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, 2005
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)
86 Morris Avenue, Summit, NJ 07901
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 673-9000.
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 5, 2005, 167,889,738 shares of Common Stock par value $.01 per share,
were outstanding.
CELGENE CORPORATION
INDEX TO FORM 10-Q
TABLE OF CONTENTS
-----------------
Page No.
--------
PART I FINANCIAL INFORMATION
Item I Unaudited Consolidated Financial Statements
Consolidated Statements of Operations -
Three and Six-Month Periods Ended June 30, 2005 and 2004 3
Consolidated Balance Sheets -
As of June 30, 2005 and December 31, 2004 4
Consolidated Statements of Cash Flows -
Six-Month Periods Ended June 30, 2005 and 2004 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 34
Item 4 Controls and Procedures 37
PART II OTHER INFORMATION 38
Item 1 Legal Proceedings 38
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds 38
Item 3 Defaults Upon Senior Securities 38
Item 4 Submission of Matters to a Vote of Security Holders 38
Item 5 Other Information 38
Item 6 Exhibits 38
Signatures 39
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three-Month Period Ended Six-Month Period Ended
June 30, June 30,
------------------------------------- -------------------------------------
2005 2004 2005 2004
--------------- ---------------- --------------- ----------------
As Restated As Restated
(See Note 2) (See Note 2)
Revenue:
Net product sales $ 105,383 $ 79,010 $ 203,028 $ 155,130
Collaborative agreements and other revenue 25,721 2,895 30,950 5,028
Royalty revenue 14,597 5,848 24,119 10,468
--------------- ---------------- --------------- ----------------
Total revenue 145,701 87,753 258,097 170,626
--------------- ---------------- --------------- ----------------
Expenses:
Cost of goods sold 18,196 14,094 30,800 28,489
Research and development 49,028 38,638 89,065 76,366
Selling, general and administrative 41,367 25,722 79,173 51,658
--------------- ---------------- --------------- ----------------
Total expenses 108,591 78,454 199,038 156,513
--------------- ---------------- --------------- ----------------
Operating income 37,110 9,299 59,059 14,113
Other income and expense:
Interest and other income (expense), net 6,716 (3,161) 5,538 4,128
Equity in losses of affiliated company 640 - 4,995 -
Interest expense 2,373 2,387 4,747 4,775
--------------- ---------------- --------------- ----------------
Income before income taxes 40,813 3,751 54,855 13,466
Income tax provision (benefit) 29,968 1,156 (4,204) 1,957
--------------- ---------------- --------------- ----------------
Net income $ 10,845 $ 2,595 $ 59,059 $ 11,509
=============== ================ =============== ================
Net income per common share:
Basic $ 0.06 $ 0.02 $ 0.35 $ 0.07
=============== ================ =============== ================
Diluted $ 0.06 $ 0.02 $ 0.32 $ 0.07
=============== ================ =============== ================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
June 30, 2005 December 31, 2004
----------------- -----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 53,790 $ 135,227
Marketable securities available for sale 669,943 613,310
Accounts receivable, net of allowance of $2,845 and $2,208
at June 30, 2005 and December 31, 2004, respectively 55,762 46,074
Inventory 33,684 24,404
Deferred income taxes 50,492 4,082
Other current assets 36,072 26,783
----------------- -----------------
Total current assets 899,743 849,880
Property, plant and equipment, net 56,811 52,039
Investment in affiliated company 18,258 -
Intangible assets, net 99,430 108,955
Goodwill 35,452 41,258
Deferred income taxes 25,379 14,613
Other assets 17,993 40,548
----------------- -----------------
Total assets $ 1,153,066 $ 1,107,293
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 22,614 $ 18,650
Accrued expenses 64,078 68,534
Income taxes payable 12,002 41,188
Current portion of deferred revenue 6,791 6,926
Deferred income taxes - 5,447
Other current liabilities 5,074 670
----------------- -----------------
Total current liabilities 110,559 141,415
Long-term convertible notes 400,000 400,000
Deferred revenue, net of current portion 64,578 73,992
Other non-current liabilities 17,260 14,442
----------------- -----------------
Total liabilities 592,397 629,849
----------------- -----------------
Stockholders' equity:
Preferred stock, $.01 par value per share,
5,000,000 authorized; none outstanding at
June 30, 2005 and December 31, 2004 - -
Common stock, $.01 par value per share,
275,000,000 shares authorized;
issued 167,750,833 and 165,079,198 shares at
June 30, 2005 and December 31, 2004, respectively 1,678 1,651
Common stock in treasury, at cost; 13,317 and 10,564 shares
at June 30, 2005 and December 31, 2004, respectively (399) (306)
Additional paid-in capital 723,661 641,907
Accumulated deficit (175,351) (234,410)
Accumulated other comprehensive income 11,080 68,602
----------------- -----------------
Total stockholders' equity 560,669 477,444
----------------- -----------------
Total liabilities and stockholders' equity $ 1,153,066 $ 1,107,293
================= =================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six-Month Period Ended
June 30,
------------------------------
2005 2004
----------- -------------
Cash flows from operating activities: As Restated
(See Note 2)
Net income $ 59,059 $ 11,509
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of long-term assets 6,708 4,062
Provision for accounts receivable allowances 637 458
Realized gain on marketable securities available for sale (423) (833)
Unrealized loss on value of EntreMed warrants 6,875 9,555
Equity in losses of affiliated company 640 -
Non-cash write off of in-process research and development 4,355 -
Non-cash stock-based compensation expense (23) 224
Amortization of premium/discount on marketable
securities available for sale, net 962 1,020
Amortization of debt issuance cost 1,221 1,221
Loss on asset disposal 51 -
Shares issued for employee benefit plans 3,506 4,267
Deferred income taxes (31,257) (912)
Other 142 -
Change in current assets and liabilities, excluding the effect of acquisition:
Increase in accounts receivable (10,444) (5,510)
Increase in inventory (9,463) (2,495)
Increase in other operating assets (11,793) (425)
Increase in accounts payable and accrued expenses 14,210 2,147
Increase (decrease) in income taxes payable (6,710) 457
Increase (decrease) in deferred revenue (1,892) 222
----------- -------------
Net cash provided by operating activities 26,361 24,967
----------- -------------
Cash flows from investing activities:
Capital expenditures (9,092) (4,683)
Business acquisition (8,429) -
Proceeds from sales and maturities of marketable
securities available for sale 188,622 237,094
Purchases of marketable securities available for sale (288,605) (235,621)
Purchase of investment securities - (7,000)
Investment in affiliated company (10,500) -
----------- -------------
Net cash used in investing activities (128,004) (10,210)
----------- -------------
Cash flows from financing activities:
Proceeds from exercise of common stock options and warrants 22,767 7,938
Purchase of treasury stock (93) -
Repayment of capital lease and note obligations (4) (15)
----------- -------------
Net cash provided by financing activities 22,670 7,923
----------- -------------
Effect of currency rate changes on cash and cash equivalents (2,464) -
Net increase (decrease) in cash and cash equivalents (81,437) 22,680
Cash and cash equivalents at beginning of period 135,227 60,328
----------- -------------
Cash and cash equivalents at end of period $ 53,790 $ 83,008
=========== =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(Dollars in thousands)
Six-Month Period Ended
June 30,
-----------------------------
2005 2004
------------ -------------
As Restated
(See Note 2)
Supplemental schedule of non-cash investing and financing activity:
Change in net unrealized gain (loss) on
marketable securities available for sale $ (42,388) $ 35,931
============ =============
Conversion of convertible notes and accrued interest thereon $ - $ 12,656
============ =============
Supplemental disclosure of cash flow information:
Interest paid $ 3,500 $ 3,500
============ =============
Income taxes paid $ 34,543 $ 1,490
============ =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Celgene Corporation and its subsidiaries (collectively "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 immune-inflammatory 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 consolidated 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 10-K, as amended.
Interim results may not be indicative of the results that may be expected for
the year. In the opinion of management, these financial statements include all
normal and recurring adjustments considered necessary for a fair presentation of
these interim statements.
The Company previously followed the common practice of classifying its
investments in auction rate notes as cash and cash equivalents on the
Consolidated Balance Sheet. It was determined that these instruments are not
cash equivalents and, therefore, the Company has made a reclassification to its
Consolidated Statement of Cash Flows for the six-month period ended June 30,
2004 in order to conform to the current year's presentation. The
reclassification resulted in a net increase of $115.6 million in the proceeds
from the sale of marketable securities (included in investing activities) for
the six-month period ended June 30, 2004.
2. RESTATEMENT OF FINANCIAL STATEMENTS
Following a review in December 2004 of the Company's accounting treatment for
the convertible preferred shares and warrants the Company received in connection
with the December 31, 2002 litigation settlement and related agreements with
EntreMed, Inc. and the Children's Medical Center Corporation, or CMCC, it was
determined that an adjustment to the Company's consolidated financial statements
was required. The Company restated its financial statements for the years ended
December 31, 2003 and 2002 in its 2004 Annual Report on Form 10-K, as amended.
For more information on the restatement see Note 2 of the Notes to the
Consolidated Financial Statements included in the Company's 2004 Annual Report
on Form 10-K, as amended. The Company has now restated its Consolidated
Statements of Operations and Cash Flows for the three- and six-month periods
ended June 30, 2004 and, as a result, interest income and other income
(expense), net, income before income taxes and net income decreased
approximately $9.8 million and $9.6 million in the three- and six-month periods
ended June 30, 2004, respectively. Earnings per share decreased by $0.05 in each
of the three- and six-month periods ended June 30, 2004. The restatement did not
have any impact on previously reported total revenue or reported net cash flows
for these same periods.
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
3. NEW ACCOUNTING PRINCIPLES
In December 2004, the FASB, issued Statement of Financial Accounting Standards
No. 123R, "Share-Based Payment," or SFAS 123R, that addresses the accounting for
share-based payment transactions in which employee services are received in
exchange for either equity instruments of the company, liabilities that are
based on the fair value of the company's equity instruments or that may be
settled by the issuance of such equity instruments. SFAS No. 123R addresses all
forms of share-based payment awards, including shares issued under employee
stock purchase plans, stock options, restricted stock and stock appreciation
rights. SFAS No. 123R eliminates the ability to account for share-based
compensation transactions using Accounting Principles Board, or APB Opinion No.
25, "Accounting for Stock Issued to Employees," or APB 25, that was provided in
Statement 123 as originally issued. Instead, under SFAS No. 123R, companies are
required to record compensation expense for all share-based payment award
transactions measured at fair value. The effective date for this statement has
been delayed to the first quarter of 2006 for calendar year companies. The
Company is currently evaluating the method of adoption and the impact of
adopting this statement and has not determined if adoption of SFAS No. 123R will
result in amounts that are similar to the current pro forma disclosures in Note
9 to these unaudited consolidated financial statements.
Emerging Issues Task Force, or EITF, Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," or
EITF 03-1, was issued in February 2004. EITF 03-1 stipulates disclosure
requirements for investments with unrealized losses that have not been
recognized as other-than-temporary impairments. The provisions of EITF 03-1 are
effective for fiscal years ending after December 15, 2003. The Company has
complied with the disclosure provisions of EITF 03-1. In September 2004, the
FASB staff issued two proposed FASB Staff Positions, or FSP: Proposed FSP EITF
Issue 03-1-a, which provides guidance for the application of paragraph 16 of
EITF 03-1 to debt securities that are impaired because of interest rate and/or
sector spread increases, and Proposed FSP EITF Issue 03-1-b, which delays the
effective date of EITF 03-1 for debt securities that are impaired because of
interest rate and/or sector spread increases. The Company is currently
monitoring these developments to assess the potential impact on its financial
position and results of operations.
4. ACQUISITION
On October 21, 2004, the Company, through an indirect wholly-owned subsidiary,
acquired all of the outstanding shares of Penn T Limited, or Penn T, a worldwide
supplier of THALOMID(R), from a consortium of private investors for a US dollar
equivalency of approximately $118.3 million in cash, net of cash acquired and
including working capital adjustments and transaction costs paid during the
three-month period ended March 31, 2005. Penn T was subsequently renamed Celgene
UK Manufacturing II, Limited, or CUK II. The results of CUK II after October 21,
2004 are included in the consolidated financial statements.
8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The purchase price allocation resulted in the following amounts being allocated
to the assets received and liabilities assumed based upon their respective fair
values.
------------------------------ ----------
Current assets $ 18,133
Intangible assets 99,841
Goodwill 35,418
---------
Assets acquired 153,392
------------------------------ ----------
Current liabilities 1,983
Deferred taxes 33,144
---------
Liabilities assumed 35,127
------------------------------ ----------
Net assets acquired $ 118,265
============================== ==========
Prior to the acquisition, Celgene and Penn T were parties to a manufacturing
agreement pursuant to which Penn T manufactured THALOMID(R) for Celgene. Through
a manufacturing agreement entered into in connection with the acquisition, the
Company is able to control manufacturing for THALOMID(R) worldwide and increases
its participation in the potential growth of THALOMID(R) opportunities in key
international markets. This acquisition was accounted for using the purchase
method of accounting for business combinations.
The following unaudited pro forma information presents a summary of consolidated
results of operations for the three- and six-month periods ended June 30, 2004
as if the acquisition of Penn T had occurred on April 1, 2004 and January 1,
2004, respectively. The unaudited pro forma results of operations are presented
for illustrative purposes only and are not necessarily indicative of the
operating results that would have occurred if the transaction had been
consummated on the date indicated, nor are they necessarily indicative of future
operating results of the combined companies and should not be construed as
representative of these amounts for any future dates or periods.
-------------------------------------- ------------------- --------------------
Three-Month Six-Month
Period Ended Period Ended
Pro forma (UNAUDITED) June 30, 2004 June 30, 2004
-------------------------------------- ------------------- --------------------
Total revenues $ 92,877 $ 179,320
Net income $ 4,388 $ 13,829
Net income per diluted share $ 0.02 $ 0.08
====================================== =================== ====================
5. 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 adjusted to add back the after-tax amount of interest recognized in the
period associated with any convertible debt issuance that may be dilutive 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
9
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
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 note issuance were determined to be
anti-dilutive for the three-month periods ended June 30, 2005 and 2004 and
therefore excluded from the diluted earnings per share computation. The
convertible note issuance was determined to be dilutive for the six-month period
ended June 2005 and anti-dilutive for the six-month period ended June 30, 2004.
The total number of potential common shares excluded from the diluted earnings
per share computation because their inclusion would have been anti-dilutive was
18,600,572 and 18,605,554 for the three-month periods ended June 30, 2005 and
2004, respectively, and 2,177,432 and 19,758,790 for the six-month periods ended
June 30, 2005 and 2004, respectively.
The following represents the reconciliation of the basic and diluted earnings
per share computations for the three- and six-month periods ended June 30, 2005
and 2004:
------------------------------------------------------------------------------ ----------------------------
Three-Month Period Ended Six-Month Period Ended
June 30, June 30,
2005 2004 2005 2004
As Restated As Restated
(See Note 2) (See Note 2)
-------------------------------------------------- ------------ -------------- ------------ ---------------
Income available to common stockholders:
Net income $ 10,845 $ 2,595 $ 59,059 $ 11,509
Interest expense on convertible debt, net of tax - - 2,786 -
------------ -------------- ------------ ---------------
Net income available to common stockholders $ 10,845 $ 2,595 $ 61,845 $ 11,509
Weighted average number of common shares
outstanding (IN THOUSANDS):
Basic 167,141 163,674 166,381 163,312
Effect of dilutive securities:
Options 8,461 12,799 7,902 12,089
Warrants 172 211 170 204
Convertible debt - - 16,512 -
Restricted shares and other
long-term incentives 237 170 257 178
-------------------------------------------------- ------------ -------------- ------------ ---------------
Diluted 176,011 176,854 191,222 175,783
Earnings per share:
Basic $ 0.06 $ 0.02 $ 0.35 $ 0.07
Diluted $ 0.06 $ 0.02 $ 0.32 $ 0.07
================================================== ============ ============== ============ ===============
6. CONVERTIBLE DEBT
In June 2003, the Company issued an aggregate principal amount of $400 million
of unsecured convertible notes in a private offering under Rule 144A. The notes
have a five-year term and a coupon rate of 1.75% payable semi-annually
commencing December 1, 2003 and June 1 and December 1 thereafter. The
convertible notes have a conversion rate of $24.225 per share, which represented
a 50% premium to the closing price on May 28, 2003 of the Company's common stock
of $16.15 per share, after adjusting prices for the two-for-one stock split
effected on October 22, 2004. The debt issuance costs related to 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
10
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
any time into an aggregate of 16,511,840 shares of common stock at the
conversion price. In addition, the noteholders 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 of the notes 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 of its assets, as defined, unless certain conditions are met.
7. MARKETABLE SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and estimated fair value of available-for-sale securities by major
security type and class of security at June 30, 2005 and December 31, 2004 were
as follows:
-------------------------------------- -------------- ---------------- ---------------- -----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
June 30, 2005 Cost Gain Loss Value
-------------------------------------- -------------- ---------------- ---------------- -----------------
Government agency mortgage obligations $ 144,285 $ 866 $ (1,011) $ 144,140
Government agency bonds and notes 645 - (6) 639
Corporate debt securities 227,985 851 (4,390) 224,446
Auction rate notes 255,700 - - 255,700
Marketable equity securities 20,212 24,806 - 45,018
-------------- ---------------- ---------------- -----------------
Total $ 648,827 $ 26,523 $ (5,407) $ 669,943
====================================== ============== ================ ================ =================
-------------------------------------- -------------- ---------------- ---------------- -----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2004 Cost Gain Loss Value
-------------------------------------- -------------- ---------------- ---------------- -----------------
Government agency mortgage obligations $ 166,959 $ 1,107 $ (904) $ 167,162
Government agency bonds and notes 798 - (7) 791
Corporate debt securities 147,864 2,723 (650) 149,937
Auction rate notes 213,550 - - 213,550
Marketable equity securities 20,212 61,658 - 81,870
-------------- ---------------- ---------------- -----------------
Total $ 549,383 $ 65,488 $ (1,561) $ 613,310
====================================== ============== ================ ================ =================
As of June 30, 2005, the duration of the Company's debt securities classified as
marketable securities available for sale were as follows:
------------------------------------- ------------------- ------------------
Amortized Fair
Cost Value
------------------------------------- ------------------- ------------------
Duration of one year or less $ 311,686 $ 311,997
Duration of one through three years 99,522 99,249
Duration of three through five years 93,172 92,635
Duration of five through seven years 107,524 106,375
Duration of seven years 16,711 14,669
------------------- ------------------
Total $ 628,615 $ 624,925
==================================== =================== ==================
11
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
8. INVENTORY
Inventory at June 30, 2005 and December 31, 2004 consisted of the following:
------------------------------------ ----------------- ---------------------
June 30, December 31,
2005 2004
------------------------------------ ----------------- ---------------------
Raw materials $ 5,084 $ 4,081
Work in process 4,223 4,356
Finished goods 24,377 15,967
----------------- ---------------------
Total $ 33,684 $ 24,404
==================================== ================= =====================
9. STOCK-BASED COMPENSATION
The Company applies the intrinsic-value-based method of accounting prescribed by
previously defined APB 25 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.
SFAS No. 123, "Accounting for Stock-Based Compensation," or 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 amortizes such
differences 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 EITF 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 or service period.
12
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
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,
2005 2004
As Restated
-------------------------------------------------------------------------------------------------
Net income as reported $ 10,845 $ 2,595
Add: stock-based employee compensation expense (income)
included in reported income (2005 net of tax) (38) 62
Deduct: stock-based employee compensation expense determined
under fair-value-based method (2005 net of tax) (4,888) (7,463)
-----------------------------
Basic pro forma net income (loss) $ 5,919 $ (4,806)
Interest expense on convertible debt, net of tax - -
-----------------------------
Diluted, pro forma net income (loss) $ 5,919 $ (4,806)
Net income per common share:
Basic, as reported $ 0.06 $ 0.02
Basic, pro forma $ 0.04 $ (0.03)
Diluted, as reported $ 0.06 $ 0.02
Diluted, pro forma $ 0.03 $ (0.03)
=================================================================================================
-------------------------------------------------------------------------------------------------
Six-Month Period Ended
June 30,
2005 2004
As Restated
-------------------------------------------------------------------------------------------------
Net income as reported $ 59,059 $ 11,509
Add: stock-based employee compensation expense (income)
included in reported income (2005 net of tax) (13) 124
Deduct: stock-based employee compensation expense determined
under fair-value-based method (2005 net of tax) (1) 8,240 (14,515)
-----------------------------
Basic pro forma net income (loss) $ 67,286 $ (2,882)
Interest expense on convertible debt, net of tax 1,393 -
-----------------------------
Diluted, pro forma net income (loss) $ 68,679 $ (2,882)
Net income per common share:
Basic, as reported $ 0.35 $ 0.07
Basic, pro forma $ 0.40 $ (0.02)
Diluted, as reported $ 0.32 $ 0.07
Diluted, pro forma $ 0.36 $ (0.02)
=================================================================================================
(1) Includes benefit attributable to recognizing deferred tax assets.
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,
2005 and 2004 may not be representative of the pro forma effects in future
years.
13
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The weighted-average fair value per share was $12.21 and $9.72 for stock options
granted in the six-month periods ended June 30, 2005 and 2004, respectively. The
Company estimated the fair values of options granted using a Black-Scholes
option pricing model with the following assumptions:
---------------------------------------------------------------------------------------------------
Three-Month Period Six-Month Period
Ended Ended
June 30, June 30,
2005 2004 2005 2004
---------------------------------------------------------------------------------------------------
Risk-free interest rate 3.74% 3.20% 3.97% 2.87%
Expected stock price volatility 41% 50% 41% 50%
Expected term until exercise (years) 4.5 3.5 4.5 3.5
Expected dividend yield 0% 0% 0% 0%
===================================================================================================
Restricted Stock Awards: During 2001, the Company issued to certain employees an
aggregate of 105,000 restricted stock awards of which 90,000 are still
outstanding. 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 the outstanding restricted stock
awards at the grant date was $1.2 million, which is being amortized as
compensation expense over the contractual vesting period and classified in
selling, general and administrative expenses. Compensation expense relating to
these restricted stock awards for the three- and six-month periods ended June
30, 2005 was favorably impacted by cancellation of a 15,000 restricted stock
award due to an employee termination, resulting in a $0.1 million credit to
expense for the three-month period ended June 30, 2005 and zero expense for the
six-month period ended June 30, 2005. Compensation expense relating to these
restricted stock awards was approximately $0.1 million for the three- and
six-month periods ended June 30, 2004.
10. INVESTMENT IN AFFILIATED COMPANY
On March 31, 2005, the Company exercised warrants to purchase 7,000,000 shares
of EntreMed, Inc. common stock (representing approximately 14.05% of the
outstanding common shares of EntreMed) at an aggregate cost of $10.5 million.
The fair value of the warrants at the time of exercise was estimated to be
approximately $12.9 million. As a result, the total value ascribed to the
Company's investment was $23.4 million. Since the Company also holds 3,350,000
shares of EntreMed voting preferred shares convertible into 16,750,000 shares of
common stock, the Company determined that it has significant influence over its
investee and is applying the equity method of accounting to its common stock
investment effective March 31, 2005. At March 31, 2005, the residual investment,
after taking a charge of approximately $4.4 million (based on the original
preliminary purchase price allocation) to write down the portion of the
investment ascribed to in-process research and development (the charge was
included in equity losses of affiliated company), exceeded the Company's
proportionate share of the EntreMed net assets by approximately $13.4 million
(based on the original preliminary purchase price allocation) and consisted of
goodwill and intangibles of approximately $12.6 million and $0.8 million,
respectively. As prescribed under the equity method of accounting, the Company
began recording its share of EntreMed gains and losses based on the Company's
common stock ownership percentage during the three-month period ended June 30,
2005. The investment in EntreMed was approximately $18.3 million at June 30,
2005 and exceeds the Company's proportionate share of EntreMed net assets by
approximately $13.2 million, which based on a preliminary valuation that is
subject to change consisted of goodwill and intangible assets of approximately
$12.4 million and $0.8 million, respectively. A summary of the unaudited
financial statements for EntreMed as of June 30, 2005 follows:
14
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
June 30, 2005
----------------------------------------------------------------------------------------
Current assets $ 37,986
Noncurrent assets 1,056
-------------------
Total assets 39,042
----------------------------------------------------------------------------------------
Current liabilities 2,862
Noncurrent liabilities 310
Minority interest 17
Total equity 35,853
-------------------
Total liabilities and equity $ 39,042
----------------------------------------------------------------------------------------
Interest in EntreMed equity at 14.05% $ 5,037
Excess of investment over share of EntreMed equity 13,221
-------------------
Total investment $ 18,258
========================================================================================
Three-Month Six-Month
Period Ended Period Ended
June 30, 2005 June 30, 2005
----------------------------------------------------------------------------------------
Total revenues $ 579 $ 579
Operating loss 4,572 4,572
Net loss 4,300 4,300
----------------------------------------------------------------------------------------
Celgene share of EntreMed, Inc. losses (14.05%) $ 604 $ 604
Amortization of intangibles 36 36
Write down of in-process research and development - 4,355
-------------------------------------
Equity in losses of affiliated company $ 640 $ 4,995
========================================================================================
Financial results of the EntreMed equity method investment are included in the
human pharmaceuticals segment. Based on the closing share price of EntreMed
common stock on June 30, 2005, the estimated fair value of the Company's common
stock investment in EntreMed was approximately $16.2 million as of June 30,
2005. The investment will be reviewed to determine whether an
other-than-temporary decline in value of the investment has been sustained. If
it is determined that the investment has sustained an other-than-temporary
decline in its value, the investment will be written down to its fair value.
Such an evaluation is judgmental and dependent on the specific facts and
circumstances. Factors that are considered by the Company in determining whether
an other-than-temporary decline in value has occurred include: the market value
of the security in relation to its cost basis, the period of time that the
market value is below cost, the financial condition of the investee and the
intent and ability to retain the investment for a sufficient period of time to
allow for recovery in the market value of the investment. The Company evaluates
information that it is aware of in addition to quoted market prices, if any, in
determining whether an other-than-temporary decline in value exists.
15
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
11. GOODWILL AND INTANGIBLE ASSETS
At June 30, 2005, the Company's recorded intangible assets related to the
acquisition of Penn T on October 21, 2004 and are being amortized over their
estimated useful lives. Intangible asset balances related to the acquisition of
Anthrogenesis Corp. were eliminated during the first quarter of 2005 as
prescribed by SFAS 109 "Accounting for Income Taxes" due to reversal of the
valuation allowance for deferred tax assets recorded at time of acquisition. At
June 30, 2005 and December 31, 2004, the gross carrying value and accumulated
amortization, by major intangible asset class were as follows:
---------------------------------------------------------------------------------------
Gross Cumulative Intangible
Carrying Accumulated Translation Assets,
June 30, 2005 Value Amortization Adjustment Net
---------------------------------------------------------------------------------------
Supplier agreements $ 99,841 $ (459) $ 48 $ 99,430
--------------------------------------------------------------
---------------------------------------------------------------------------------------
Gross Cumulative Intangible
Carrying Accumulated Translation Assets,
December 31, 2004 Value Amortization Adjustment Net
---------------------------------------------------------------------------------------
Supplier agreements $ 99,841 $ (75) $ 6,802 $ 106,568
Supplier relationships 710 (284) - 426
Customer lists 1,700 (227) - 1,473
Technology 609 (121) - 488
--------------------------------------------------------------
Total $ 102,860 $ (707) $ 6,802 $ 108,955
=======================================================================================
Amortization of acquired intangible assets was approximately $0.2 million and
$0.1 million for the three-month periods ended June 30, 2005 and 2004,
respectively, and approximately $0.4 million and $0.2 million for the six-month
periods ended June 30, 2005 and 2004, 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 $2.7
million for 2005, $8.5 million for 2006 and $8.2 million for each of the years
2007 through 2009.
At June 30, 2005, the Company's recorded goodwill related to the acquisition of
Penn T on October 21, 2004 and has been allocated to the Company's human
pharmaceuticals segment. Goodwill related to the acquisition of Anthrogenesis
Corp. was eliminated during the first quarter of 2005 as prescribed by SFAS 109,
"Accounting for Income Taxes," due to reversal of the valuation allowance for
deferred tax assets recorded at time of acquisition. The carrying value of
goodwill was $35.5 million and $41.3 million at June 30, 2005 and December 31,
2004, respectively, and is summarized as follows:
--------------------------------------------------------------------------------
Human Stem Cell
Pharmaceuticals Therapy Total
--------------------------------------------------------------------------------
Balance, December 31, 2004 $ 38,252 $ 3,006 $ 41,258
Anthrogenesis elimination - (3,006) (3,006)
Purchase accounting adjustments (347) - (347)
Foreign currency translation (2,453) - (2,453)
-------------------------------------------
Balance, June 30, 2005 $ 35,452 $ - $ 35,452
================================================================================
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill is not amortized, but rather is reviewed at least annually for
impairment.
16
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
12. COMPREHENSIVE INCOME
The components of comprehensive income, which represents the change in equity
from non-owner sources, consists of net income (losses), changes in currency
translation adjustments and the change in net unrealized gains (losses) on
marketable securities classified as available for sale. A summary of
comprehensive income for the three- and six-month periods ended June 30, 2005
and 2004 follows:
-------------------------------------------------------------------------------------------------------------
Three-Month Period Ended Six-Month Period Ended
June 30, June 30,
2005 2004 2005 2004
As Restated As Restated
(See Note 2) (See Note 2)
-----------------------------------------------------------------------------------------------------------
Net income $ 10,845 $ 2,595 $ 59,059 $ 11,509
--------------------------------------------------------------
Other comprehensive income (loss):
Unrealized gains (losses) on marketable
securities available for sale, before tax (11,543) 21,465 (42,388) 36,764
Less: reclassification adjustment for gains
included in net income (214) (69) (423) (833)
--------------------------------------------------------------
Net unrealized gains (losses) on
marketable securities available for sale (11,757) 21,396 (42,811) 35,931
Tax effect on unrealized losses 6,118 - 6,118 -
--------------------------------------------------------------
Unrealized gains (losses) on marketable
securities available for sale, net of tax (5,639) 21,396 (36,693) 35,931
Deferred income tax (see Note 13) - - (14,775) -
Currency translation adjustments (3,517) - (6,054) -
--------------------------------------------------------------
Total other comprehensive income (loss) (9,156) 21,396 (57,522) 35,931
--------------------------------------------------------------
Comprehensive income (loss) $ 1,689 $ 23,991 $ 1,537 $ 47,440
===========================================================================================================
The unrealized loss on marketable securities available for sale for the three-
and six-month periods ended June 30, 2005 included a decrease in fair value
related to the shares of Pharmion common stock of $11.2 million and $36.9
million, respectively. The unrealized gain on marketable securities available
for sale for the three- and six-month periods ended June 30, 2004 included an
increase in fair value related to shares of Pharmion common stock of $30.4
million and $43.6 million, respectively.
13. INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement carrying amounts and tax
bases of assets and liabilities using enacted tax rates in effect for years in
which the temporary differences are expected to reverse. The Company provides a
valuation allowance when it is more likely than not that deferred tax assets
will not be realized.
The Company periodically evaluates the likelihood of the realization of deferred
tax assets, and reduces the carrying amount of these deferred tax assets by a
valuation allowance to the extent it believes a portion will not be realized.
The Company considers many factors when assessing the likelihood of future
realization of its
17
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
deferred tax assets, including recent cumulative earnings experience by taxing
jurisdiction, expectations of future taxable income, the carryforward periods
available to it for tax reporting purposes, and other relevant factors.
Significant judgment is required in making this assessment.
At March 31, 2005, the Company determined it was more likely than not that the
benefits of its deferred tax assets would be realized based on favorable
clinical data related to REVLIMID(R) during the quarter in concert with the
Company's nine consecutive quarters of profitability. This led to the conclusion
that it was more likely than not that the Company will generate sufficient
taxable income to realize the benefits of its deferred tax assets. The income
tax benefit from elimination of the valuation allowances totaled $42.6 million.
The elimination of valuation allowances of approximately $3.0 million and $2.3
million related to certain deferred tax affects of historical acquisitions has
been offset first to reduce related goodwill and intangibles, respectively, with
the balance to reduce income tax expense. The elimination of valuation
allowances of approximately $30.2 million related to tax deductions that arose
in connection with stock option exercises has been offset against components of
equity. The effect of elimination of the valuation allowances of approximately
$14.8 million related to certain deferred tax affects of unrealized gains and
losses on marketable securities available for sale has been offset against
accumulated other comprehensive income. Deferred tax account balances at June
30, 2005 included deferred current and non-current assets of $63.5 million and
$60.4 million, respectively, and deferred current and non-current liabilities of
$13.0 million and $35.0 million, respectively. Deferred tax asset and liability
balances have been presented net on the accompanying balance sheet.
14. SEGMENTS
The Company operates in two business segments - Human Pharmaceuticals and Stem
Cell Therapies. Revenues and income before taxes by segment for the three- and
six-month periods ended June 30, 2005 and 2004 were as follows:
-------------------------------------------------------------------------------------------------------
Three-Month Period Ended June 30, Six-Month Period Ended June 30,
2005 2004 2005 2004
As Restated As Restated
(See Note 2) (See Note 2)
-------------------------------------------------------------------------------------------------------
Revenues:
Human Pharmaceuticals $ 138,369 $ 86,621 $ 249,486 $ 168,583
Stem Cell Therapies 7,332 1,132 8,611 2,043
-------------------------------------------------------------------
Total $ 145,701 $ 87,753 $ 258,097 $ 170,626
-------------------------------------------------------------------
Income (loss) before income:
Human Pharmaceuticals $ 40,972 $ 8,017 $ 62,182 $ 21,392
Stem Cell Therapies (159) (4,266) (7,327) (7,926)
-------------------------------------------------------------------
Total $ 40,813 $ 3,751 $ 54,855 $ 13,466
=======================================================================================================
Expenses incurred at the consolidated level are included in the results of the
human pharmaceuticals segment.
Total assets by segment as of June 30, 2005 and December 31, 2004 were as
follows:
18
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
--------------------------------------------------------------------
June 30, December 31,
2005 2004
--------------------------------------------------------------------
Human Pharmaceuticals $ 398,979 $ 334,932
Stem Cell Therapies 30,354 23,824
Unallocated 723,733 748,537
------------------------------------------
Total $ 1,153,066 $ 1,107,293
--------------------------------------------------------------------
Unallocated corporate assets consist of cash and cash equivalents and
available-for-sale marketable securities.
15. AGREEMENTS
In connection with the Company's acquisition of Penn T, the Company entered into
a Technical Services Agreement with Penn Pharmaceutical Services Limited, or
PPSL, and Penn Pharmaceutical Holding Limited pursuant to which PPSL provides
the services and facilities necessary for the manufacture of THALOMID(R) and
other thalidomide formulations. The total cost to be incurred over the five-year
minimum agreement period is approximately $11.0 million. At June 30, 2005, the
remaining cost to be incurred was approximately $9.2 million.
Following the Penn T acquisition, in December 2004 the Company amended the
Pharmion product supply agreement acquired in the Penn T acquisition. Under the
amended agreement, Pharmion paid the Company a one-time payment of $77.0 million
to amend a pre-existing supply agreement between Penn T and Pharmion in return
for a reduction in their total product supply purchase price from 28.0% of
Pharmion's thalidomide net sales, for cost of goods, to 15.5% of net sales.
Pharmion will pay the Company an additional $8.0 million over the next three
years to extend the two companies' existing thalidomide research and development
efforts. Pharmion also made a one-time payment of $3.0 million for granting
Pharmion license rights to develop and market thalidomide in three additional
Asian territories (Hong Kong, Korea and Taiwan), as well as for eliminating
termination rights held by Celgene tied to the regulatory approval of
thalidomide in the United Kingdom by November 2006. Amounts under the agreement
are recorded as deferred revenue and will be recognized on a straight-line basis
over 13 years.
In late 2004, the Company entered into agreements providing manufacturers of
isotretinoin a non-exclusive license to its System for Thalidomide Education and
Prescribing Safety, or S.T.E.P.S., patent portfolio. Revenues will be recognized
as received under the agreements. The manufacturers of isotretinoin have
licensed these patents with the intention of implementing a new pregnancy risk
management system to safely deliver isotretinoin in potentially high-risk
patient populations.
In March 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, the Company purchases ALKERAN(R)
tablets and ALKERAN(R) 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 an 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. At June 30, 2005, the remaining minimum
purchase requirements under the agreement totaled $38.1 million, consisting of
$18.1 million from the initial agreement and $20.0 million from a 12 month
extension effective to March 2007.
19
(Thousands of dollars, except per share amounts, unless otherwise indicated)
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY BACKGROUND
We are a multi-national integrated biopharmaceutical company primarily engaged
in the discovery, development and commercialization of innovative therapies
designed to treat cancer and immune-inflammatory related diseases. Over the last
several years, the Company has experienced rapid growth led by sales of
THALOMID(R) (thalidomide), our lead product, which is currently marketed for the
treatment of erythema nodosum leprosum, or ENL but more widely used off-label
for treating multiple myeloma and other cancers. The sales growth of THALOMID(R)
has enabled us to make substantial investments in research and development,
which has resulted in a broad portfolio of drug candidates in our product
pipeline. These include a pipeline of IMiDs(R) which are THALOMID(R) analogs
proprietory to Celgene and having certain immunomodulatory properties. We have
filed a New Drug Application, or NDA, with the FDA seeking approval to market
REVLIMID(R), one of our clinical-stage ImiDs immunomodulatory drugs, for the
treatment of patients with transfusion-dependent anemia due to low-or
intermediate-1- risk myelodyplastic syndromes associated with a deletion 5q
cytogenetic abnormality with or without additional cytogenetic abnormalities.
The FDA has granted priority review status for the REVLIMID(R) NDA and a
Prescription Drug User Fee Act, or PDUFA, date of October 7, 2005 has been set.
Given REVLIMID(R)'s safety and efficacy profile, its large sales potential and
the leverage we can achieve from marketing REVLIMID(R) through our established
U.S. sales force, we anticipate that if approved, the launch of REVLIMID(R),
which could occur in late 2005 or early 2006, may result in increased revenue
and earnings. Moreover, we believe that the sales growth of THALOMID(R), the
growth potential for REVLIMID(R), the depth of our product pipeline, and our
strong balance sheet position, uniquely positions us within the
biopharmaceutical industry.
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(R) and, in the longer term, failure to commercialize
our early-stage drug candidates.
NEAR-TERM COMPETITION WITH THALOMID(R): While we believe that THALOMID(R) will
continue to be used as a treatment in multiple myeloma and that competing
products will not eliminate its use, it is possible that competition as well as
changes in dosing regimens could reduce THALOMID(R) sales in multiple myeloma.
In addition, generic competition could reduce THALOMID(R) sales. However, we own
intellectual property which includes, for example, numerous U.S. patents
covering restrictive drug distribution systems for more safely delivering drugs,
including our "System for Thalidomide Education and Prescribing Safety", or
S.T.E.P.S.(R), distribution program, which all patients receiving thalidomide in
the United States must follow and which are listed in the FDA Approved Drug
Products with Therapeutic Equivalence Evaluation, or 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(R) in oncology and other
therapeutic areas. Even if generic competition were able to enter the market, it
is unlikely such products could do so before 2008 based on a number of factors.
Such factors include the time needed to commercialize such a product and the
fact that challenges to THALOMID(R) will require a generic
20
(Thousands of dollars, except per share amounts, unless otherwise indicated)
competitor to make a patent certification of non-infringement and/or invalidity
of our patents listed in the Orange Book pursuant to the U.S. Food, Drug and
Cosmetic Act, which would then, in turn, entitle us to up to a 30-month stay of
market approval of that generic equivalent. By that time, we plan to have at
least partially replaced THALOMID(R) sales with REVLIMID(R) sales. On October
22, 2004, we received an approvable letter from the FDA relating to our
THALOMID(R) multiple myeloma supplemental new drug application, or sNDA. The FDA
letter stated that sufficient support for an accelerated approval could be
provided by the results of the completed Eastern Cooperative Oncology Group, or
ECOG, study comparing thalidomide plus dexamethasone to dexamethasone alone in
previously untreated multiple myeloma patients. We completed and submitted our
responses to the FDA approvable letter during the second quarter of 2005. Review
of the data by the FDA may result in an accelerated approval of THALOMID(R) as a
treatment for multiple myeloma in the second half of 2005.
DELAY IN THE INTRODUCTION OF REVLIMID(R): While we believe that we have made
significant progress toward regulatory approval of REVLIMID(R), a delay in its
introduction or failure to demonstrate efficacy or an acceptable safety profile
could adversely affect our business, consolidated financial condition and
results of operations. Moreover, other factors such as the availability of
FDA-approved competing products could impact the market's acceptance of
REVLIMID(R). Progress made towards regulatory approval of REVLIMID(R) includes:
1) the findings of an Independent Data Monitoring Committee that evaluated both
Phase III Special Protocol Assessment (SPA) multiple myeloma trials and found a
statistically significant improvement in time to disease progression in patients
receiving REVLIMID(R) plus dexamethasone versus patients receiving dexamethasone
alone. As a result of these findings, the trials were unblinded to give patients
currently not on REVLIMID(R) the opportunity to add REVLIMID(R) to their regimen
and we have initiated discussions with the FDA and international regulatory
authorities regarding the submission of this data for potential approval, 2) the
submission of an NDA to the FDA seeking approval to market REVLIMID(R) for the
treatment of patients with transfusion-dependent anemia due to low-or
intermediate-1-risk myelodyplastic syndromes associated with a deletion 5q
cytogenetic abnormality with or without additional cytogenetic abnormalities.
Our NDA was granted priority review status and a PDUFA date of October 7, 2005
has been set. While the submission of the NDA could result in regulatory
approval if the FDA deems the data were to be sufficiently compelling, it should
be noted that the NDA is based on Phase II open label data and that the FDA does
not often grant approvals based on such data alone and 3) initiation of a Named
Patient Program in Europe.
FAILURE TO COMMERCIALIZE EARLY-STAGE DRUG CANDIDATES: Our long-term success and
sustainability depends on our ability to advance our earlier-stage drug
candidates through development and to realize the commercial potential of our
broad product pipeline.
ACQUISITION
On October 21, 2004, we acquired all of the outstanding shares of Penn T
Limited, or Penn T, a worldwide supplier of THALOMID(R), from a consortium of
private investors for a US dollar equivalency of approximately $118.3 million in
cash, net of cash acquired and including working capital adjustments and total
transaction costs. For more information see Note 4 of the Notes to the Unaudited
Consolidated Financial Statements.
21
(Thousands of dollars, except per share amounts, unless otherwise indicated)
RESULTS OF OPERATIONS-
THREE-MONTH PERIOD ENDED JUNE 30, 2005 VS. THREE-MONTH PERIOD ENDED
JUNE 30, 2004
TOTAL REVENUE: Total revenue and related percentages for the three-month periods
ended June 30, 2005 and 2004 were as follows:
-----------------------------------------------------------------------
Three-Month Period Ended
June 30,
2005 2004 % Change
-----------------------------------------------------------------------
Net product sales:
THALOMID(R) $ 94,447 $ 74,580 26.6%
Focalin(R) 1,577 1,165 35.4%
ALKERAN(R) 9,119 3,053 198.7%
Other 240 212 13.2%
-------------------------------
Total net product sales 105,383 79,010 33.4%
Collaborative agreements
and other revenue 25,721 2,895 788.5%
Royalty revenue 14,597 5,848 149.6%
-------------------------------
Total revenue $ 145,701 $ 87,753 66.0%
=======================================================================
THALOMID(R) net sales were higher in the three-month period ended June 30, 2005,
as compared to the three-month period ended June 30, 2004, primarily due to
price increases implemented as we move towards a cost of therapy pricing
structure as opposed to a price per milligram basis. Total sales volume
decreased as a result of a decrease of approximately 0.7% in the total number of
prescriptions. Partially offsetting the increase in THALOMID(R) sales were
higher gross to net sales accruals for sales returns, Medicaid rebates and
distributor chargebacks, which are recorded based on historical data. Included
in the three-month period ended June 30, 2005 were sales of approximately $1.5
million from our U.K. subsidiary, Celgene U.K. Manufacturing II, Limited, or CUK
II, which acquired Penn T Limited on October 21, 2004. We anticipate CUK II's
sales to be higher in the second half of 2005 relative to the first half of 2005
as revenue begins to be recognized on sales of post acquisition inventory to
Pharmion. Focalin(R) net sales were higher in the three-month period ended June
30, 2005, as compared to the three-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 three-month period ended June 30, 2005, as compared
to the three-month period ended June 30, 2004, due to price increases
implemented since the end of the second quarter of 2004 as well as the
improvement of supply disruptions experienced in which led to inconsistent
supplies of ALKERAN(R) IV and consequently inconsistent end-market buying
patterns. Partially offsetting the increase in ALKERAN(R) sales were higher
gross to net sales accruals (primarily distributor chargebacks) as we begin to
have more historical data on which to base our accrual amounts.
Revenues from collaborative agreements and other sources for the three-month
period ended June 30, 2005 included a $20.0 million milestone payment from
Novartis for the NDA approval of Focalin(R)XR; approximately $3.5 million
related to our sponsored research, license and other agreements with Pharmion
Corporation; approximately $1.4 million from umbilical cord blood enrollment,
collection and storage fees generated through our LifeBank(TM)USA business; and
approximately $0.8 million for licensing to EntreMed, Inc. rights to develop and
commercialize our tubulin inhibitor compounds. The three-month period ended June
30, 2004 included approximately $1.9 million related to our sponsored research,
license and other agreements with Pharmion Corporation; approximately $0.9
million from umbilical cord
22
(Thousands of dollars, except per share amounts, unless otherwise indicated)
blood enrollment, collection and storage fees generated through our
LifeBank(TM)USA business; and approximately $0.1 million from other
miscellaneous research and development agreements.
Royalty revenue for the three-month period ended June 30, 2005 included
approximately $11.7 million and $2.6 million of royalties received from Novartis
on sales of their entire family of Ritalin(R) drugs and Focalin(R)XR,
respectively; approximately $0.1 million of royalties received from Pharmion on
their commercial sales of THALOMID(R); and approximately $0.2 million of
miscellaneous other royalties. The three-month period ended June 30, 2004
included approximately $5.8 million of royalties received from Novartis on sales
of their entire family of Ritalin(R) drugs. The increase in Ritalin(R) royalty
revenue in 2005 was due to increases in the royalty rate on both Ritalin(R) and
Ritalin(R) LA as well as an increase in Ritalin(R) LA sales by Novartis.
COST OF GOODS SOLD: Cost of goods sold and related percentages for the
three-month periods ended June 30, 2005 and 2004 were as follows:
--------------------------------------------------------------
Three-Month Period Ended
June 30,
2005 2004
--------------------------------------------------------------
Cost of goods sold $ 18,196 $14,094
Increase from prior year $ 4,102 N/A
Percentage increase from prior year 29.1% N/A
Percentage of net product sales 17.3% 17.8%
==============================================================
Cost of goods sold were higher in the three-month period ended June 30, 2005, as
compared to the three-month period ended June 30, 2004, primarily due to higher
ALKERAN(R) costs as a result of higher sales volumes and higher royalties on
THALOMID(R) net sales. Cost of goods sold as a percentage of net product sales
decreased in the three-month period ended June 30, 2005, as compared to the
three-month period ended June 30, 2004, primarily due to higher gross profit
margins on ALKERAN(R) net sales.
RESEARCH AND DEVELOPMENT: Research and development expenses consist primarily of
salaries and benefits, contractor fees (paid principally to contract research
organizations to assist in our clinical development programs), costs of drug
supplies for our clinical and preclinical programs, costs of other consumable
research supplies, regulatory and quality expenditures and allocated facilities
charges such as building rent and utilities.
Research and development expenses and related percentages for the three-month
periods ended June 30, 2005 and 2004 were as follows:
-----------------------------------------------------------------
Three-Month Period Ended
June 30,
2005 2004
-----------------------------------------------------------------
Research and development expenses $ 49,028 $38,638
Increase from prior year $ 10,390 N/A
Percentage increase from prior year 26.9% N/A
Percentage of total revenue 33.6% 44.0%
=================================================================
Research and development expenses were higher in the three-month period ended
June 30, 2005, as compared to the three-month period ended June 30, 2004,
primarily due to higher clinical research and
23
(Thousands of dollars, except per share amounts, unless otherwise indicated)
development costs to support on-going clinical development and regulatory
advancement of REVLIMID(R) Phase II and Phase III programs in myelodysplastic
syndromes and pivotal Phase III SPA trials for multiple myeloma.
Research and development expenses in the three-month period ended June 30, 2005
consisted of approximately $25.8 million spent on human pharmaceutical clinical
programs; $11.5 million spent on other human pharmaceutical programs, including
toxicology, analytical research and development, drug discovery, quality and
regulatory affairs; $9.2 million spent on biopharmaceutical discovery and
development programs; and $2.5 million spent on placental stem cell and
biomaterials programs. These expenditures support multiple core programs,
including THALOMID(R), REVLIMID(R), ACTIMID(R), CC-11006, PDE4/TNF-alpha
inhibitors, other investigational compounds, such as kinase inhibitors,
benzopyranones and ligase inhibitors and placental and cord blood derived stem
cell programs. In 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 placental stem cell and biomaterials
programs.
As total revenue increases, research and development expense may continue to
decrease as a percentage of total revenue, however the actual dollar amount may
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 clinical development, which would significantly
impact the costs incurred to bring a project to completion.
SELLING, GENERAL AND ADMINISTRATIVE: Selling expenses consisted primarily of
salaries and benefits for sales and marketing and customer service personnel and
other commercial expenses to support our sales force. General and administrative
expenses consisted primarily of salaries and benefits, outside services for
legal, audit, tax and investor activities and allocations of facilities costs,
principally for rent, utilities and property taxes.
24
(Thousands of dollars, except per share amounts, unless otherwise indicated)
Selling, general and administrative expenses and related percentages for the
three-month periods ended June 30, 2005 and 2004 were as follows:
---------------------------------------------------------------------------
Three-Month Period Ended
June 30,
2005 2004
---------------------------------------------------------------------------
Selling, general and administrative expenses $ 41,367 $ 25,722
Increase from prior year $ 15,645 N/A
Percentage increase from prior year 60.8% N/A
Percentage of total revenue 28.4% 29.3%
===========================================================================
Selling, general and administrative expenses were higher in the three-month
period ended June 30, 2005, as compared to the three-month period ended June 30,
2004, primarily due to an increase of approximately $5.8 million in marketing
expenses related to market research, headcount and other pre- REVLIMID(R) launch
expenses and an increase of approximately $8.0 million in general administrative
and medical affair expenses largely the result of higher headcount-related
expenses. Included in the three-month period ended June 30, 2005 was
approximately $1.0 million of expenses related to accelerated depreciation of
leasehold improvements at four New Jersey locations being consolidated into our
new corporate headquarters.
INTEREST AND OTHER INCOME (EXPENSE), NET: Interest and other income (expense),
net was $6.7 million of income for the three-month period ended June 30, 2005
and primarily reflects interest and realized gains on our cash and marketable
securities portfolio. Interest and other income (expense) was $3.2 million of
expense for the three-month period ended June 30, 2004 and includes a charge of
approximately $9.8 million related to changes in the estimated value of our
investment in EntreMed, Inc. warrants. Excluding this charge, adjusted interest
and other income (expense) was $6.7 million of net other income for the
three-month period ended June 30, 2004 and in-line with 2005.
EQUITY IN LOSSES OF AFFILIATED COMPANY: On March 31, 2005 the Company exercised
warrants to purchase 7,000,000 shares of EntreMed, Inc. common stock
(approximately 14.05% of the outstanding common shares). Since we also hold
3,350,000 shares of EntreMed voting preferred shares convertible into 16,750,000
shares of common stock, we determined that we have significant influence over
EntreMed and are applying the equity method of accounting to our common stock
investment effective March 31, 2005. Under the equity method of accounting, we
record our 14.05% share of EntreMed gains and losses, which for the three-month
period ended June 30, 2005, was a loss of approximately $0.6 million.
INTEREST EXPENSE: Interest expense was approximately $2.4 million for each of
the three-month periods ended June 30, 2005 and 2004 and primarily reflects
three months of interest expense and amortization of debt issuance costs on the
$400 million convertible notes issued on June 3, 2003.
INCOME TAX PROVISION (BENEFIT): The income tax provision for the three-month
period ended June 30, 2005 was approximately $30.0 million and reflects the
impact of certain expenses that are not currently deductible for tax purposes.
The income tax provision for the three-month period ended June 30, 2004 was
approximately $1.2 million.
At March 31, 2005, we determined it was more likely than not that the benefits
of our deferred tax assets would be realized. This determination was based upon
the external Independent Data Monitoring Committee's ("IMDC") analyses of two
Phase III Special Protocol Assessment (SPA) multiple myeloma
25
(Thousands of dollars, except per share amounts, unless otherwise indicated)
trials and the conclusion that these trials exceeded the pre-specified stopping
rule. The IDMC found a statistically significant improvement in time to disease
progression -- the primary endpoint of these Phase III trials -- in patients
receiving REVLIMID(R) plus dexamethasone compared to patients receiving
dexamethasone alone. This, in concert with our nine consecutive quarters of
profitability led to the conclusion that it was more likely than not that we
will generate sufficient taxable income to realize the benefits of our deferred
tax assets. As a result, we recognized an income tax benefit in the three-month
period ended March 31, 2005 from elimination of the valuation allowance of
approximately $42.6 million. The elimination of valuation allowances relating to
certain historical acquisitions were first offset against goodwill and
intangibles with the balance applied to reduce income tax expense. The
elimination of valuation allowances relating to tax deductions that arose in
connection with stock option exercises and marketable securities were offset
against components of equity.
NET INCOME: Net income and per common share amounts for the three-month periods
ended June 30, 2005 and 2004 were as follows:
------------------------------------------------------------------------
Three-Month Period Ended
June 30,
2005 2004
As Restated
------------------------------------------------------------------------
Net income $ 10,845 $ 2,595
Per common share amounts:
Basic $ 0.06 $ 0.02
Diluted $ 0.06 $ 0.02
Weighted average number of shares of
common stock utilized to calculate
per common share amounts:
Basic 167,141 163,674
Diluted 176,011 176,854
========================================================================
Net income and per common share amounts were higher in the three-month period
ended June 30, 2005, as compared to the three-month period ended June 30, 2004,
primarily due to an increase in total revenues of approximately $57.9 million
(driven primarily by an increase in THALOMID(R) net sales of $19.9 million and
inclusion in the three-month period ended June 30, 2005 of a $20.0 milestone
payment from Novartis for the NDA approval of Focalin(R)XR) offset by higher
operating expenses of approximately $30.1 million (driven by REVLIMID(R)
clinical and regulatory research and development costs and related prelaunch
selling, general and administrative costs). Also contributing to the increase
was the fact that included in the three-month period ended June 30, 2004 was a
charge of approximately $9.8 million for the change in the estimated value of
our investment in EntreMed warrants, which were exercised on March 31, 2005, and
accordingly no amounts were recorded for changes in the estimated value of the
warrants during the three-month period ended June 30, 2005.
26
(Thousands of dollars, except per share amounts, unless otherwise indicated)
RESULTS OF OPERATIONS-
SIX-MONTH PERIOD ENDED JUNE 30, 2005 VS. SIX-MONTH PERIOD ENDED JUNE 30, 2004
TOTAL REVENUE: Total revenue and related percentages for the six-month periods
ended June 30, 2005 and 2004 were as follows:
-----------------------------------------------------------------------
Six-Month Period Ended
June 30,
2005 2004 % Change
-----------------------------------------------------------------------
Net product sales:
THALOMID(R) $ 182,838 $ 143,782 27.2%
Focalin(R) 2,803 2,194 27.8%
ALKERAN(R) 16,858 8,823 91.1%
Other 529 331 59.8%
-----------------------------
Total net product sales $ 203,028 $ 155,130 30.9%
Collaborative agreements
and other revenue 30,950 5,028 515.6%
Royalty revenue 24,119 10,468 130.4%
-----------------------------
Total revenue $ 258,097 $ 170,626 51.3%
=======================================================================
THALOMID(R) net sales were higher in the six-month period ended June 30, 2005,
as compared to the six-month period ended June 30, 2004, primarily due to price
increases implemented as we move towards a cost of therapy pricing structure as
opposed to a price per milligram. The total number of prescriptions, which
increased 2.2% from the prior year period, was offset by lower average daily
doses. Partially offsetting the increase in THALOMID(R) sales were higher gross
to net sales accruals for sales returns, Medicaid rebates and distributor
chargebacks, which are recorded based on historical data. Included in the
six-month period ended June 30, 2005 were sales of approximately $3.0 million
from our U.K. subsidiary, Celgene U.K. Manufacturing II, Limited, or CUK II,
which acquired Penn T Limited on October 21, 2004. We anticipate CUK II's sales
to be higher in the second half of 2005 relative to the first half of 2005 as
revenue begins to be recognized on sales of post acquisition inventory to
Pharmion. Focalin(R) net sales were higher in the six-month period ended June
30, 2005, as compared to 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, 2005, as compared
to the six-month period ended June 30, 2004, due to price increases implemented
since the end of the second quarter of 2004 as well as the improvement of supply
disruptions experienced in 2004, which led to inconsistent supplies of
ALKERAN(R) IV and consequently inconsistent end-market buying patterns.
Partially offsetting the increase in ALKERAN(R) sales were higher gross to net
sales accruals (primarily distributor chargebacks) as we begin to have more
historical data on which to base our accrual amounts.
Revenues from collaborative agreements and other sources for the six-month
period ended June 30, 2005 included a $20.0 million milestone payment from
Novartis for the NDA approval of Focalin(R)XR; approximately $7.1 million
related to our sponsored research, license and other agreements with Pharmion
Corporation; approximately $2.4 million from umbilical cord blood enrollment,
collection and storage fees generated through our LifeBank(TM)USA business;
approximately $0.8 million for licensing to EntreMed, Inc. rights to develop and
commercialize our tubulin inhibitor compounds; $0.5 million related to the
agreements providing manufacturers of isotretinoin, a non-exclusive license to
our System for Thalidomide Education and Prescribing Safety, or S.T.E.P.S.(R),
patent portfolio; and $0.1 million from
27
(Thousands of dollars, except per share amounts, unless otherwise indicated)
other miscellaneous research and development agreements. The six-month period
ended June 30, 2004 included approximately $3.2 million related to our sponsored
research, license and other agreements with Pharmion Corporation; approximately
$1.7 million from umbilical cord blood enrollment, collection and storage fees
generated through our LifeBank(TM)USA business; and approximately $0.1 million
from other miscellaneous research and development agreements.
Royalty revenue for the six-month period ended June 30, 2005 included
approximately $20.9 million and $2.6 million of royalties received from Novartis
on sales of their entire family of Ritalin(R) drugs and Focalin(R)XR,
respectively, approximately $0.2 million of royalties received from Pharmion on
their commercial sales of THALOMID(R), and approximately $0.4 million of
miscellaneous other royalties. The six-month period ended June 30, 2004 included
approximately $10.5 million of royalties received from Novartis on sales of
their entire family of Ritalin(R) drugs. The increase in Ritalin(R) royalty
revenue was due to increases in the royalty rate on both Ritalin(R) and
Ritalin(R) LA as well as an increase in Ritalin(R) LA sales by Novartis.
COST OF GOODS SOLD: Cost of goods sold and related percentages for the six-month
periods ended June 30, 2005 and 2004 were as follows:
---------------------------------------------------------------
Six-Month Period Ended
June 30,
2005 2004
---------------------------------------------------------------
Cost of goods sold $ 30,800 $ 28,489
Increase from prior year $ 2,311 N/A
Percentage increase from prior year 8.1% N/A
Percentage of net product sales 15.2% 18.4%
===============================================================
Cost of goods sold were higher in the six-month period ended June 30, 2005, as
compared to the six-month period ended June 30, 2004, due to higher THALOMID(R)
costs primarily as a result of higher royalties on net sales, partially offset
by lower costs at our Stem Cell Therapies segment. Cost of goods sold as a
percentage of net product sales decreased in the six-month period ended June 30,
2005, as compared to the six-month period ended June 30, 2004, primarily due to
higher gross profit margins on ALKERAN(R) net sales.
RESEARCH AND DEVELOPMENT: Research and development expenses and related
percentages for the six-month periods ended June 30, 2005 and 2004 were as
follows:
---------------------------------------------------------------
Six-Month Period Ended
June 30,
2005 2004
---------------------------------------------------------------
Research and development expenses $89,065 $76,366
Increase from prior year $12,699 N/A
Percentage increase from prior year 16.6% N/A
Percentage of total revenue 34.5% 44.8%
===============================================================
Research and development expenses were higher in the six-month period ended June
30, 2005, as compared to the six-month period ended June 30, 2004, primarily due
to higher clinical research and development costs to support on-going clinical
development and regulatory advancement of REVLIMID(R) Phase II and Phase III
programs in myelodysplastic syndromes and pivotal Phase III SPA trials for
multiple myeloma, as well as higher toxicology, process chemistry and drug
discovery costs to support
28
(Thousands of dollars, except per share amounts, unless otherwise indicated)
further development of early stage clinical and preclinical compounds such as
ACTIMID(R), CC-11006, CC-10015 and PDE4.
Research and development expenses in the six-month period ended June 30, 2005
consisted of approximately $43.5 million spent on human pharmaceutical clinical
programs; $22.3 million spent on other human pharmaceutical programs, including
toxicology, analytical research and development, drug discovery, quality and
regulatory affairs; $18.1 million spent on biopharmaceutical discovery and
development programs; and $5.2 million spent on placental stem cell and
biomaterials programs. These expenditures support multiple core programs,
including THALOMID(R), REVLIMID(R), ACTIMID(R), CC-11006, PDE4/TNF-alpha
inhibitors, other investigational compounds, such as kinase inhibitors,
benzopyranones and ligase inhibitors and placental and cord blood derived stem
cell programs. In 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 placental stem cell and biomaterials programs.
As total revenue increases, research and development expense may continue to
decrease as a percentage of total revenue, however the actual dollar amount may
continue to increase as earlier stage compounds are moved through the
preclinical and clinical stages. 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 can vary. 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: Selling, general and administrative
expenses and related percentages for the six-month periods ended June 30, 2005
and 2004 were as follows:
---------------------------------------------------------------------------
Six-Month Period Ended
June 30,
2005 2004
---------------------------------------------------------------------------
Selling, general and administrative expenses $79,173 $51,658
Increase from prior year $27,515 N/A
Percentage increase from prior year 53.3% N/A
Percentage of total revenue 30.7% 30.3%
===========================================================================
Selling, general and administrative expenses were higher in the six-month period
ended June 30, 2005, as compared to the six-month period ended June 30, 2004,
primarily due to an increase of approximately $14.4 million in general
administrative and medical affair expenses largely the result of higher
headcount-related expenses and an increase of approximately $10.0 million in
marketing expenses related to market research, headcount and other pre-
REVLIMID(R) launch expenses. Included in the six-month period ended June 30,
2005 was approximately $2.2 million of expenses related to accelerated
depreciation of leasehold improvements at four New Jersey locations being
consolidated into our new corporate headquarters.
29
(Thousands of dollars, except per share amounts, unless otherwise indicated)
INTEREST AND OTHER INCOME (EXPENSE), NET: Interest and other income (expense),
net for the six-month periods ended June 30, 2005 and 2004 included expense
related to changes in the estimated value of our investment in EntreMed, Inc.
warrants of approximately $6.9 million and $9.6 million, respectively, recorded
prior to the March 31, 2005 exercise of warrants. Excluding these charges,
adjusted interest and other income (expense), net was $12.4 million and $13.7
million for the six-month periods ended June 30, 2005 and 2004, respectively.
The decrease in the adjusted interest and other income (expense), net was
primarily due to lower returns on our cash and marketable securities portfolio.
EQUITY IN LOSSES OF AFFILIATED COMPANY: On March 31, 2005 the Company exercised
warrants to purchase 7,000,000 shares of EntreMed, Inc. common stock
(approximately 14.05% of the outstanding common shares). Since we also hold
3,350,000 shares of EntreMed voting preferred shares convertible into 16,750,000
shares of common stock, we determined that we have significant influence over
EntreMed and are applying the equity method of accounting to our common stock
investment effective March 31, 2005. Under the equity method of accounting, we
have recorded equity losses of approximately $5.0 million for the six-months
ended June 30, 2005, which includes a charge of $4.4 million at March 31, 2005
to write down the value of the investment ascribed to in-process research and
approximately $0.6 million to record our 14.05% share of EntreMed losses.
INTEREST EXPENSE: Interest expense was approximately $4.8 million for each of
the six-month periods ended June 30, 2005 and 2004 and primarily reflects six
months of interest expense and amortization of debt issuance costs on the $400
million convertible notes issued on June 3, 2003.
INCOME TAX PROVISION (BENEFIT): The income tax benefit for the six-month period
ended June 30, 2005 was approximately $4.2 million and reflects tax expense
impacted by certain expenses that are not currently deductible for tax purposes
offset by the benefit from elimination of valuation allowances totaling
approximately $42.6 million as of March 31, 2005, which was based on the fact
that we determined it was more likely than not that the benefits of our deferred
tax assets would be realized. This determination was based upon the external
Independent Data Monitoring Committee's ("IMDC") analyses of two Phase III
Special Protocol Assessment (SPA) multiple myeloma trials and the conclusion
that these trials exceeded the pre-specified stopping rule. The IDMC found a
statistically significant improvement in time to disease progression -- the
primary endpoint of these Phase III trials -- in patients receiving REVLIMID(R)
plus dexamethasone compared to patients receiving dexamethasone alone. This, in
concert with our nine consecutive quarters of profitability led to the
conclusion that is was more likely than not that we will generate sufficient
taxable income to realize the benefits of our deferred tax assets. The
elimination of valuation allowances relating to certain historical acquisitions
were first offset against goodwill and intangibles with the balance applied to
reduce income tax expense. The elimination of valuation allowances relating to
tax deductions that arose in connection with stock option exercises were offset
against components of equity. Income tax provision for the six-month period
ended June 30, 2004 was approximately $2.0 million.
30
(Thousands of dollars, except per share amounts, unless otherwise indicated)
NET INCOME: Net income and per common share amounts for the six-month periods
ended June 30, 2005 and 2004 were as follows:
------------------------------------------------------------------------
Six-Month Period Ended
June 30,
2005 2004
As Restated
------------------------------------------------------------------------
Net income $ 59,059 $ 11,509
Per common share amounts:
Basic $ 0.35 $ 0.07
Diluted $ 0.32 $ 0.07
Weighted average number of shares of
common stock utilized to calculate
per common share amounts:
Basic 166,381 163,312
Diluted 191,222 175,783
========================================================================
Net income and per common share amounts were higher in the six-month period
ended June 30, 2005, as compared to the six-month period ended June 30, 2004,
primarily due to an increase in total revenues of approximately $87.5 million
(driven primarily by an increase in THALOMID(R) net sales of $39.1 million, an
increase in ALKERAN(R) net sales of $8.0 million, an increase in royalty
revenues received from Novartis related to the Ritalin(R) line of drugs and
Focalin(R)XR of $13.1 million and inclusion in the six-month period ended June
30, 2005 of a $20.0 million milestone payment from Novartis for the NDA approval
of Focalin(R)XR) offset by higher operating expenses of approximately $42.5
million (driven by REVLIMID(R) clinical and regulatory research and development
costs and related prelaunch selling, general and administrative costs).
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $26.4 million for
the six-month period ended June 30, 2005 and was comparable with the $25.0
million net cash provided by operating activities in the year ago period. Net
cash provided by operating activities for the six-month period ended June 30,
2005 reflects our record operating performance which included a 51.3% increase
in total revenue and over a 300% increase in our operating income, offset by an
increase in income taxes paid, an increase in current assets and liabilities,
excluding the effects of acquisitions and increased investment of excess cash in
marketable securities available for sale.
Net cash used in investing activities was approximately $128.0 million for the
six-month period ended June 30, 2005 compared to $10.2 million in the year ago
period. Included in the 2005 period activities were cash outflows of $9.1
million for capital expenditures, $8.4 million for working capital adjustments
and acquisition costs related to the October 2004 acquisition of Penn T, $100.0
million for net purchases of marketable securities available for sale and $10.5
million for the exercise of warrants to purchase 7,000,000 shares of EntreMed
common stock. Included in the 2004 activities were cash outflows of $4.7 million
for capital expenditures and $7.0 million for an investment made in Royalty
Pharma Strategic Partners, LP, which is classified in other assets on the
consolidated balance sheet, offset by $1.5 million for net sales of marketable
securities available for sale.
Net cash provided by financing activities was approximately $22.7 million for
the six-month period ended June 30, 2005 compared to $7.9 million in the year
ago period. Included in financing activities were
31
(Thousands of dollars, except per share amounts, unless otherwise indicated)
proceeds from the exercise of common stock and warrants of approximately $22.8
million and $7.9 million in the 2005 and 2004 periods, respectively.
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. In addition, we expect
commercial expenses, such as marketing and market research expenses, to increase
leading up to and following a potential approval of REVLIMID(R) by the FDA.
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(R) supply and
distribution agreement, Penn Pharmaceutical Holding Limited technical services
agreement, employment agreements and certain other contract commitments. The
following table sets forth our contractual obligations as of June 30, 2005 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 notes obligation $ - $ 400.0 $ - $ - $ 400.0
Operating leases 3.4 6.5 5.3 5.1 20.3
ALKERAN(R) agreements 18.1 20.0 - - 38.1
Employment agreements 2.0 - - - 2.0
Other contract commitments 4.6 7.2 3.1 - 14.9
-----------------------------------------------------------------------
Total $ 28.1 $ 433.7 $ 8.4 $ 5.1 $ 475.3
=================================================================================================================
In 2003, we adopted a Long-Term Incentive Plan, or LTIP, designed to provide key
officers and executives with long-term performance based incentive opportunities
contingent upon achievement of pre-established corporate performance objectives,
and payable only if the officer or executive is employed at the end of the
performance cycle. There are three active plans. The performance cycle is
generally three years for the 2005, 2006 and 2007 Plans and ends on December
31st of each respective plan year.
Payouts may be in the range of 0% to 200% of the participant's salary for the
2005 and 2007 Plans and 0% to 150% of the participant's salary for the 2006
Plan. The maximum potential payout, assuming objectives are achieved at the 200%
level for the 2005 and 2007 Plans and 150% level for the 2006 Plan are $6.1
million, $4.9 million and $7.1 million for the 2005 Plan, 2006 Plan and 2007
Plan, respectively, and are not reflected in the above table. Such awards are
payable in cash or, at our discretion, we can elect to pay the same value in our
common stock based upon the fair value of our common stock at the payout date.
Upon a change in control, participants will be entitled to an immediate payment
equal to their target awards, or, if greater, an award based on actual
performance through the date of the change in control.
2005 FINANCIAL OUTLOOK
During the three-month period ended June 30, 2005, we did not change our fiscal
year 2005 financial guidance. Although management believes that this guidance
continues to reflect the current thinking of management, there can be no
assurance that revenues or earnings will
32
(Thousands of dollars, except per share amounts, unless otherwise indicated)
develop in the manner projected or if the analysis on which these projections
were based, were to be redone on the date hereof that there would be no change
in the guidance. In the event that REVLIMID(R) receives FDA approval, or the
establishment of a strategic REVLIMID(R) partnership, we anticipate updating the
2005 financial guidance to reflect REVLIMID(R) revenues and expenses, which
currently are not included in our guidance.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one which is both important to the portrayal of
our 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. Our
significant accounting policies are fully described in Note 1 of the Notes to
the Consolidated Financial Statements included in our 2004 Annual Report on Form
10-K, as amended. Our critical accounting policies are disclosed in the
Management's Discussion and Analysis of Financial Condition and Results of
Operation section of our 2004 Annual Report on Form 10-K, as amended. The only
significant change as it pertains to such accounting policies relates to our
investment in EntreMed, Inc.
On March 31, 2005 the Company exercised warrants to purchase 7,000,000 shares of
EntreMed common stock (approximately 14.05% of the outstanding common shares) at
an aggregate cost of $10.5 million. The fair value of the warrants at the time
of exercise was estimated to be approximately $12.9 million. As a result, the
total value ascribed to the Company's investment was $23.4 million. Since the
Company also holds 3,350,000 shares of EntreMed voting preferred shares
convertible into 16,750,000 shares of common stock, the Company determined that
it has significant influence over its investee and is applying the equity method
of accounting to its common stock investment effective March 31, 2005. At March
31, 2005, the residual investment, after taking a charge of approximately $4.4
million to write down the portion of the investment ascribed to in-process
research and development (the charge was included in equity in losses of
affiliated company), exceeded the Company's proportionate share of the EntreMed
net assets by approximately $13.4 million and consisted of goodwill and
intangibles of approximately $12.6 million and $0.8 million, respectively. As
prescribed under the equity method of accounting, the Company began recording
its share of EntreMed gains and losses based on the Company's common stock
ownership percentage during the three-month period ended June 30, 2005. The
investment in EntreMed had a carrying value of approximately $18.3 million at
June 30, 2005, which exceeds the estimated fair value of our common stock
investment by approximately $2.1 million based on the closing share price of
EntreMed common stock on June 30, 2005.
The investment will be reviewed to determine whether an other-than-temporary
decline in value of the investment has been sustained. If it is determined that
the investment has sustained an other-than-temporary decline in its value, the
investment will be written down to its fair value. Such an evaluation is
judgmental and dependent on the specific facts and circumstances. Factors that
are considered by the Company in determining whether an other-than-temporary
decline in value has occurred include: the market value of the security in
relation to its cost basis, the period of time that the market value is below
cost, the financial condition of the investee and the intent and ability to
retain the investment for a sufficient period of time to allow for recovery in
the market value of the investment. The Company evaluates information that it is
aware of in addition to quoted market prices, if any, in determining whether an
other-than-temporary decline in value exists.
33
(Thousands of dollars, except per share amounts, unless otherwise indicated)
RECENT DEVELOPMENTS
We currently are dependent on ChemSyn Laboratories, a Division of Eagle-Picher
Technologies, L.L.C., for the supply of the raw material for THALOMID(R).
ChemSyn Laboratories operates a cGMP, or current Good Manufacturing Practices,
compliant, FDA-approved facility for the manufacture of the bulk active
pharmaceutical ingredient, or API, for THALOMID(R). On April 11, 2005,
Eagle-Picher filed to reorganize under Chapter 11 of the Bankruptcy Code.
Eagle-Picher plans to continue to operate while it seeks to divest a number of
its operating units. In papers filed with the U.S. Bankruptcy Court in the
Southern District of Ohio in Cincinnati, Eagle-Picher indicated that it has
received a commitment for up to $50 million in debtor-in-possession financing
from a group of lenders led by Harris Trust and Savings Bank, subject to certain
limitations and conditions. We currently have adequate supplies of API on hand
to support long-term requirements. Although we do not believe that the
Eagle-Picher's Chapter 11 bankruptcy filing will result in any supply
disruptions, we will continue to monitor the status of the proceeding.
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
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, our products failure to demonstrate
efficacy or an acceptable safety profile, actions by the FDA, the financial
condition of suppliers including their solvency and ability to supply product
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 our 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.
We have 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, 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. We do not use derivative instruments for trading
purposes. At June 30, 2005, our market risk sensitive instruments consisted of
marketable securities available-for-sale, other equity investments and unsecured
convertible notes issued by the Company.
34
(Thousands of dollars, except per share amounts, unless otherwise indicated)
MARKETABLE SECURITIES AVAILABLE FOR SALE: At June 30, 2005 our marketable
securities available for sale consisted of U.S. government agency mortgage
obligations, U.S. government agency bonds, corporate debt securities and
1,939,600 shares of Pharmion common stock. Marketable securities available for
sale are carried at fair value, are held for an indefinite period of time and
are intended to be used to meet our ongoing liquidity needs. Unrealized gains
and losses on available for sale securities, which are deemed to be temporary,
are reported as a separate component of stockholders' equity, net of tax. 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 (expense), net.
As of June 30, 2005, the principal amounts, fair values and related weighted
average interest rates of our investments in debt securities classified as
marketable securities available-for-sale were as follows:
-------------------------------------------------------------------------------------------------------
Fixed Rate Securities
Duration
---------------------------------------------------------------
Less Variable
Than 1-3 3-5 5-7 Rate
(IN THOUSANDS $) 1 Year Years Years Years Securities Total
-------------------------------------------------------------------------------------------------------
Principal amount $311,312 $97,106 $92,230 $110,425 $20,513 $631,586
Fair value $311,997 $99,249 $92,635 $106,375 $14,669 $624,925
Average Interest Rate 3.2% 4.2% 4.6% 5.4% 4.9% 4.0%
=======================================================================================================
PHARMION COMMON STOCK At June 30, 2005, we held 1,939,600 shares of Pharmion
Corporation common stock, which based on the closing share price of Pharmion
common stock on June 30, 2005 had an estimated fair value of approximately $45.0
million, and which exceeded the cost by approximately $24.8 million. The amount
by which the fair value exceeded the cost (i.e., the unrealized gain) was
included in Accumulated Other Comprehensive Income in the Stockholders' Equity
section of the Consolidated Balance Sheet. The fair value of the Pharmion common
stock investment is subject to market price volatility and any increase or
decrease in Pharmion's common stock quoted market price will have a similar
percentage increase or decrease in the fair value of the investment.
INVESTMENT IN AFFILIATED COMPANIES: At June 30, 2005, we held 7,000,000 shares
of EntreMed, Inc. common stock (approximately 14.05% of the outstanding common
shares) to which we are applying the equity method of accounting. The investment
in EntreMed had a carrying value of approximately $18.3 million at June 30,
2005, which exceeds the estimated fair value of our common stock investment by
approximately $2.1 million based on the closing share price of EntreMed common
stock on June 30, 2005. Under the equity method, the investment will be reviewed
to determine whether an other-than-temporary decline in value of the investment
has been sustained. If it is determined that the investment has sustained an
other-than-temporary decline in its value, the investment will be written down
to its fair value. Such an evaluation is judgmental and dependent on the
specific facts and circumstances. Factors that are considered in determining
whether an other-than-temporary decline in value has occurred include: the
market value of the security in relation to its cost basis, the period of time
that the market value is below cost, the financial condition of the investee and
the intent and ability to retain the investment for a sufficient period of time
to allow for recovery in the market value of the investment. We evaluate
information that we are aware of in addition to quoted market prices, if any, in
determining whether an other-than-temporary decline in value exists. For more
information on the EntreMed equity method investment see Note 10 of the Notes to
Unauditied Consolidated Financial Statements and further discussions contained
in Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
35
(Thousands of dollars, except per share amounts, unless otherwise indicated)
CONVERTIBLE DEBT: In June 2003, we issued an aggregate principal amount of
$400.0 million of unsecured convertible notes. The convertible notes have a
five-year term and a coupon rate of 1.75% payable semi-annually. The convertible
notes can be converted at any time into 16,511,840 shares of common stock at a
conversion price of $24.225 per share (for more information see Note 6 of the
Notes to the unaudited Consolidated Financial Statements).
At June 30, 2005, the fair value of our convertible notes exceeded the carrying
value of $400.0 million by approximately $307.0 million, which we believe
reflects the increase in the market price of our common stock to $40.70 per
share as of June 30, 2005. 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 our stock price generally results in an increase in the fair value
of convertible debt, but does not impact the carrying value.
36
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end
of the period covered by this quarterly report, we carried out an
evaluation, under the supervision and with the participation of
the Company's management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
and 15d-15(e)). Based upon the foregoing evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and
Exchange Commission.
(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, except for internal controls
implemented related to the equity method investment in EntreMed,
Inc., to which this report relates that have materially affected,
or are reasonably likely to materially affect, our internal
control over financial reporting.
37
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - 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, 2005. At this
meeting stockholders of the Company were asked to elect ten directors, approve
an amendment to our 1998 Stock Incentive Plan to increase the number of shares
of common stock that may be subject to awards from 25,000,000 to 31,000,000 and
to decrease the number of shares that may be used for awards of restricted stock
or performance-based awards denominated in shares of common stock from 1,700,000
to 750,000, approve an amendment to our 1995 Non-Employee Directors' Incentive
Plan to increase the number of shares of common stock that may be subject to
awards from 3,600,000 to 3,850,000 and to extend until June 30, 2015 the period
under which options may be granted and to ratify the appointment of KPMG LLP as
our independent certified public accountants for the fiscal year ending December
31, 2005. All ten nominated directors were elected, the amendments to our 1998
Stock Incentive Plan and our 1995 Non-Employee Directors' Incentive Plan were
approved and the proposal regarding the appointment of KPMG LLP as auditors was
approved. 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 145,088,614 1,764,794
Sol J. Bare, Ph.D 144,859,944 1,993,464
Robert J. Hugin 142,165,310 4,688,098
Jack L. Bowman 142,591,476 4,261,932
Frank T. Cary 144,327,036 2,526,372
Michael D. Casey 143,561,214 3,292,194
Arthur Hull Hayes, Jr., M.D. 145,574,631 1,278,777
Gilla Kaplan, Ph.D 145,548,357 1,305,051
Richard C.E. Morgan 144,996,333 1,857,075
Walter L. Robb, Ph.D 144,984,887 1,868,521
B. Amendment to our 1998 Stock Incentive Plan:
Number of Shares
----------------
For Against Abstained
--- ------- ---------
101,299,649 9,576,330 301,573
C. Amendment to our 1995 Non-Employee Directors' Incentive Plan:
Number of Shares
----------------
For Against Abstained
--- ------- ---------
93,448,778 17,404,679 324,495
D. Appointment of KPMG LLP as auditors:
Number of Shares
----------------
For Against Abstained
--- ------- ---------
145,910,087 568,008 375,313
Item 5. Other Information - None
Item 6. Exhibits
31.1 Certification by the Company's Chief Executive Officer dated
August 9, 2005.
31.2 Certification by the Company's Chief Financial Officer dated
August 9, 2005.
32.1 Certification by the Company's Chief Executive Officer pursuant
to 18 U.S.C. Section 1350 dated August 9, 2005.
32.2 Certification by the Company's Chief Financial Officer pursuant
to 18 U.S.C. Section 1350 dated August 9, 2005.
38
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, 2005 By: /S/Robert J. Hugin
------------------------------------ -------------------------------
Robert J. Hugin
Senior Vice President
Chief Financial Officer
DATE August 9, 2005 By: /s/James R. Swenson
------------------------------------ -------------------------------
James R. Swenson
Controller
(Chief Accounting Officer)
39