:
Net income $ 21,064 $ 3,846
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of long-term assets 4,062 4,184
Provision (recovery) for accounts receivable allowances 458 (151)
Realized gain on marketable securities available
for sale (833) (4,244)
Non-cash stock-based expense 224 342
Amortization of premium/discount on marketable
securities available for sale, net 1,020 428
Amortization of debt issuance cost 1,221 200
Shares issued for employee benefit plans 4,267 2,775
Change in current assets and liabilities:
Increase in accounts receivable (5,510) (11,921)
Increase in inventory (2,495) (4,115)
Increase in other operating assets (1,337) (1,322)
Increase in accounts payable and
accrued expenses 2,604 15,255
Increase in deferred revenue 222 --
--------- ---------
Net cash provided by operating activities 24,967 5,277
--------- ---------
Cash flows from investing activities:
Capital expenditures (4,683) (5,244)
Proceeds from sales and maturities of marketable
securities available for sale 121,519 54,596
Purchases of marketable securities
available for sale (235,621) (21,800)
Purchase of long-term investment (7,000) --
--------- ---------
Net cash provided by (used in) investing activities (125,785) 27,552
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of common stock
options and warrants 7,938 6,704
Proceeds from issuance of convertible notes -- 387,900
Proceeds from notes receivable from stockholders -- 42
Repayment of capital lease and note obligations (15) (73)
--------- ---------
Net cash provided by financing activities 7,923 394,573
--------- ---------
Net increase (decrease) in cash and cash equivalents (92,895) 427,402
Cash and cash equivalents at beginning of period 267,453 85,475
--------- ---------
Cash and cash equivalents at end of period $ 174,558 $ 512,877
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(Thousands of dollars)
Six Month Period Ended
June 30,
2004 2003
--------- ---------
Supplemental schedule of non-cash investing and
financing activity:
Change in net unrealized gain on
marketable securities available for sale $ 35,931 $ 2,507
========= =========
Conversion of convertible notes and accrued interest thereon $ 12,656 $ --
========= =========
Supplemental disclosure of cash flow information:
Cash received related to tax benefit, net $ 337 $ 653
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(Thousands of dollars, except share and per share amounts, unless
otherwise indicated)
1. ORGANIZATION AND BASIS OF PRESENTATION
Celgene Corporation and subsidiaries ("Celgene" or the "Company") is an
integrated biopharmaceutical company primarily engaged in the discovery,
development and commercialization of innovative therapies designed to treat
cancer and immunological diseases through regulation of cellular, genomic and
proteomic targets.
The unaudited consolidated financial statements included herein have been
prepared from the books and records of the Company pursuant to the rules and
regulations of the Securities and Exchange Commission for reporting on Form
10-Q. Certain information and footnote disclosures normally included in complete
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. Certain
reclassifications have been made to the prior period's financial statements in
order to conform to the current period's 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.
Interim results may not be indicative of the results that may be expected for
the year. In the opinion of management, all adjustments considered necessary for
a fair presentation of these interim statements have been included and are of a
normal and recurring nature.
2. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per common share is computed by dividing net
income available to common stockholders by the weighted-average number of common
shares outstanding during the period increased to include all additional common
shares that would have been outstanding assuming potentially dilutive common
shares had been issued and any proceeds thereof used to repurchase common stock
at the average market price during the period. The proceeds used to repurchase
common stock are assumed to be the sum of the amount to be paid to the Company
upon exercise of options, the amount of compensation cost attributed to future
services and not yet recognized and, if applicable, the amount of income taxes
that would be credited to or deducted from capital upon exercise. The potential
common shares related to the June 2003 convertible notes issuance were
anti-dilutive and were excluded from the diluted earnings per share computation
for the three and six month periods ended June 30 2004 and 2003.
The total number of potential common shares excluded from the diluted earnings
per share computation because their inclusion would have had an anti-dilutive
was 9,302,777 and 10,750,809 for the three month period ended June 30, 2004 and
2003, respectively, and 9,879,395 and 11,709,585 for the six month period ended
June 30, 2004 and 2003, respectively.
7
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(Thousands of dollars, except share and per share amounts, unless
otherwise indicated)
The following represents the reconciliation of the basic and diluted earnings
per share computations for the three and six month periods ended June 30, 2004
and 2003:
--------------------------------------------------------------------------
Three month period ended
June 30, June 30,
2004 2003
--------------------------------------------------------------------------
Net income $12,444 $2,894
Weighted average number of common
shares outstanding:
Basic 81,837,000 80,839,000
Effect of dilutive securities:
Options 6,400,000 4,168,000
Warrants 105,000 102,000
Restricted shares and other
long-term incentives 85,000 25,000
----------- -----------
Diluted 88,427,000 85,134,000
Earnings per share:
Basic $0.15 $0.04
Diluted $0.14 $0.03
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--------------------------------------------------------------------------
Six month period ended
June 30, June 30,
2004 2003
--------------------------------------------------------------------------
Net income $21,064 $3,846
Weighted average number of common
shares outstanding:
Basic 81,656,000 80,613,000
Effect of dilutive securities:
Options 6,044,000 3,707,000
Warrants 102,000 93,000
Restricted shares and other
long-term incentives 89,000 22,000
----------- -----------
Diluted 87,891,000 84,435,000
Earnings per share:
Basic $0.26 $0.05
Diluted $0.24 $0.05
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3. CONVERTIBLE NOTES
In June 2003, the Company issued $400 million of unsecured convertible notes to
qualified institutional investors. The convertible notes have a five-year term
and a coupon rate of 1.75% payable semi-annually commencing December 1, 2003.
The convertible notes have a conversion rate of $48.45 per share, which
represented a 50% premium to the closing price of the Company's common stock on
May 28, 2003. The debt issuance costs related to
8
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(Thousands of dollars, except share and per share amounts, unless
otherwise indicated)
these convertible notes, which totaled approximately $12.2 million, are
classified under "Other Assets" on the Consolidated Balance Sheet and are being
amortized over five years, assuming no conversion. Under the terms of the
Purchase Agreement, the noteholders can convert the notes at any time into
8,255,920 shares of common stock at the conversion price, and also have the
right to require the Company to redeem the notes in cash at a price equal to
100% of the principal amount to be redeemed, plus accrued interest, prior to
maturity in the event of a change of control and certain other transactions
defined as a "fundamental change" within the Agreement. The Company has
registered the notes and common stock issuable upon conversion with the
Securities and Exchange Commission, and is required to use reasonable best
efforts to keep the related registration statement effective for the defined
period. Pursuant to the indenture governing the notes, the Company may not merge
or transfer substantially all assets, as defined, unless certain conditions are
met.
4. 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
and class of security at June 30, 2004 and December 31, 2003 were as follows:
-----------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
June 30, 2004 Cost Gain Loss Value
-----------------------------------------------------------------------------------------------------------------
Government agency
mortgage obligations $183,778 $ 590 $ (1,578) $182,790
Government agency
bonds and notes 801 -- (14) 787
Corporate debt
securities 318,238 6,581 (2,663) 322,156
Equity securities 12,656 43,627 -- 56,283
-----------------------------------------------------
Total $515,473 $ 50,798 $ (4,255) $562,016
-----------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2003 Cost Gain Loss Value
-----------------------------------------------------------------------------------------------------------------
Government agency
mortgage obligations $188,319 $ 1,053 $ (186) $189,186
Government agency
bonds and notes 650 1 (5) 646
Corporate debt
securities 199,933 9,977 (228) 209,682
-----------------------------------------------------
Total $388,902 $ 11,031 $ (419) $399,514
-----------------------------------------------------
9
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(Thousands of dollars, except share and per share amounts, unless
otherwise indicated)
As of June 30, 2004, the duration of the Company's debt securities classified as
marketable securities available-for-sale were as follows:
----------------------------------------------------------------------------
Amortized Fair
Cost Value
----------------------------------------------------------------------------
Due within one year $ 58,898 $ 59,706
Due after one year through
three years 181,672 184,331
Due after three years
through five years 82,141 80,911
Due after five years
through seven years 78,603 78,279
Due after seven years 101,503 102,506
------------------------
$502,817 $505,733
------------------------
5. INVENTORY
Inventory at June 30, 2004 and December 31, 2003 consisted of the following:
--------------------------------------------------------------------------------
March 31, December 31,
2004 2003
--------------------------------------------------------------------------------
Raw materials $2,668 $3,009
Work in process 1,295 2,537
Finished goods 8,228 4,150
-------------------------------
Total $12,191 $9,696
-------------------------------
6. STOCK BASED COMPENSATION
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES," and related interpretations, in accounting for its fixed stock
option plans. As such, compensation expense for grants to employees or members
of the Board of Directors would be recorded on the date of grant only if the
current market price of the Company's stock exceeded the exercise price.
Statement of Financial Accounting Standards ("SFAS") No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS 123") as amended, establishes accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As permitted under SFAS 123, the
Company has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements of SFAS
123, as amended.
If the exercise price of employee or director stock options is less than the
fair value of the underlying stock on the grant date, the Company records
deferred compensation for the difference and amortizes such amounts to expense
over the vesting period of the options. Options or stock awards issued to
non-employees and consultants are recorded at fair value as determined in
accordance with SFAS 123 and Emerging Issues Task Force
10
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(Thousands of dollars, except share and per share amounts, unless
otherwise indicated)
("EITF") Issue No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO
OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR
SERVICES," and expensed over the related vesting period.
The following table illustrates the effect on net income and net income per
share as if the fair-value-based method under SFAS 123 had been applied:
--------------------------------------------------------------------------------
Three Month Period Ended
June 30,
2004 2003
--------------------------------------------------------------------------------
Net income applicable to common stockholders:
As reported $ 12,444 $ 2,894
Add stock-based employee compensation
expense included in reported net income 62 63
Deduct total stock-based employee
compensation expense determined under
fair-value-based method for all awards (7,463) (4,905)
-------------------------------
Pro forma $ 5,043 $ (1,948)
-------------------------------
Net income (loss) per common share:
Basic, as reported $ 0.15 $ 0.04
Basic, pro forma $ 0.06 $ (0.02)
Diluted, as reported $ 0.14 $ 0.03
Diluted, pro forma $ 0.06 $ (0.02)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Six Month Period Ended
June 30,
2004 2003
--------------------------------------------------------------------------------
Net income applicable to common stockholders:
As reported $ 21,064 $ 3,846
Add stock-based employee compensation
expense included in reported net income 124 124
Deduct total stock-based employee
compensation expense determined under
fair-value-based method for all awards (14,515) (8,939)
-------------------------------
Pro forma $ 6,673 $ (4,969)
-------------------------------
Net income (loss) per common share:
Basic, as reported $ 0.26 $ 0.05
Basic, pro forma $ 0.08 $ (0.06)
Diluted, as reported $ 0.24 $ 0.05
Diluted, pro forma $ 0.08 $ (0.06)
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11
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(Thousands of dollars, except share and per share amounts, unless
otherwise indicated)
The pro forma effects on net income applicable to common stockholders and net
income per common share for the three and six month periods ended June 30, 2004
and 2003 may not be representative of the pro forma effects in future years.
The weighted-average fair value per share was $19.43 and $9.35 for stock options
granted in the six-month periods ended June 30, 2004 and 2003, respectively. The
company estimated the fair values of options granted using a Black-Scholes
option pricing model with the following assumptions:
--------------------------------------------------------------------------------
Three Month Period
Ended June 30,
2004 2003
--------------------------------------------------------------------------------
Risk-free interest rate 3.20% 1.92%
Expected stock price volatility 50% 44%
Expected term until exercise (years) 3.5 2.53
Expected dividend yield 0% 0%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Six Month Period
Ended June 30,
2004 2003
--------------------------------------------------------------------------------
Risk-free interest rate 2.87% 1.97%
Expected stock price volatility 50% 47%
Expected term until exercise (years) 3.5 2.68
Expected dividend yield 0% 0%
--------------------------------------------------------------------------------
Restricted Stock Awards: During 2001, the Company issued to certain employees an
aggregate of 52,500 restricted stock awards. Such restricted stock awards will
vest on September 19, 2006, unless certain conditions that would trigger
accelerated vesting are otherwise met prior to such date. The fair value of
these restricted stock awards at the grant date was $1.4 million and is being
amortized as compensation expense over the contractual vesting period.
Compensation expense relating to these restricted stock awards was approximately
$0.1 million for the three and six month periods ended June 30, 2004 and 2003,
respectively, and was classified as selling, general and administrative
expenses.
Non-Employee Share Based Payments: Expense relating to stock, stock
options and warrants issued to consultants, advisors or financial institutions
was approximately $0.1 million for each of the three month periods ended June
30, 2004 and 2003 and approximately $0.1 million and $0.2 million for the six
month periods ended June 30, 2004 and 2003, respectively.
12
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(Thousands of dollars, except share and per share amounts, unless
otherwise indicated)
7. INTANGIBLE ASSETS
The Company's intangible assets are being amortized over their estimated useful
lives. The gross carrying amount and accumulated amortization, by major
intangible asset class at June 30, 2004 and December 31, 2003 were as follows:
--------------------------------------------------------------------------------
Gross Intangible
carrying Accumulated assets,
June 30, 2004 value amortization net
--------------------------------------------------------------------------------
Supplier relationships $ 710 $ 213 $ 497
Customer lists 1,700 170 1,530
Technology 604 91 513
---------------------------------------------------
Total $ 3,014 $ 474 $ 2,540
---------------------------------------------------
--------------------------------------------------------------------------------
Gross Intangible
carrying Accumulated assets,
December 31, 2003 value amortization net
--------------------------------------------------------------------------------
Supplier relationships $ 710 $ 142 $ 568
Customer lists 1,700 113 1,587
Technology 600 60 540
---------------------------------------------------
Total $ 3,010 $ 315 $ 2,695
---------------------------------------------------
Amortization of acquisition intangibles was approximately $0.1 million for the
three month period ended June 30, 2004 and 2003, respectively, and approximately
$0.2 million for the six month period ended June 30, 2004 and 2003,
respectively. Assuming no changes in the gross carrying amount of intangible
assets, the amortization of intangible assets for the next five fiscal years is
estimated to be approximately $0.3 million for the years 2004 through 2007 and
$0.2 million for 2008.
Goodwill was $3.5 million at June 30, 2004 and December 31, 2003, respectively,
and has been allocated to the Company's Stem Cell Therapies segment. In
accordance with SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS," goodwill
is not amortized, but rather is reviewed at least annually for impairment.
8. COMPREHENSIVE INCOME
The components of comprehensive income, which represents the change in equity
from non-owner sources, for the three and six month periods ended June 30, 2004
and 2003 were as follows:
13
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(Thousands of dollars, except share and per share amounts, unless
otherwise indicated)
--------------------------------------------------------------------------------
Three Month Period Ended
June 30,
2004 2003
--------------------------------------------------------------------------------
Net income $ 12,444 $ 2,894
Other comprehensive income (loss):
Change in net unrealized gains on
available-for-sale investments 21,465 4,659
Less: reclassification adjustment
for gains included in net income (69) (1,702)
-------------------------
Net unrealized income (loss) on
available-for-sale investments 21,396 2,957
-------------------------
Total comprehensive income $ 33,840 $ 5,851
-------------------------
--------------------------------------------------------------------------------
Six Month Period Ended
June 30,
2004 2003
--------------------------------------------------------------------------------
Net income $ 21,064 $ 3,846
Other comprehensive income (loss):
Change in net unrealized gains on
available-for-sale investments 36,764 6,751
Less: reclassification adjustment
for gains included in net income (833) (4,244)
-------------------------
Net unrealized income (loss) on
available-for-sale investments 35,931 2,507
-------------------------
Total comprehensive income $ 56,995 $ 6,353
-------------------------
9. SEGMENTS
The Company operates in two business segments - Human Pharmaceuticals and Stem
Cell Therapies. Revenues and income (loss) before taxes by segment for the three
and six month periods ended June 30, 2004 and 2003 were as follows:
--------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
June 30, 2004 June 30, 2003
--------------------------------------------------------------------------------
Revenues:
Human Pharmaceuticals $ 86,621 $ 66,161
Stem Cell Therapies 1,132 1,125
---------------------------------
Total $ 87,753 $ 67,286
---------------------------------
Income (loss) before taxes:
Human Pharmaceuticals $ 17,866 $ 6,420
Stem Cell Therapies (4,266) (3,316)
---------------------------------
Total $ 13,600 $ 3,104
---------------------------------
14
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(Thousands of dollars, except share and per share amounts, unless
otherwise indicated)
----------------------------------------------------------------------
Six Months Six Months
Ended Ended
June 30, 2004 June 30, 2003
----------------------------------------------------------------------
Revenues:
Human Pharmaceuticals $ 168,583 $ 114,330
Stem Cell Therapies 2,043 2,045
----------------------------------
Total $ 170,626 $ 116,375
----------------------------------
Income (loss) before taxes:
Human Pharmaceuticals $ 30,947 $ 10,223
Stem Cell Therapies (7,926) (6,032)
----------------------------------
Total $ 23,021 $ 4,191
----------------------------------
Expenses incurred at the consolidated level are included in the results of the
human pharmaceuticals segment.
10. ALKERAN DISTRIBUTION AGREEMENT
On March 31, 2003, the Company entered into a three-year supply and distribution
agreement with GlaxoSmithKline ("GSK") to distribute, promote and sell
ALKERAN(R) (melphalan), a therapy approved by the U.S. Food and Drug
Administration for the palliative treatment of multiple myeloma and carcinoma of
the ovary. Under the terms of the agreement, Celgene purchases ALKERAN tablets
and ALKERAN for infusion from GSK and distributes the products in the United
States under the Celgene label. The agreement requires the Company to purchase
certain minimum quantities each year for the initial three-year term under a
take-or-pay arrangement aggregating $56.6 million over such period and is
automatically extended by successive one-year periods, unless at least one-year
prior to the renewal date, either party advises the other party that it elects
not to extend the agreement. The remaining minimum purchase requirements at June
30, 2004 were $43.5 million.
11. PHARMION AGREEMENTS
In March 2004, the Company converted its $12.0 million Pharmion Senior
Convertible Promissory Note, with a principal amount of $12.0 million, and
accrued interest of approximately $0.7 million into 1,150,511 shares of Pharmion
common stock at a conversion price of $11.00 per share. The Pharmion equity
securities investment, which had a fair value at June 30, 2004 of $56.3 million,
is classified as Marketable Securities Available for Sale and carried at fair
value. The unrealized gain of $43.6 million is included in Accumulated Other
Comprehensive Income in the Stockholders' Equity section of the Consolidated
Balance Sheet. For more information on the Pharmion Senior Convertible
Promissory Note and other Pharmion agreements, refer to Note 15 of the Notes to
the Consolidated Financial Statements included in the Company's 2003 Annual
Report on Form 10-K.
15
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FACTORS AFFECTING FUTURE RESULTS
Future operating results will depend on many factors, including demand for our
products, regulatory approvals of our products, the timing and market acceptance
of new products launched by us or competing companies, the timing of research
and development milestones, challenges to our intellectual property, and our
ability to control costs. The most salient factors are, in the near term,
competition with THALOMID(R), including generic competition, and delays in the
introduction of REVLIMID(TM) and, in the longer term, failure to commercialize
our early-stage drug candidates.
NEAR-TERM COMPETITION WITH THALOMID: In June 2003, the U.S. Food and Drug
Administration ("FDA") approved Millennium Pharmaceuticals' Velcade(R) for use
in refractory multiple myeloma patients. While it is possible that Velcade could
reduce THALOMID sales in multiple myeloma, we believe that THALOMID will
continue to be used as a first-line treatment and that Velcade will usually be
used in patients that have not had success with THALOMID. Also, generic
competition could reduce THALOMID sales. However, we own intellectual property,
which includes, for example, numerous United States patents covering our "System
for Thalidomide Education and Prescribing Safety," (or S.T.E.P.S.(R))
distribution program, which all patients receiving thalidomide must follow and
which are listed in the FDA Approved Drug Products with Therapeutic Equivalence
Evaluation (orange book). These patents do not expire until the years 2018-2020.
We also have exclusive rights to several issued patents covering the use of
THALOMID in oncology. Even if generic competition could manage to enter the
market, it is unlikely such products could do so before 2007 given the time
needed to commercialize a product; by that time, we expect to have at least
partially replaced THALOMID with REVLIMID. In February 2004, the FDA accepted
for review our Supplemental New Drug Application (sNDA) seeking approval to
market THALOMID for the treatment of multiple myeloma. We expect the FDA's
action in the fourth quarter of this year, which if unfavorable could have a
negative impact on the Company's financial position and/or results of
operations.
DELAY IN THE INTRODUCTION OF REVLIMID: While we have made progress in REVLIMID's
path to regulatory approval and ongoing trials remain on or ahead of their
planned patient accrual timelines for potential approvals in 2005, a delay in
the introduction of REVLIMID or its failure to demonstrate efficacy or an
acceptable safety profile could adversely affect our business, financial
condition and results of operations. On April 28, 2004, we announced plans to
stop Phase III trials in metastatic melanoma due to lack of efficacy.
16
FAILURE TO COMMERCIALIZE EARLY-STAGE DRUG CANDIDATES: Our long-term success and
sustainability depends on our ability to move our earlier-stage drug candidates
through development and to realize the commercial potential of our broad
pipeline.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED JUNE 30, 2004 VS.
THREE-MONTH PERIOD ENDED JUNE 30, 2003
TOTAL REVENUE: Total revenue and related percentages for the three-month periods
ended June 30, 2004 and 2003 were as follows:
--------------------------------------------------------------------------------
Three-month period ended
June 30, June 30,
(In thousands $) 2004 2003 % Change
--------------------------------------------------------------------------------
Net product sales:
THALOMID $ 74,580 $ 54,878 35.9%
Focalin 1,165 1,335 -12.7%
ALKERAN 3,053 6,044 -49.5%
Other 212 240 -11.7%
-------------------------------
Total net product sales $ 79,010 $ 62,497 26.4%
Collaborative agreements
and other revenue 2,895 2,308 25.4%
Royalty revenue 5,848 2,481 135.7%
-------------------------------
Total revenue $ 87,753 $ 67,286 30.4%
--------------------------------------------------------------------------------
THALOMID(R) net sales were higher in the three-month period ended June 30, 2004
primarily due to price increases implemented in the second half of 2003 and in
the second quarter of 2004. The total number of prescriptions, which increased
11.0% from the prior year period, was offset by lower average daily doses. The
three-month period ended June 30, 2003 included the benefit of the market
introduction of two new higher strength formulations during March 2003 that
resulted in increased orders at pharmacies and thus an increase in second
quarter 2003 sales volumes. Focalin(TM) net sales were lower in the three-month
period ended June 30, 2004 due to the timing of shipments to Novartis for their
commercial distribution. ALKERAN(R) net sales in the three-month period ended
June 30, 2004 were lower due to manufacturing and supply delays from the
third-party supplier.
Collaborative agreements and other revenue for the three-month period ended June
30, 2004 included approximately $1.9 million of research funding and S.T.E.P.S.
license fees received in connection with the Pharmion agreements, $0.9 million
of umbilical cord blood enrollment, collection and storage fees generated
through our Stem Cell Therapies segment and $0.1 million of other revenue. The
three-month period ended June 30, 2003 included approximately $1.3 million of
research funding and S.T.E.P.S. license fees received from Pharmion, $0.9
17
million of umbilical cord blood enrollment, collection and storage fees and $0.1
million of other revenue. We anticipate receiving a milestone payment in the
third quarter of 2004 based on the potential submission of a New Drug
Application ("NDA") by Novartis relating to Focalin LA(TM).
Royalty revenue reflects royalties received from Novartis on sales of their
entire family of Ritalin(R) drugs. The increase in royalty revenue was due to
higher Ritalin LA(R) sales in the three-month period ended June 30, 2004, and an
increase in the royalty rate.
COST OF GOODS SOLD: Cost of goods sold and related percentages for the
three-month periods ended June 30, 2004 and 2003 were as follows:
--------------------------------------------------------------------------------
Three-month period ended
June 30, June 30,
(In thousands $) 2004 2003
--------------------------------------------------------------------------------
Cost of goods sold $ 14,094 $ 13,874
Increase from prior year $ 220 N/A
Percentage increase from prior year 1.6% N/A
Percentage of net product sales 17.8% 22.2%
--------------------------------------------------------------------------------
Cost of goods sold increased from the prior year period primarily as a result of
higher royalties on THALOMID net sales, and, to a much lesser extent, higher
costs at our Stem Cell Therapies segment, which resulted from expensing
pre-approval inventory costs associated with processing umbilical cord blood and
tissue units. These increases were largely offset by lower ALKERAN costs.
Cost of goods sold as a percentage of net product sales decreased primarily due
to higher gross profit margins on THALOMID net sales that resulted from price
increases initiated in the second half of 2003 and in the second quarter of 2004
and lower ALKERAN costs as a percentage of net sales.
RESEARCH AND DEVELOPMENT: Research and development expenses consist primarily of
salaries and benefits, contractor 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, regulatory and quality expenditures and allocated facilities
charges such as building rent and utilities.
18
Research and development expenses and related percentages for the three-month
periods ended June 30, 2004 and 2003 were as follows:
--------------------------------------------------------------------------------
Three-month period ended
June 30, June 30,
(In thousands $) 2004 2003
--------------------------------------------------------------------------------
Research and development expenses $ 38,638 $ 30,517
Increase from prior year $ 8,121 N/A
Percentage increase from prior year 26.6% N/A
Percentage of total revenue 44.0% 45.4%
--------------------------------------------------------------------------------
Research and development expenses increased from the prior year period primarily
due to increased clinical spending on REVLIMID(TM) Phase III SPA trials for
multiple myeloma and REVLIMID Phase II trials for myelodysplastic syndromes and
multiple myeloma. During the three-month period ended June 30, 2004,
approximately $19.4 million was spent on human pharmaceutical clinical programs;
$9.1 million was spent on other human pharmaceutical programs, including
toxicology, analytical research and development, drug discovery, quality and
regulatory affairs; $8.3 million was spent on biopharmaceutical discovery and
development programs; and $1.8 million was spent on stem cell, biomaterials and
placental extraction programs. These expenditures support multiple core
programs, including THALOMID, REVLIMID, ACTIMID(TM), CC-11006, CC-10004,
PDE4/TNF-(alpha) inhibitors and other investigational compounds, such as kinase
inhibitors, benzopyrans, ligase inhibitors, tubulin inhibitors and placental
derived stem cell programs. During the three-month period ended June 30, 2003,
approximately $13.1 million was spent on human pharmaceutical clinical programs;
$7.5 million was spent on other human pharmaceutical programs, including
toxicology, analytical research and development and drug discovery; $9.1 million
was spent on biopharmaceutical discovery and development and agro-chemical
programs; and $0.8 million was spent on stem cell, biomaterials and placental
extraction programs. As total revenue increases, research and development
expense may continue to decrease as a percentage of total revenue, however the
actual dollar amount will continue to increase as earlier stage compounds are
moved through the preclinical and clinical stages. Generally, the time to
completion of each phase is estimated as follows:
PHASE I ----- 1-2 YEARS
PHASE II ---- 2-3 YEARS
PHASE III --- 2-3 YEARS
Due to the significant risk factors 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
19
clinical development, which would significantly impact the costs incurred to
bring a project to completion.
SELLING, GENERAL AND ADMINISTRATIVE: Selling expenses consist primarily of
salaries and benefits for sales and marketing and customer service personnel and
other commercial expenses to support the sales force. General and administrative
expenses consist primarily of salaries and benefits, outside professional
services for legal, audit, tax and investor activities, medical affairs expenses
and allocations of facilities costs, principally for rent, utilities and
property taxes.
Selling, general and administrative expenses and related percentages for the
three-month periods ended June 30, 2004 and 2003 were as follows:
--------------------------------------------------------------------------------
Three-month period ended
June 30, June 30,
(In thousands $) 2004 2003
--------------------------------------------------------------------------------
Selling, general and administrative $ 25,722 $ 23,660
expenses
Increase from prior year $ 2,062 N/A
Percentage increase from prior year 8.7% N/A
Percentage of total revenue 29.3% 35.2%
--------------------------------------------------------------------------------
Selling, general and administrative expenses increased from the prior year
period as a result of an increase of approximately $1.1 million in general
administrative and medical affairs expenses primarily due to higher headcount
related expenses and an increase of approximately $1.9 million in sales force
expenses primarily due to the creation of a sales operations group, which among
other things manages pricing and reimbursement, corporate accounts, customer
service and government affairs as well as, sales fleet expenses, offset by a
decrease in product marketing expenses.
INTEREST AND OTHER INCOME: Interest and other income increased 50.0% to
approximately $6.7 million for the three-month period ended June 30, 2004,
compared to approximately $4.5 million in the prior year period. The increase
was primarily due to an increase in interest income as a result of higher
average balances of cash, cash equivalents and marketable securities available
for sale following the issuance of our $400 million convertible notes issued on
June 3, 2003 as well as generated through operations, partially offset by lower
realized gains on the sale of marketable securities.
INTEREST EXPENSE: Interest expense increased to approximately $2.4 million for
the three-month period ended June 30, 2004 compared to approximately $0.6
million for the prior year period. The increase reflects interest expense and
amortization of debt issuance costs on the $400 million convertible notes issued
on June 3, 2003, whereas the prior year period only reflects one month of
interest expense.
20
INCOME TAX PROVISION: For the three-month period ended June 30, 2004, the income
tax provision was approximately $1.2 million and reflects an underlying
effective tax rate of 8.5%. For the prior year period, the income tax provision
was approximately $0.2 million and reflects an underlying effective tax rate of
6.8%.
NET INCOME: Net income and per common share amounts for the three-month periods
ended June 30, 2004 and 2003 were as follows:
--------------------------------------------------------------------------------
Three-month period ended
June 30, June 30,
(In thousands $, except per share amounts) 2004 2003
--------------------------------------------------------------------------------
Net income $ 12,444 $ 2,894
Per common share amounts:
Basic $ 0.15 $ 0.04
Diluted $ 0.14 $ 0.03
Weighted average number of shares of
common stock utilized to calculate per
common share amounts
Basic 81,837,000 80,839,000
Diluted 88,427,000 85,134,000
--------------------------------------------------------------------------------
Net income increased approximately $9.6 million in the three-month period ended
June 30, 2004 compared to the prior year period primarily due to an increase in
total revenues of approximately $20.5 million (attributable primarily to an
increase in THALOMID net sales of $19.7 million) offset by higher operating
expenses of approximately $10.4 million.
SIX-MONTH PERIOD ENDED JUNE 30, 2004 VS.
SIX-MONTH PERIOD ENDED JUNE 30, 2003
TOTAL REVENUE: Total revenue and related percentages for the six-month periods
ended June 30, 2004 and 2003 were as follows:
--------------------------------------------------------------------------------
Six-month period ended
June 30, June 30,
(In thousands $) 2004 2003 % Change
--------------------------------------------------------------------------------
Net product sales:
THALOMID $ 143,782 $ 100,506 43.1%
Focalin 2,194 1,335 64.3%
ALKERAN 8,823 6,044 46.0%
Other 331 416 -20.4%
-----------------------------
Total net product sales $ 155,130 $ 108,301 43.2%
Collaborative agreements
and other revenue 5,028 3,387 48.4%
Royalty revenue 10,468 4,687 123.3%
-----------------------------
Total revenue $ 170,626 $ 116,375 46.6%
-------------------------------------------------------------------------------
21
THALOMID(R) net sales were higher in the six-month period ended June 30, 2004
primarily due to price increases implemented in the second half of 2003 and the
second quarter of 2004. The total number of prescriptions, which increased 10.5%
from the prior year period, was offset by lower average daily doses. The
six-month period ended June 30, 2003 included the benefit of the market
introduction of two new higher strength formulations during March 2003 that
resulted in increased orders at pharmacies and thus an increase in second
quarter 2003 sales volumes. Focalin(TM) net sales were higher in the six-month
period ended June 30, 2004 due to the timing of shipments to Novartis for their
commercial distribution. ALKERAN(R) net sales were higher in the six-month
period ended June 30, 2004 primarily due to the fact that the ALKERAN supply and
distribution agreement with GlaxoSmithKline was executed in March 2003 and,
consequently, ALKERAN sales did not commence until the second quarter of 2003.
ALKERAN net sales in the six-month period ended June 30, 2004 were unfavorably
impacted by manufacturing and supply delays from the third-party supplier.
Collaborative agreements and other revenue for the six-month period ended June
30, 2004 included approximately $3.2 million of research funding and S.T.E.P.S.
license fees received in connection with the Pharmion agreements, $1.7 million
of umbilical cord blood enrollment, collection and storage fees generated
through our Stem Cell Therapies segment and $0.1 million of other revenue. The
six-month period ended June 30, 2003 included approximately $1.6 million of
research funding and license fees received from Pharmion, $1.6 million of
umbilical cord blood enrollment, collection and storage fees and $0.2 million of
other revenue. We anticipate receiving a milestone payment in the third quarter
of 2004 based on the potential submission of an NDA by Novartis relating to
Focalin LA(TM).
Royalty revenue reflects royalties received from novartis on sales of their
entire family of Ritalin(R) drugs. the increase in royalty revenue was due to
higher Ritalin LA(R) sales in the six-month period ended June 30, 2004, and an
increase in the royalty rate.
COST OF GOODS SOLD: Cost of goods sold and related percentages for the six-month
periods ended June 30, 2004 and 2003 were as follows:
--------------------------------------------------------------------------------
Six-month period ended
June 30, June 30,
(In thousands $) 2004 2003
--------------------------------------------------------------------------------
Cost of goods sold $ 28,489 $ 20,427
Increase from prior year $ 8,062 n/a
Percentage increase from prior year 39.5% n/a
Percentage of net product sales 18.4% 18.9%
--------------------------------------------------------------------------------
Cost of goods sold increased from the prior year period primarily as a result of
higher product sales (i.e., THALOMID, Focalin and ALKERAN), higher royalties on
THALOMID net sales and higher costs at our Stem
22
Cell Therapies segment, which resulted from expensing pre-approval inventory
costs associated with processing umbilical cord blood and tissue units.
Cost of goods sold as a percentage of net product sales decreased slightly due
to higher gross profit margins on THALOMID net sales that resulted from price
increases initiated in the second half of 2003 and in the second quarter of
2004. The increase in THALOMID gross profit margins was largely offset by higher
ALKERAN sales, and, to a much lesser extent, higher Focalin sales (both of which
have a higher cost structures than THALOMID) and by higher costs associated with
the processing of more umbilical cord blood and tissue units at our Stem Cell
Therapies segment.
RESEARCH AND DEVELOPMENT: Research and development expenses and related
percentages for the six-month periods ended June 30, 2004 and 2003 were as
follows:
--------------------------------------------------------------------------------
Six-month period ended
June 30, June 30,
(In thousands $) 2004 2003
--------------------------------------------------------------------------------
Research and development expenses $ 76,366 $ 55,238
Increase from prior year $ 21,128 N/A
Percentage increase from prior year 38.2% N/A
Percentage of total revenue 44.8% 47.5%
--------------------------------------------------------------------------------
Research and development expenses increased from the prior year period primarily
due to increased clinical spending on REVLIMID(TM) Phase III SPA trials for
multiple myeloma, REVLIMID Phase II trials for myelodysplastic syndromes and
multiple myeloma and THALOMID Phase III trials for multiple myeloma. During the
six-month period ended June 30, 2004, approximately $40.1 million was spent on
human pharmaceutical clinical programs; $16.2 million was spent on other human
pharmaceutical programs, including toxicology, analytical research and
development, drug discovery, quality and regulatory affairs; $16.7 million was
spent on biopharmaceutical discovery and development programs; and $3.4 million
was spent on stem cell, biomaterials and placental extraction programs. These
expenditures support multiple core programs, including THALOMID, REVLIMID,
ACTIMID(TM), CC-11006, CC-10004, PDE4/TNF-(alpha) inhibitors and other
investigational compounds, such as kinase inhibitors, benzopyrans, ligase
inhibitors, tubulin inhibitors and placental derived stem cell programs. During
the six-month period ended June 30, 2003, approximately $22.9 million was spent
on human pharmaceutical clinical programs; $11.9 million was spent on other
human pharmaceutical programs, including toxicology, analytical research and
development and drug discovery; $18.7 million was spent on biopharmaceutical
discovery and development and agro-chemical programs; and $1.7 million was spent
on stem cell, biomaterials and placental extraction programs. As total revenue
increases, research and development expense may continue to decrease as a
percentage of total revenue,
23
however the actual dollar amount will continue to increase as earlier stage
compounds are moved through the preclinical and clinical stages.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses and related percentages for the six-month periods ended June 30, 2004
and 2003 were as follows:
--------------------------------------------------------------------------------
Six-month period ended
June 30, June 30,
(In thousands $) 2004 2003
--------------------------------------------------------------------------------
Selling, general and administrative $ 51,658 $ 45,142
expenses
Increase from prior year $ 6,516 N/A
Percentage increase from prior year 14.4% N/A
Percentage of total revenue 30.3% 38.8%
--------------------------------------------------------------------------------
Selling, general and administrative expenses increased from the prior year
period as a result of an increase of approximately $4.4 million in general
administrative and medical affairs expenses primarily due to higher headcount
related expenses and an increase of approximately $3.0 million in sales force
expenses primarily due to the creation of a sales operations group, which among
other things manages pricing and reimbursement, corporate accounts, customer
service and government affairs as well as, sales fleet expenses, offset by a
decrease in product marketing expenses.
INTEREST AND OTHER INCOME: Interest and other income increased 48.5% to
approximately $13.7 million for the six-month period ended June 30, 2004,
compared to approximately $9.2 million in the prior year period. The increase
was primarily due to an increase in interest income as a result of higher
average balances of cash, cash equivalents and marketable securities available
for sale following the issuance of our $400 million convertible notes issued on
June 3, 2003 as well as generated through operations, partially offset by lower
realized gains on the sale of marketable securities.
INTEREST EXPENSE: Interest expense increased to approximately $4.8 million for
the six-month period ended June 30, 2004 compared to approximately $0.6 million
for the prior year period. The increase reflects interest expense and
amortization of debt issuance costs on the $400 million convertible notes issued
on June 3, 2003, whereas the prior year period only reflects one month of
interest expense.
INCOME TAX PROVISION: For the six-month period ended June 30, 2004, the income
tax provision was approximately $2.0 million and reflects an underlying
effective tax rate of 8.5%. For the prior year period, the income tax provision
was approximately $0.3 million and reflects an underlying effective tax rate of
8.2%.
24
NET INCOME: Net income and per common share amounts for the six-month periods
ended June 30, 2004 and 2003 were as follows:
--------------------------------------------------------------------------------
Six-month period ended
June 30, June 30,
(In thousands $, except per share amounts) 2004 2003
--------------------------------------------------------------------------------
Net income $ 21,064 $ 3,846
Per common share amounts:
Basic $ 0.26 $ 0.05
Diluted $ 0.24 $ 0.05
Weighted average number of shares of
common stock utilized to calculate per
common share amounts
Basic 81,656,000 80,613,000
Diluted 87,891,000 84,435,000
--------------------------------------------------------------------------------
Net income increased approximately $17.2 million in the six-month period ended
June 30, 2004 compared to the prior year period primarily due to an increase in
total revenues of approximately $54.3 million (attributable primarily to an
increase in THALOMID net sales of $43.3 million) offset by higher operating
expenses of approximately $35.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased to approximately $25.0
million for the six-month period ended June 30, 2004 compared to $5.3 million
for the prior year period. The increase was primarily due to higher earnings and
recent upward trends in net working capital levels (i.e., current assets minus
current liabilities). Net working capital at June 30, 2004 was $736.4 million
and included increases from December 31, 2003 levels in cash, cash equivalents
and marketable securities primarily due to higher net earnings and inclusion of
the Pharmion equity securities, accounts receivable primarily due to higher net
product sales and inventory primarily due to higher ALKERAN inventory levels.
Partially offsetting these increases was an increase in accounts payable.
Accrued expenses decreased from December 31, 2003 levels primarily due to 2003
incentive-based compensation, profit sharing and other accruals that were paid
during the first quarter of 2004.
Net cash used in investing activities was $125.8 million for the six-month
period ended June 30, 2004 compared to net cash provided by investing activities
of $27.6 million for the prior year period. Included in the six-month period
ended June 30, 2004 was a $7.0 million investment in Royalty Pharma Strategic
Partners, LP. The investment is classified under Other Assets on the
Consolidated Balance Sheet and measured at cost. Also included in the 2004
period investing activities were approximately $114.1 million of net marketable
securities purchases and capital spending of $4.7 million.
25
Included in the six-month period ended June 30, 2003 was approximately $32.8
million of net marketable securities sales and capital spending of $5.2 million.
Net cash provided by financing activities was $7.9 million for the six-month
period ended June 30, 2004 compared to $394.6 million in the prior year period.
Included in the prior year period were net proceeds of $387.9 million from the
issuance of our convertible notes on June 3, 2003.
We expect increased research and product development costs, clinical trial
costs, expenses associated with the regulatory approval process and
commercialization of products and capital investments. However, existing cash,
cash equivalents and marketable securities available for sale, combined with
expected net product sales and revenues from various research, collaboration and
royalties agreements are expected to provide sufficient capital resources to
fund our operations for the foreseeable future.
CONTRACTUAL OBLIGATIONS
Our major outstanding contractual obligations relate primarily to our
convertible note obligation, operating leases, ALKERAN supply and distribution
agreement, employment agreements and certain other contract commitments. The
following table sets forth our contractual obligations as of June 30, 2004 by
contractual due dates:
--------------------------------------------------------------------------------
Contractual Due Dates
Less than 1-3 3-5 More than
(IN MILLIONS $) 1 year Years Years 5 years Total
--------------------------------------------------------------------------------
Convertible Note
Obligation $ -- $ -- $ 400.0 $ -- $ 400.0
Operating leases 3.7 6.9 6.1 8.1 24.8
ALKERAN supply and
distribution agreement 18.5 25.0 -- -- 43.5
Employment agreements 2.5 4.6 -- -- 7.1
Other contract
Commitments 0.7 7.2 -- -- 7.9
-----------------------------------------------------
Total $ 25.4 $ 43.7 $ 406.1 $ 8.1 $ 483.3
--------------------------------------------------------------------------------
The Company's major outstanding contractual obligations are described in greater
detail in Notes 9 and 17 of the Notes to the Consolidated Financial Statements
included in the Company's 2003 Annual Report on Form 10-K and in the
Management's Discussion and Analysis of Financial Condition and Results of
Operation section of the Company's 2003 Annual Report on Form 10-K.
In 2003, we established a Long-Term Incentive Plan ("LTIP") designed to provide
key officers and executives with performance based incentive opportunities
contingent upon achievement of pre-established
26
corporate performance objectives, and payable only if employed at the end of the
performance cycle. The 2003 performance cycle began on May 1, 2003 and ends on
December 31, 2005 (the "2003 Cycle"). The 2004 performance cycle began on
January 1, 2004 and will end on December 31, 2006 (the "2004 Cycle").
Performance measures for the 2003 Cycle and the 2004 Cycle are based on the
following components: 25% on earnings per share, 25% on net income and 50% on
revenue.
Payouts may be in the range of 0% to 200% of the participant's salary for the
2003 Cycle and 0% to 150% of the participant's salary for the 2004 Cycle. The
maximum potential payout, assuming objectives are achieved at the 200% level and
150% level, respectively, is $6.1 million for the 2003 Cycle and $4.9 million
for the 2004 Cycle. Such awards are payable in cash or, at its discretion, the
Company can elect to pay the same value in its common stock based upon the
Company's common stock fair value at the payout date. Upon a change in control,
participants will be entitled to an immediate payment equal to their target
award, or, if higher, an award based on actual performance through the date of
the change in control.
2004 FINANCIAL OUTLOOK
In our July 22, 2004 earnings release, we updated the earnings estimate, as set
forth below, for full year 2004. Although management believes that the July 22,
2004 earnings projection continues to reflect the current thinking of
management, there can be no assurance that revenues or earnings will develop in
the manner projected or if the analysis, on which the earnings projection was
based, were to be redone on the date hereof that there would be no change in the
guidance.
REVENUES: We updated our 2004 guidance for total revenue to be in the range of
$370 to $390 million, with THALOMID net sales targeted to be in the range of
$295 to $305 million. We maintained our 2004 target revenue for the Ritalin(R)
family of drugs in a range of $40 million, which includes a significant
milestone payment for filing an NDA for Focalin LA(TM).
OPERATING EXPENSES: We maintained our 2004 guidance for research and development
expenses and selling, general and administrative expenses in the range of $160
million to $170 million and $115 million to $125 million, respectively.
EARNINGS PER SHARE: We updated our full year 2004 guidance for diluted earnings
per share to be in the range of $0.50 to $0.60 per share.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one which is both important to the portrayal of
the Company's financial condition and results of operation 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. The
27
Company's significant accounting policies are fully described in Note 1 of the
Notes to the Consolidated Financial Statements included in the Company's 2003
Annual Report on Form 10-K. The Company's critical accounting policies are
disclosed in the Management's Discussion and Analysis of Financial Condition and
Results of Operation section of the Company's 2003 Annual Report on Form 10-K.
There have been no significant changes with respect to such accounting policies.
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 the Company's 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 the Company's other filings with the
Securities and Exchange Commission.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion provides forward-looking quantitative and qualitative
information about the Company's potential exposure to market risk. Market risk
represents the potential loss arising from adverse changes in the value of
financial instruments. The risk of loss is assessed based on the likelihood of
adverse changes in fair values, cash flows or future earnings.
The Company has established guidelines relative to the diversification and
maturities of investments to maintain safety and liquidity. These guidelines are
reviewed periodically and may be modified depending on market conditions.
Although investments may be subject to credit risk, the Company's investment
policy specifies credit quality standards for its investments and limits the
amount of credit exposure from any single issue, issuer or type of investment.
The Company's investments are also subject to interest rate risk and will
decrease in value if market interest rates increase. The Company does not use
derivative instruments for investment or trading purposes. At June 30, 2004, the
Company's market risk sensitive instruments consisted of marketable securities
available for sale and unsecured convertible notes issued by the Company.
MARKETABLE SECURITIES AVAILABLE FOR SALE: At June 30, 2004 the Company's
marketable securities available for sale consisted of U.S. government agency
mortgage obligations, U.S. government agency bonds, corporate debt securities
and Pharmion equity securities, which we obtained in connection with the
conversion of the $12.0 million Pharmion Senior Convertible Promissory Note.
Marketable securities
28
available for sale are carried at fair value, 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 and
other income.
As of June 30, 2004, the principal amounts, fair values and related weighted
average interest rates of the Company's debt securities classified as marketable
securities available-for-sale were as follows:
------------------------------------------------------------------------------------------------------------------------
Fixed rate securities
Duration
0 to 1 1 to 3 3 to 5 5 to 8 Variable rate
(IN THOUSANDS $) Year Year Year Year securities Total
------------------------------------------------------------------------------------------------------------------------
Principal amount $58,543 $178,450 $80,706 $138,275 $47,150 $503,124
Fair value $59,706 $184,331 $80,911 $135,467 $45,318 $505,733
Average Interest Rate 4.09% 4.73% 4.46% 4.96% 6.98% 4.89%
------------------------------------------------------------------------------------------------------------------------
In March 2004, the Company converted the $12.0 million Pharmion Senior
Convertible Promissory Note, with a principal amount of $12.0 million and
accrued interest of approximately $0.7 million, into 1,150,511 shares of
Pharmion common stock at a conversion price of $11.00 per share. The Pharmion
equity securities investment had a fair value at June 30, 2004 of $56.3 million.
For more information see Note 11 of the Notes to the Consolidated Financial
Statements.
CONVERTIBLE DEBT: At June 30, 2004, the Company had $400.0 million of unsecured
convertible notes outstanding. The notes have a five-year term and a coupon rate
of 1.75% payable semi-annually. The notes can be converted at any time into
8,255,920 shares of common stock at a conversion price of $48.45 per share (for
more information see Note 3 of the Notes to the Consolidated Financial
Statements). At June 30, 2004, the fair value of the Company's convertible notes
exceeded the carrying value of $400.0 million by approximately $142.0 million,
which the Company believes reflects the increase in the market price of the
Company's common stock to $57.26 per share as of June 30, 2004. Assuming other
factors are held constant, an increase in interest rates generally results in a
decrease in the fair value of fixed-rate convertible debt, but does not impact
the carrying value, and an increase in the Company's stock price generally
results in an increase in the fair value of convertible debt, but does not
impact the carrying value.
29
Item 4 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our principal
executive officer and principal financial officer have concluded
that our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended), based on their evaluation of these controls and
procedures as of June 30, 2004, are effective.
(b) Changes in Internal Control Over Financial Reporting. There have not
been any changes in our internal control over financial reporting
during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes In Securities, Use of Proceeds
and Issuer Purchases of Equity Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on June 15, 2004. At
this meeting stockholders of the Company were asked to elect ten
directors, to approve an amendment to our Certificate of Incorporation to
increase the total number of authorized shares of stock to 280,000,000 and
to ratify the appointment of KPMG LLP as our independent certified public
accountants for the fiscal year ending December 31, 2004. All ten
nominated directors were elected, the amendment to our Certificate of
Incorporation was approved (and subsequently filed with the Secretary of
State for the state of Delaware) and the proposal regarding the
appointment of KPMG LLP as auditors was approved and ratified. The
election of directors and other proposals were approved by the following
votes:
A. Election of Directors:
Number of Shares
----------------
Name For Withheld
---- --- --------
John W. Jackson 67,804,164 440,770
Sol J. Barer, Ph.D 67,715,223 529,711
Robert J. Hugin 66,841,344 1,403,590
Jack L. Bowman 65,838,720 2,406,214
Frank T. Cary 66,699,743 1,545,191
Michael D. Casey 67,608,953 635,981
Arthur Hull Hayes, Jr., M.D. 67,597,320 647,614
Gilla Kaplan, Ph.D 67,604,101 640,833
Richard C.E. Morgan 66,699,942 1,544,992
Walter L. Robb, Ph.D 67,465,779 779,155
B. Amendment to our Certificate of Incorporation to increase the total
number of authorized shares of stock to 280,000,000:
Number of Shares
----------------
For Against Abstained
--- ------- ---------
59,327,289 8,849,172 68,472
31
C. Appointment of KPMG LLP as auditors:
Number of Shares
----------------
For Against Abstained
--- ------- ---------
67,339,397 851,165 54,372
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification by the Company's Chief Executive Officer dated
August 9, 2004
31.2 Certification by the Company's Chief Financial Officer dated
August 9, 2004.
32.1 Certification by the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350 dated August 9, 2004.
32.2 Certification by the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 dated August 9, 2004.
(b) Reports on Form 8-K
The Company furnished a Form 8-K, on April 22, 2004 under
Item 12 thereof, which included the Company's earnings press
release for the quarter ended March 31, 2004. The
information included in this Current Report on Form 8-K
shall not be deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise
subject to the liabilities of that section, nor shall it be
deemed incorporated by reference in this filing.
The Company filed a Form 8-K, on April 28, 2004 under Item 5
and relating to a press release, which the Company issued on
April 28, 2004.
32
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 9, 2004 BY /s/Robert J. Hugin
------------------------- -----------------------------------
Robert J. Hugin
Senior Vice President
Chief Financial Officer
DATE August 9, 2004 BY /s/James R. Swenson
------------------------- -----------------------------------
James R. Swenson
Controller
(Chief Accounting Officer)
33