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 September 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
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(Exact name of registrant as specified in its charter)
Delaware 22-2711928
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
86 Morris Avenue, Summit, NJ 07901
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(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 ___
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ____ No _X__
At November 7, 2005, 169,609,031 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 1 Unaudited Consolidated Financial Statements
Consolidated Statements of Operations -
Three and Nine-Month Periods Ended September 30, 2005 and 2004 3
Consolidated Balance Sheets -
As of September 30, 2005 and December 31, 2004 4
Consolidated Statements of Cash Flows -
Nine-Month Periods Ended September 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. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
As Restated As Restated
(See Note 2) (See Note 2)
Revenue:
Net product sales $ 113,900 $ 83,803 $ 316,928 $ 238,933
Collaborative agreements and other revenue 4,879 10,392 35,829 15,420
Royalty revenue 10,727 7,273 34,846 17,741
----------- ----------- ----------- -----------
Total revenue 129,506 101,468 387,603 272,094
----------- ----------- ----------- -----------
Expenses:
Cost of goods sold 23,199 15,166 53,999 43,655
Research and development 49,348 40,154 138,413 116,520
Selling, general and administrative 46,941 27,750 126,114 79,408
----------- ----------- ----------- -----------
Total expenses 119,488 83,070 318,526 239,583
----------- ----------- ----------- -----------
Operating income 10,018 18,398 69,077 32,511
Other income and expense:
Interest and other income, net 6,979 4,972 12,517 9,101
Equity in losses of affiliated company 980 -- 5,975 --
Interest expense 2,374 2,388 7,121 7,164
----------- ----------- ----------- -----------
Income before income taxes 13,643 20,982 68,498 34,448
Income tax provision 12,975 1,974 8,770 3,931
----------- ----------- ----------- -----------
Net income $ 668 $ 19,008 $ 59,728 $ 30,517
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.00 $ 0.12 $ 0.36 $ 0.19
=========== =========== =========== ===========
Diluted $ 0.00 $ 0.11 $ 0.33 $ 0.17
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
September 30, December 31,
2005 2004
------------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 62,305 $ 135,227
Marketable securities available for sale 683,685 613,310
Accounts receivable, net of allowance of
$3,068 and $2,208 at September 30, 2005
and December 31, 2004, respectively 61,571 46,074
Inventory 31,689 24,404
Deferred income taxes 81,075 4,082
Other current assets 34,390 26,783
----------- -----------
Total current assets 954,715 849,880
Property, plant and equipment, net 67,838 52,039
Investment in affiliated company 17,454 --
Intangible assets, net 97,066 108,955
Goodwill 34,633 41,258
Deferred income taxes 24,059 14,613
Other assets 17,690 40,548
----------- -----------
Total assets $ 1,213,455 $ 1,107,293
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 26,995 $ 18,650
Accrued expenses 74,799 68,534
Income taxes payable 11,225 41,188
Current portion of deferred revenue 6,876 6,926
Deferred income taxes -- 5,447
Other current liabilities 30,602 670
----------- -----------
Total current liabilities 150,497 141,415
Long-term convertible notes 399,992 400,000
Deferred revenue, net of current portion 61,101 73,992
Other non-current liabilities 18,633 14,442
----------- -----------
Total liabilities 630,223 629,849
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value per share,
5,000,000 authorized; none outstanding at
September 30, 2005 and December 31, 2004 -- --
Common stock, $.01 par value per share,
275,000,000 shares authorized;
issued 170,421,714 and 165,079,198 shares
at September 30, 2005 and December 31,
2004, respectively 1,704 1,651
Common stock in treasury, at cost; 928,844
and 10,564 shares at September 30, 2005
and December 31, 2004, respectively (47,669) (306)
Additional paid-in capital 798,365 641,907
Accumulated deficit (174,682) (234,410)
Accumulated other comprehensive income 5,514 68,602
----------- -----------
Total stockholders' equity 583,232 477,444
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Total liabilities and stockholders' equity $ 1,213,455 $ 1,107,293
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine-Month Period Ended
September 30,
----------- -----------
2005 2004
----------- -----------
As Restated
(See Note 2)
Cash flows from operating activities:
Net income $ 59,728 $ 30,517
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of long-term assets 9,771 6,260
Provision for accounts receivable allowances 578 396
Realized gain on marketable securities available for sale (341) (1,599)
Unrealized loss on value of EntreMed warrants 6,875 11,801
Equity in losses of affiliated company 5,975 --
Non-cash stock-based compensation expense 32 296
Amortization of premium/discount on marketable
securities available for sale, net 1,395 1,521
Amortization of debt issuance cost 1,832 1,832
Loss on asset disposal 218 --
Shares issued for employee benefit plans 3,506 4,267
Deferred income taxes (57,544) (1,998)
Other (35) --
Change in current assets and liabilities, excluding the effect of acquisition:
Increase in accounts receivable (16,219) (9,377)
Increase in inventory (7,438) (11,869)
(Increase) decrease in other operating assets (10,796) 253
Increase in accounts payable and accrued expenses 29,542 11,556
Increase in income taxes payable 31,293 2,047
Increase (decrease) in deferred revenue (3,749) 278
----------- -----------
Net cash provided by operating activities 54,623 46,181
----------- -----------
Cash flows from investing activities:
Capital expenditures (22,637) (6,702)
Business acquisition (8,429) --
Proceeds from sales and maturities of marketable
securities available for sale 356,135 346,938
Purchases of marketable securities available for sale (476,968) (387,953)
Purchase of investment securities -- (7,000)
Purchase of intangible assets (122) --
Investment in affiliated company (10,500) --
----------- -----------
Net cash used in investing activities (162,521) (54,717)
----------- -----------
Cash flows from financing activities:
Net proceeds from exercise of common stock options and warrants 37,921 10,687
Repayment of capital lease and note obligations (6) (32)
----------- -----------
Net cash provided by financing activities 37,915 10,655
----------- -----------
Effect of currency rate changes on cash and cash equivalents (2,939) --
Net increase (decrease) in cash and cash equivalents (72,922) 2,119
Cash and cash equivalents at beginning of period 135,227 60,328
----------- -----------
Cash and cash equivalents at end of period $ 62,305 $ 62,447
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(Dollars in thousands)
Nine-Month Period Ended
September 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 $ (49,062) $ 77,595
=========== ===========
Matured shares tendered for stock option
exercises and employee tax withholdings $ (47,363) $ --
=========== ===========
Conversion of convertible notes and accrued
interest thereon $ 8 $ --
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 5,250 $ 5,250
=========== ===========
Income taxes paid $ 36,168 $ 2,190
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 for the year ended December 31, 2004, 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 nine-month period ended September
30, 2004 in order to conform to the current year's presentation. The
reclassification resulted in an increase of $115.6 million in proceeds from the
sale of marketable securities and an increase of $115.0 million in purchases of
marketable securities (both of which are included in investing activities) for
the nine-month period ended September 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 Annual Report on Form 10-K for the year ended
December 31, 2004, as amended. For more information on the restatement see Note
2 of the Notes to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004, as
amended. The Company has now restated its Consolidated Statements of Operations
and Cash Flows for the three- and nine-month periods ended September 30, 2004
and, as a result, interest and other income, net, income before income taxes and
net income decreased approximately $2.2 million and $11.8 million in the
three-and nine-month periods ended September 30, 2004, respectively. Diluted
earnings per share decreased by $0.01 and $.07 in the three- and nine-month
periods ended September 30, 2004, respectively. The restatement did not have any
impact on previously reported total revenue or reported net cash provided by
operating activities for these same periods.
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 ended 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
SEPTEMBER 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 third party manufacturing agreement entered into in connection with the
acquisition, the Company is able to control manufacturing for THALOMID(R)
worldwide and increase 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 nine-month periods ended September 30,
2004 as if the acquisition of Penn T had occurred on July 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 Nine-Month
Period Ended Period Ended
Pro forma (UNAUDITED) September 30, 2004 September 30, 2004
--------------------------------------------------------------------------------
Total revenues $ 104,993 $ 284,313
Net income $ 19,511 $ 33,340
Net income per diluted share $ 0.11 $ 0.19
================================================================================
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
SEPTEMBER 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 September 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 nine-month
period ended September 2005 and anti-dilutive for the nine-month period ended
September 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
17,535,587 and 19,581,378 for the three-month periods ended September 30, 2005
and 2004, respectively, and 1,773,735 and 20,843,378 for the nine-month periods
ended September 30, 2005 and 2004, respectively.
The following represents the reconciliation of the basic and diluted earnings
per share computations for the three- and nine-month periods ended September 30,
2005 and 2004:
------------------------------------------------------------------------------------------------------------------
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
2005 2004 2005 2004
As Restated As Restated
(See Note 2) (See Note 2)
------------------------------------------------------------------------------------------------------------------
Income available to common stockholders:
Net income $ 668 $ 19,008 $ 59,728 $ 30,517
Interest expense on convertible debt, net of tax -- -- 4,179 --
----------------------------------------------------------
Net income available to common stockholders $ 668 $ 19,008 $ 63,907 $ 30,517
Weighted average number of common
shares outstanding (IN THOUSANDS):
Basic 168,298 164,091 167,027 163,574
Effect of dilutive securities:
Options 11,157 12,519 11,027 12,238
Warrants 178 210 174 207
Convertible debt -- -- 16,512 --
Restricted shares and other long-term incentives 229 244 262 254
------------------------------------------------------------------------------------------------------------------
Diluted 179,862 177,064 195,002 176,273
Earnings per share:
Basic $ 0.00 $ 0.12 $ 0.36 $ 0.19
Diluted $ 0.00 $ 0.11 $ 0.33 $ 0.17
==================================================================================================================
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 on June 1 and December 1 thereafter. Each $1,000
principal amount of convertible notes is convertible into 41.2796 shares of
common stock as adjusted, or a conversion price 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
10
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
agreement, the noteholders can convert the outstanding notes at any time into an
aggregate of 16,511,510 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. During the quarter ended September
30, 2005, a note holder converted an immaterial amount of principal into common
stock.
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 September 30, 2005 and December 31, 2004
were as follows:
-----------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30, 2005 Cost Gain Loss Value
-----------------------------------------------------------------------------------------------------
Government agency mortgage obligations $ 137,881 $ 481 $ (1,454) $ 136,908
Government agency bonds and notes 495 -- (13) 482
Corporate debt securities 226,998 519 (7,099) 220,418
Auction rate notes 283,575 -- -- 283,575
Marketable equity securities 20,212 22,090 -- 42,302
----------------------------------------------------------
Total $ 669,161 $ 23,090 $ (8,566) $ 683,685
=====================================================================================================
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 September 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 $ 346,068 $ 346,159
Duration of one through three years 86,298 85,477
Duration of three through five years 173,544 170,731
Duration of five through seven years 22,075 20,647
Duration greater than seven years 20,964 18,369
----------- -----------
Total $ 648,949 $ 641,383
====================================================================
11
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
8. INVENTORY
Inventory at September 30, 2005 and December 31, 2004 consisted of the
following:
--------------------------------------------------------------------
September 30, December 31,
2005 2004
--------------------------------------------------------------------
Raw materials $ 8,999 $ 4,081
Work in process 1,956 4,356
Finished goods 20,734 15,967
----------- -----------
Total $ 31,689 $ 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
SEPTEMBER 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
September 30,
2005 2004
As Restated
--------------------------------------------------------------------------------
Net income as reported $ 668 $ 19,008
Add: stock-based employee compensation expense
included in reported income (2005 net of tax) 32 63
Deduct: stock-based employee compensation
expense determined under fair-value-based
method (2005 net of tax) (6,407) (7,702)
----------- -----------
Basic pro forma net income $ (5,707) $ 11,369
Interest expense on convertible debt, net of tax -- --
----------- -----------
Diluted, pro forma net income $ (5,707) $ 11,369
Net income per common share:
Basic, as reported $ 0.00 $ 0.12
Basic, pro forma $ (0.03) $ 0.07
Diluted, as reported $ 0.00 $ 0.11
Diluted, pro forma $ (0.03) $ 0.06
================================================================================
--------------------------------------------------------------------------------
Nine-Month Period Ended
September 30,
2005 2004
As Restated
--------------------------------------------------------------------------------
Net income as reported $ 59,728 $ 30,517
Add: stock-based employee compensation expense
included in reported income (2005 net of tax) 19 187
Deduct: stock-based employee compensation
expense determined under fair-value-based
method (2005 net of tax)(1) 1,834 (22,218)
----------- -----------
Basic pro forma net income $ 61,581 $ 8,486
Interest expense on convertible debt, net of tax 4,179 --
----------- -----------
Diluted, pro forma net income $ 65,760 $ 8,486
Net income per common share:
Basic, as reported $ 0.36 $ 0.19
Basic, pro forma $ 0.37 $ 0.05
Diluted, as reported $ 0.33 $ 0.17
Diluted, pro forma $ 0.34 $ 0.05
================================================================================
(1) Includes benefit attributable to recognizing deferred tax assets during the
three-month period ended March 31, 2005.
The pro forma effects on net income applicable to common stockholders and net
income per common share for the three- and nine-month periods ended September
30, 2005 and 2004 may not be representative of the pro forma effects in future
years.
13
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The weighted-average fair value per share was $14.23 and $10.05 for stock
options granted in the nine-month periods ended September 30, 2005 and 2004,
respectively. The Company estimated the fair value of options granted using a
Black-Scholes option pricing model with the following assumptions:
--------------------------------------------------------------------------------
Three-Month Nine-Month
Period Ended Period Ended
September 30, September 30,
2005 2004 2005 2004
--------------------------------------------------------------------------------
Risk-free interest rate 4.09% 2.89% 4.03% 2.88%
Expected stock price volatility 41% 48% 41% 50%
Expected term until exercise (years) 3.5 3.6 4.0 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 was approximately $0.1 million for the three-month
periods ended September 30, 2005 and 2004. The nine-month period ended September
30, 2005 was favorably impacted by a $0.1 million credit due to cancellation of
a 15,000 restricted stock award for a terminated employee resulting in zero
expense for the period. The expense for the nine-month period ended September
30, 2004 was approximately $0.2 million.
Stock Option Exercises: During the three-month period ended September 30, 2005
certain employees exercised certain stock options containing a reload feature
and pursuant to our stock option plan paid the exercise price and their
withholding taxes by using 915,527 mature shares based on the current market
value on the date of exercise. Such tendered shares are reflected as treasury
stock at September 30, 2005.
10. INVESTMENT IN AFFILIATED COMPANY
On March 31, 2005, the Company exercised warrants to purchase 7,000,000 shares
of EntreMed, Inc. common stock 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 losses of affiliated company for the nine-month period ended
September 30, 2005), 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 $17.5 million at
September 30, 2005, which exceeds estimated fair value of the Company's common
stock investment by approximately $0.7 million based on the closing share price
of EntreMed common stock on September 30, 2005. A summary of the unaudited
financial statements for EntreMed as of September 30, 2005 follows:
14
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
September 30,
2005
--------------------------------------------------------------------------------
Current assets $ 35,320
Noncurrent assets 954
-----------
Total assets $ 36,274
--------------------------------------------------------------------------------
Current liabilities $ 4,362
Noncurrent liabilities 247
Minority interest 17
Total equity 31,648
-----------
Total liabilities and equity $ 36,274
--------------------------------------------------------------------------------
Interest in EntreMed equity (1) $ 4,387
Excess of investment over share of EntreMed equity 13,067
-----------
Total investment $ 17,454
================================================================================
Three-Month Six-Month Period
Period Ended March 31, 2005 thru
September 30, September 30,
2005 2005
--------------------------------------------------------------------------------
Total revenues $ 1,250 $ 1,829
Operating loss 4,666 9,238
Net loss 4,380 8,680
---------------------------------------------------------- -----------
Celgene share of EntreMed, Inc. losses (1) $ 651 $ 1,255
Amortization of intangibles 125 161
Write off of in-process research
and development 28 4,383
Elimination of inter-company transaction 176 176
----------- -----------
Equity in losses of affiliated company $ 980 $ 5,975
================================================================================
(1) The Company records its estimated share of EntreMed losses in the current
period and subsequently adjusts to actual results, which is currently
14.0%.
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 September 30, 2005, the estimated fair value of the Company's
common stock investment in EntreMed was approximately $16.7 million as of
September 30, 2005. The investment is 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 the Company considers 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. After
reviewing these factors, the Company has determined that its excess investment
over share of EntreMed equity is temporary and that as of September 30, 2005, no
adjustment to its investment is required.
15
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
11. GOODWILL AND INTANGIBLE ASSETS
At September 30, 2005, the Company's recorded intangible assets primarily
related to the October 21, 2004 acquisition of Penn T 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 September 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,
September 30, 2005 Value Amortization Adjustment Net
--------------------------------------------------------------------------------
Supplier agreements $ 99,841 $ (654) $ (2,243) $ 96,944
Technology 122 -- -- 122
-------------------------------------------------------
Total $ 99,963 $ (654) $ (2,243) $ 97,066
================================================================================
--------------------------------------------------------------------------------
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 September 30, 2005 and 2004,
respectively, and approximately $0.6 million and $0.2 million for the nine-month
periods ended September 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, $8.3 million for 2006 and $8.0 million for each of the years
2007 through 2009.
At September 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
changes in the carrying value of goodwill are 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 (3,272) -- (3,272)
---------------------------------------------
Balance, September 30, 2005 $ 34,633 $ -- $ 34,633
================================================================================
16
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill is not amortized, but rather is reviewed at least annually for
impairment.
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 nine-month periods ended September 30,
2005 and 2004 follows:
-------------------------------------------------------------------------------------------------------------
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
2005 2004 2005 2004
As Restated As Restated
(See Note 2) (See Note 2)
-------------------------------------------------------------------------------------------------------------
Net income $ 668 $ 19,008 $ 59,728 $ 30,517
-------------------------------------------------------------
Other comprehensive income (loss):
Unrealized gains (losses) on marketable
securities available for sale, before tax (6,674) 40,830 (49,062) 77,595
Less: reclassification adjustment for (gains)
losses included in net income 82 (765) (341) (1,599)
-------------------------------------------------------------
Net unrealized gains (losses) on
marketable securities available for sale (6,592) 40,065 (49,403) 75,996
Tax effect on unrealized losses 2,703 -- 8,821 --
-------------------------------------------------------------
Unrealized gains (losses) on marketable
securities available for sale, net of tax (3,889) 40,065 (40,582) 75,996
Deferred income tax (see note 13) -- -- (14,775) --
Currency translation adjustments (1,677) -- (7,731) --
-------------------------------------------------------------
Total other comprehensive income (loss) (5,566) 40,065 (63,088) 75,996
-------------------------------------------------------------
Comprehensive income $ (4,898) $ 59,073 $ (3,360) $ 106,513
=============================================================================================================
The unrealized loss on marketable securities available for sale for the three-
and nine-month periods ended September 30, 2005 included a decrease in fair
value related to the shares of Pharmion common stock of $2.7 million and $39.6
million, respectively. The unrealized gain on marketable securities available
for sale for the three- and nine-month periods ended September 30, 2004 included
an increase in fair value related to shares of Pharmion common stock of $36.4
million and $80.1 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.
17
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
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 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) (Lenalidomide) 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 September 30, 2005 included deferred current and
non-current assets of $90.1 million and $58.5 million, respectively, and
deferred current and non-current liabilities of $9.0 million and $34.4 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
nine-month periods ended September 30, 2005 and 2004 were as follows:
-------------------------------------------------------------------------------------------------------------
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
2005 2004 2005 2004
As Restated As Restated
(See Note 2) (See Note 2)
-------------------------------------------------------------------------------------------------------------
Revenues:
Human Pharmaceuticals $ 127,924 $ 100,100 $ 383,151 $ 268,682
Stem Cell Therapies 1,582 1,368 4,452 3,412
----------- ----------- ----------- -----------
Total $ 129,506 $ 101,468 $ 387,603 $ 272,094
----------- ----------- ----------- -----------
Income (loss) before income taxes:
Human Pharmaceuticals $ 20,336 $ 24,491 $ 88,260 $ 45,884
Stem Cell Therapies (6,693) (3,509) (19,762) (11,436)
----------- ----------- ----------- -----------
Total $ 13,643 $ 20,982 $ 68,498 $ 34,448
=============================================================================================================
Expenses incurred at the consolidated level are included in the results of the
human pharmaceuticals segment.
Total assets by segment as of September 30, 2005 and December 31, 2004 were as
follows:
18
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
--------------------------------------------------------------------------------
September 30, December 31,
2005 2004
--------------------------------------------------------------------------------
Human Pharmaceuticals $ 439,731 $ 334,932
Stem Cell Therapies 27,734 23,824
Unallocated 745,990 748,537
---------------------------
Total $ 1,213,455 $ 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 September 30, 2005,
the remaining cost to be incurred was approximately $8.5 million.
Following the Penn T acquisition, in December 2004 the Company amended the
product supply agreement between Penn T and Pharmion. Under the amended
agreement, Pharmion paid the Company a one-time payment of $77.0 million 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 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 September 30, 2005, the remaining minimum
purchase requirements under the agreement totaled $35.1 million, consisting of
$15.1 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, we have 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,
including a pipeline of IMiDs(R) which are a group of compounds proprietary 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)
(Lenalidomide), our most clinically advanced IMID(R) drug for the treatment of
patients with transfusion-dependent anemia due to low-or intermediate-1- risk
myelodyplastic syndromes, or MDS, associated with a deletion 5q cytogenetic
abnormality with or without additional cytogenetic abnormalities.
Given REVLIMID(R)'s 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 positions us
favorably 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 (see also the Risk Factors discussion in Part I, Item 1
of our Annual Report on Form 10-K for the year ended December 31, 2004, as
amended). We believe some of the more salient factors affecting future results
are, in the near term, continued market demand of THALOMID(R), including the
impact of competition on THALOMID(R) sales, and delays in the introduction of
REVLIMID(R) and, in the longer term, failure to commercialize our early-stage
drug candidates.
THALOMID(R) MARKET DEMAND: THALOMID(R) is a widely prescribed therapy for
treating multiple myeloma across all stages of disease, driven by clinical data
reported at numerous international medical meetings, multiple peer-reviewed
medical journal publications, as well as recommendations highlighted in the
National Comprehensive Cancer Network, or NCCN, guidelines. 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, 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 S.T.E.P.S.(R) distribution program for the safer delivery of
Thalidomide, ("System for Thalidomide Education and Prescribing Safety", which
20
(Thousands of dollars, except per share amounts, unless otherwise indicated)
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 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 fourth quarter of 2005.
DELAY IN THE INTRODUCTION OF REVLIMID(R): While we believe that we have made
significant progress toward obtaining 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). The FDA is currently reviewing our NDA in MDS. The
NDA is based on Phase II open label data and, while the FDA does not often grant
approvals based on such data alone, it should be noted that on September 14,
2005, the FDA's Oncologic Drugs Advisory Committee, or ODAC, recommended
approval of the REVLIMID(R) NDA, by a vote of 10 to 5. The current Prescription
Drug User Fee Act, or PDUFA, date has been extended to January 7, 2006. Other
efforts directed towards gaining regulatory approval of REVLIMID(R) include: our
submission to the European Medicines Agency, or EMEA, subsequent acceptance for
review of our Marketing Authorization Application, or MAA, on October 26, 2005,
seeking authorization to market REVLIMID(R) as a treatment for the same
indication as the U.S. NDA; and, plans to submit a supplemental New Drug
Application, or sNDA, in the fourth quarter of 2005, which based on Phase III
Special Protocol Assessment (SPA) trials data, will seek approval to market
REVLIMID(R) as a treatment in multiple myeloma.
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
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 SEPTEMBER 30, 2005 VS. THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 2004
TOTAL REVENUE: Total revenue and related percentages for the three-month periods
ended September 30, 2005 and 2004 were as follows:
--------------------------------------------------------------------------------
Three-Month Period Ended
September 30,
2005 2004 % Change
--------------------------------------------------------------------------------
Net product sales:
THALOMID(R) $ 99,134 $ 78,716 25.9%
Focalin(TM) 326 1,504 (78.3%)
ALKERAN(R) 13,945 3,202 335.5%
Other 495 381 29.9%
----------------------------
Total net product sales 113,900 83,803 35.9%
Collaborative agreements
and other revenue 4,879 10,392 (53.1%)
Royalty revenue 10,727 7,273 47.5%
----------------------------
Total revenue $ 129,506 $ 101,468 27.6%
================================================================================
THALOMID(R) net sales were higher in the three-month period ended September 30,
2005, as compared to the three-month period ended September 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. Sales volumes decreased due
to lower average daily doses and a slight decrease 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 September 30, 2005 were sales of approximately
$2.8 million from our U.K. subsidiary, Celgene U.K. Manufacturing II, Limited,
or CUK II, which was formerly known as Penn T Limited and was acquired through
an indirect wholly-owned subsidiary on October 21, 2004. Focalin(TM) net sales
were lower in the three-month period ended September 30, 2005, as compared to
the three-month period ended September 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 September 30, 2005, as compared to the
three-month period ended September 30, 2004, due to price increases implemented
since the end of the third quarter of 2004 and an increase in sales volumes.
ALKERAN(R) use in combination therapies for the treatment of hematological
diseases continues to grow driven by clinical data reported at major medical
conferences around the world. Also contributing to the increase in ALKERAN(R)
sales volumes was the resolution of supply disruptions experienced in 2004,
which resolution led to more consistent supplies of ALKERAN(R) IV and
consequently more consistent end-market buying patterns.
Revenues from collaborative agreements and other sources for the three-month
period ended September 30, 2005 included approximately $3.5 million related to
our sponsored research, license and other agreements with Pharmion Corporation
and approximately $1.4 million from umbilical cord blood enrollment, collection
and storage fees generated through our LifeBank USA(SM) business. The
three-month period ended September 30, 2004 included a $7.5 million milestone
payment from Novartis for the NDA submission of Focalin XR(TM); approximately
$1.8 million related to our sponsored research, license and other agreements
with Pharmion Corporation; approximately $0.9 million from umbilical cord blood
22
(Thousands of dollars, except per share amounts, unless otherwise indicated)
enrollment, collection and storage fees generated through our LifeBank USA(SM)
business; and approximately $0.1 million from other miscellaneous research and
development agreements.
Royalty revenue for the three-month period ended September 30, 2005 included
approximately $10.4 million of royalties received from Novartis on sales of
their entire family of Ritalin(R) drugs and Focalin XR(TM); 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 September 30, 2004 included approximately $7.3
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
three-month periods ended September 30, 2005 and 2004 were as follows:
--------------------------------------------------------------------------------
Three-Month Period Ended
September 30,
2005 2004
--------------------------------------------------------------------------------
Cost of goods sold $ 23,199 $ 15,166
Increase from prior year $ 8,033 N/A
Percentage increase from prior year 53.0% N/A
Percentage of net product sales 20.4% 18.1%
================================================================================
Cost of goods sold were higher in the three-month period ended September 30,
2005, as compared to the three-month period ended September 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 increased in the three-month period ended September 30, 2005, as
compared to the three-month period ended September 30, 2004, primarily due to
sales mix (i.e., higher ALKERAN sales, which has a significantly higher cost
structure than THALOMID).
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.
23
(Thousands of dollars, except per share amounts, unless otherwise indicated)
Research and development expenses and related percentages for the three-month
periods ended September 30, 2005 and 2004 were as follows:
--------------------------------------------------------------------------------
Three-Month Period Ended
September 30,
2005 2004
--------------------------------------------------------------------------------
Research and development expenses $ 49,348 $ 40,154
Increase from prior year $ 9,194 N/A
Percentage increase from prior year 22.9% N/A
Percentage of total revenue 38.1% 39.6%
================================================================================
Research and development expenses were higher in the three-month period ended
September 30, 2005, as compared to the three-month period ended September 30,
2004, primarily due to higher clinical research and development, quality and
regulatory affair 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 drug discovery costs. Research and development expenses are expected to
increase in the fourth quarter of 2005 in support of our ongoing global
regulatory filings, late stage clinical trials, clinical progress in multiple
proprietary development programs and related clinical manufacturing costs.
Research and development expenses in the three-month period ended September 30,
2005 consisted of approximately $23.6 million spent on human pharmaceutical
clinical programs; $13.7 million spent on other pharmaceutical programs,
including toxicology, analytical research and development, drug discovery,
quality and regulatory affairs; $9.4 million spent on biopharmaceutical
discovery and development programs; and $2.6 million spent on placental stem
cell and biomaterials programs. These expenditures support multiple core
programs, including THALOMID(R), REVLIMID(R), ACTIMID(TM), CC-11006,
TNF-alpha/PDE4 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 September 30, 2004,
approximately $19.6 million was spent on human pharmaceutical clinical programs;
$9.2 million was spent on other human pharmaceutical programs, including
toxicology, analytical research and development, drug discovery, quality and
regulatory affairs; $8.7 million was spent on biopharmaceutical discovery and
development programs; and $2.6 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.
24
(Thousands of dollars, except per share amounts, unless otherwise indicated)
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.
Selling, general and administrative expenses and related percentages for the
three-month periods ended September 30, 2005 and 2004 were as follows:
--------------------------------------------------------------------------------
Three-Month Period Ended
September 30,
2005 2004
--------------------------------------------------------------------------------
Selling, general and administrative expenses $ 46,941 $ 27,750
Increase from prior year $ 19,191 N/A
Percentage increase from prior year 69.2% N/A
Percentage of total revenue 36.2% 27.3%
================================================================================
Selling, general and administrative expenses were higher in the three-month
period ended September 30, 2005, as compared to the three-month period ended
September 30, 2004, primarily due to an increase of approximately $10.3 million
in marketing expenses consisting of approximately $13.0 million related to
market research, headcount and other pre- REVLIMID(R) launch expenses offset by
lower THALOMID(R) and ALKERAN(R) related marketing expenses and an increase of
approximately $5.5 million in general administrative expenses resulting from
higher professional and other miscellaneous outside service fees, higher
personnel-related expenses, higher facility related expenses and higher
insurance costs. Selling, general and administrative expenses are expected to
increase in the fourth quarter of 2005 as we near the commercial launch of
REVLIMID(R).
INTEREST AND OTHER INCOME, NET: Interest and other income, net was approximately
$7.0 million and $5.0 million for the three-month periods ended September 30,
2005 and 2004, respectively. Included in the three-month period ended September
30, 2004 was a charge of approximately $2.2 million related to changes in the
estimated value of our investment in EntreMed, Inc. warrants, which were
exercised on March 31, 2005. Excluding this charge, interest and other income,
net was approximately $7.2 million for the three-month period ended September
30, 2004. The period-over-period decrease in interest and other income, net was
primarily due to lower returns on our cash and marketable securities portfolio.
EQUITY IN LOSSES OF AFFILIATED COMPANY: On March 31, 2005, we exercised warrants
to purchase 7,000,000 shares of EntreMed, Inc. common stock. 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
recorded equity losses of approximately $1.0 million for the three-month period
ended September 30, 2005, which included approximately $0.7 million to record
our share of EntreMed losses, approximately $0.1 million related to amortization
of acquired intangible assets and a charge of approximately $0.2 million to
eliminate our share of THALOMID(R) royalties payable to EntreMed, Inc.
INTEREST EXPENSE: Interest expense was approximately $2.4 million for each of
the three-month periods ended September 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.
25
(Thousands of dollars, except per share amounts, unless otherwise indicated)
INCOME TAX PROVISION: The income tax provision for the three-month period ended
September 30, 2005 was approximately $13.0 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 September 30, 2004 was
approximately $2.0 million.
NET INCOME: Net income and per common share amounts for the three-month periods
ended September 30, 2005 and 2004 were as follows:
--------------------------------------------------------------------------------
Three-Month Period Ended
September 30,
2005 2004
As Restated
--------------------------------------------------------------------------------
Net income $ 668 $ 19,008
Per common share amounts:
Basic $ 0.00 $ 0.12
Diluted $ 0.00 $ 0.11
Weighted average number of shares of
common stock utilized to calculate
per common share amounts:
Basic 168,298 164,091
Diluted 179,862 177,064
================================================================================
Net income and per common share amounts were lower in the three-month period
ended September 30, 2005, as compared to the three-month period ended September
30, 2004, primarily due to higher operating expenses of approximately $36.4
million (driven by REVLIMID(R) clinical and regulatory research and development
costs and related pre-launch selling, general and administrative costs) and an
increase of approximately $11.0 million in the income tax provision resulting
from certain expenses that are not currently deductible for tax purposes
partially offset by an increase in total revenues of approximately $28.0 million
(driven primarily by a $20.4 million increase in THALOMID(R) net sales and a
$10.7 million increase in ALKERAN(R) net sales). Also offsetting the decrease
was the fact that included in the three-month period ended September 30, 2004
was a charge of approximately $2.2 million for the change in the estimated value
of our investment in EntreMed warrants, which were exercised on March 31, 2005.
26
(Thousands of dollars, except per share amounts, unless otherwise indicated)
RESULTS OF OPERATIONS-
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2005 VS. NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2004
TOTAL REVENUE: Total revenue and related percentages for the nine-month periods
ended September 30, 2005 and 2004 were as follows:
--------------------------------------------------------------------------------
Nine-Month Period Ended
September 30,
2005 2004 % Change
--------------------------------------------------------------------------------
Net product sales:
THALOMID(R) $ 281,972 $ 222,498 26.7%
Focalin(TM) 3,129 3,698 (15.4%)
ALKERAN(R) 30,803 12,025 156.2%
Other 1,024 712 43.8%
-----------------------------
Total net product sales $ 316,928 $ 238,933 32.6%
Collaborative agreements
and other revenue 35,829 15,420 132.4%
Royalty revenue 34,846 17,741 96.4%
-----------------------------
Total revenue $ 387,603 $ 272,094 42.5%
================================================================================
THALOMID(R) net sales were higher in the nine-month period ended September 30,
2005, as compared to the nine-month period ended September 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. Sales volumes decreased due to
lower average daily doses; however, the total number of prescriptions for the
nine-month period ended September 30, 2005 remained essentially flat when
compared to the prior year period. 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 nine-month period ended September 30, 2005 were
sales of approximately $5.8 million from our U.K. subsidiary, CUK II.
Focalin(TM) net sales were lower in the nine-month period ended September 30,
2005, as compared to the nine-month period ended September 30, 2004, due to the
timing of shipments to Novartis for their commercial distribution. ALKERAN(R)
net sales were higher in the nine-month period ended September 30, 2005, as
compared to the nine-month period ended September 30, 2004, due to price
increases implemented since the end of the third quarter of 2004 and an increase
in sales volumes. ALKERAN(R) use in combination therapies for the treatment of
hematological diseases continues to grow driven by clinical data reported at
major medical conferences around the world. Also contributing to the increase in
ALKERAN(R) sales volumes was the resolution of supply disruptions experienced in
2004, which resolution led to more consistent supplies of ALKERAN(R) IV and
consequently more consistent end-market buying patterns.
Revenues from collaborative agreements and other sources for the nine-month
period ended September 30, 2005 included a $20.0 million milestone payment from
Novartis for the NDA approval of Focalin XR(TM); approximately $10.6 million
related to our sponsored research, license and other agreements with Pharmion
Corporation; approximately $3.7 million from umbilical cord blood enrollment,
collection and storage fees generated through our LifeBank USA(SM) business;
approximately $0.9 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 S.T.E.P.S.(R) patent portfolio encompassing restrictive drug distribution
systems; and $0.1
27
(Thousands of dollars, except per share amounts, unless otherwise indicated)
million from other miscellaneous research and development agreements. The
nine-month period ended September 30, 2004 included a $7.5 million milestone
payment from Novartis for the NDA submission of Focalin XR(TM); approximately
$5.0 million related to our sponsored research, license and other agreements
with Pharmion Corporation; approximately $2.7 million from umbilical cord blood
enrollment, collection and storage fees generated through our LifeBank USA(SM)
business; and approximately $0.2 million from other miscellaneous research and
development agreements.
Royalty revenue for the nine-month period ended September 30, 2005 included
approximately $33.9 million of royalties received from Novartis on sales of
their entire family of Ritalin(R) drugs and Focalin XR(TM); approximately $0.3
million of royalties received from Pharmion on their commercial sales of
THALOMID(R), and approximately $0.6 million of miscellaneous other royalties.
The nine-month period ended September 30, 2004 included approximately $17.7
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
nine-month periods ended September 30, 2005 and 2004 were as follows:
--------------------------------------------------------------------------------
Nine-Month Period Ended
September 30,
2005 2004
--------------------------------------------------------------------------------
Cost of goods sold $ 53,999 $ 43,655
Increase from prior year $ 10,344 N/A
Percentage increase from prior year 23.7% N/A
Percentage of net product sales 17.0% 18.3%
================================================================================
Cost of goods sold were higher in the nine-month period ended September 30,
2005, as compared to the nine-month period ended September 30, 2004, primarily
due to higher royalties on THALOMID(R) net sales and higher ALKERAN(R) costs as
a result of higher sales volumes. Cost of goods sold as a percentage of net
product sales decreased in the nine-month period ended September 30, 2005, as
compared to the nine-month period ended September 30, 2004, primarily related to
higher gross profit margins on ALKERAN(R) net sales due to selling price
increases implemented since September 30, 2004.
RESEARCH AND DEVELOPMENT: Research and development expenses and related
percentages for the nine-month periods ended September 30, 2005 and 2004 were as
follows:
--------------------------------------------------------------------------------
Nine-Month Period Ended
September 30,
2005 2004
--------------------------------------------------------------------------------
Research and development expenses $ 138,413 $ 116,520
Increase from prior year $ 21,893 N/A
Percentage increase from prior year 18.8% N/A
Percentage of total revenue 35.7% 42.8%
================================================================================
Research and development expenses were higher in the nine-month period ended
September 30, 2005, as compared to the nine-month period ended September 30,
2004, primarily due to higher clinical research and development, quality and
regulatory affair costs to support on-going clinical development and
28
(Thousands of dollars, except per share amounts, unless otherwise indicated)
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 further development of early stage clinical and preclinical compounds
such as ACTIMID(TM), CC-11006, CC-10015 and TNF-alpha/PDE4. Research and
development expenses are expected to increase in the fourth quarter of 2005 in
support of our ongoing global regulatory filings, late stage clinical trials,
clinical progress in multiple proprietary development programs and related
clinical manufacturing costs.
Research and development expenses in the nine-month period ended September 30,
2005 consisted of approximately $67.1 million spent on human pharmaceutical
clinical programs; $36.0 million spent on other pharmaceutical programs,
including toxicology, analytical research and development, drug discovery,
quality and regulatory affairs; $27.5 million spent on biopharmaceutical
discovery and development programs; and $7.8 million spent on placental stem
cell and biomaterials programs. These expenditures support multiple core
programs, including THALOMID(R), REVLIMID(R), ACTIMID(TM), CC-11006,
TNF-alpha/PDE4 inhibitors, other investigational compounds, such as kinase
inhibitors, benzopyranones and ligase inhibitors and placental and cord blood
derived stem cell programs. In the nine-month period ended September 30, 2004,
approximately $59.7 million was spent on human pharmaceutical clinical programs;
$25.4 million was spent on other human pharmaceutical programs, including
toxicology, analytical research and development, drug discovery, quality and
regulatory affairs; $25.4 million was spent on biopharmaceutical discovery and
development programs; and $6.0 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 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.
Selling, general and administrative expenses and related percentages for the
nine-month periods ended September 30, 2005 and 2004 were as follows:
--------------------------------------------------------------------------------
Nine-Month Period Ended
September 30,
2005 2004
--------------------------------------------------------------------------------
Selling, general and administrative expenses $ 126,114 $ 79,408
Increase from prior year $ 46,706 N/A
Percentage increase from prior year 58.8% N/A
Percentage of total revenue 32.5% 29.2%
================================================================================
Selling, general and administrative expenses were higher in the nine-month
period ended September 30, 2005, as compared to the nine-month period ended
September 30, 2004, primarily due to an increase of
29
(Thousands of dollars, except per share amounts, unless otherwise indicated)
approximately $20.3 million in marketing expenses consisting of approximately
$23.0 million related to market research, headcount and other pre- REVLIMID(R)
launch expenses offset by lower THALOMID(R) and ALKERAN(R) related marketing
expenses and an increase of approximately $16.2 million in general
administrative expenses resulting from higher professional and other
miscellaneous outside service fees, higher personnel-related expenses, higher
facility related expenses and higher insurance costs. Included in the nine-month
period ended September 30, 2005 was approximately $2.4 million of expense
related to accelerated depreciation of leasehold improvements at four New Jersey
locations being consolidated into our new corporate headquarters. Selling,
general and administrative expenses are expected to increase in the fourth
quarter of 2005 as we near the commercial launch of REVLIMID(R).
INTEREST AND OTHER INCOME, NET: Interest and other income, net for the
nine-month periods ended September 30, 2005 and 2004 primarily reflects interest
and realized gains on our cash and marketable securities portfolio as well as
charges related to changes in the estimated value of our investment in EntreMed,
Inc. warrants, which were exercised on March 31, 2005. Excluding the charges
related to changes in the estimated value of the EntreMed warrants, interest and
other income, net for the nine-month period ended September 30, 2005 and 2004
was approximately $19.4 million and $20.9 million, respectively. The decrease
was primarily due to lower returns on our cash and marketable securities
portfolio.
EQUITY IN LOSSES OF AFFILIATED COMPANY: On March 31, 2005, we exercised warrants
to purchase 7,000,000 shares of EntreMed, Inc. common stock. 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
recorded equity losses of approximately $6.0 million for the nine-month period
ended September 30, 2005, which includes a charge of approximately $4.4 million
to write down the value of the investment ascribed to in-process research and
development, approximately $0.1 million related to amortization of acquired
intangible assets, approximately $1.3 million to record our share of EntreMed
losses and a charge of approximately $0.2 million to eliminate our share of
THALOMID(R) royalties payable to EntreMed, Inc.
INTEREST EXPENSE: Interest expense was approximately $7.1 million and $7.2
million for the nine-month period ended September 30, 2005 and 2004,
respectively, and primarily reflects nine months of interest expense and
amortization of debt issuance costs on the $400 million convertible notes issued
on June 3, 2003.
INCOME TAX PROVISION: The income tax provision for the nine-month period ended
September 30, 2005 was approximately $8.8 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 ("IDMC") 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 nine-month period
ended September 30, 2004 was approximately $3.9 million.
30
(Thousands of dollars, except per share amounts, unless otherwise indicated)
NET INCOME: Net income and per common share amounts for the nine-month periods
ended September 30, 2005 and 2004 were as follows:
--------------------------------------------------------------------------------
Nine-Month Period Ended
September 30,
2005 2004
As Restated
--------------------------------------------------------------------------------
Net income $ 59,728 $ 30,517
Per common share amounts:
Basic $ 0.36 $ 0.19
Diluted $ 0.33 $ 0.17
Weighted average number of shares of
common stock utilized to calculate
per common share amounts:
Basic 167,027 163,574
Diluted 195,002 176,273
================================================================================
Net income and per common share amounts were higher in the nine-month period
ended September 30, 2005, as compared to the nine-month period ended September
30, 2004, primarily due to an increase in total revenues of approximately $115.5
million (driven primarily by a $59.5 million increase in THALOMID(R) net sales,
an $18.8 million increase in ALKERAN(R) net sales, a $16.1 million increase in
royalty revenues received from Novartis related to the Ritalin(R) line of drugs
and Focalin XR(TM) and a $12.5 million increase in milestone payments from
Novartis related to Focalin XR(TM) offset by higher operating expenses of
approximately $78.9 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 $54.6 million for
the nine-month period ended September 30, 2005, as compared to $46.2 million for
the nine-month period ended September 30, 2004. Net cash provided by operating
activities for the nine-month period ended September 30, 2005 reflects our
strong operating performance which included a 42.5% increase in total revenue
and over a 112% 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.
Net cash used in investing activities was approximately $162.5 million for the
nine-month period ended September 30, 2005 compared to $54.7 million for the
nine-month period ended September 30, 2004. Included in the nine-month period
ended September 30, 2005 were cash outflows of $22.6 million for capital
expenditures, $8.4 million for working capital adjustments and acquisition costs
related to the October 2004 acquisition of Penn T, $120.8 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 nine-month period ended September 30, 2004 were cash outflows of
$6.7 million for capital expenditures, $41.0 million for net purchases of
marketable securities available for sale 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.
Net cash provided by financing activities was approximately $37.9 million for
the nine-month period ended September 30, 2005 compared to $10.7 million for the
nine-month period ended September 30, 2004. Included in the nine-month periods
ended September 30, 2005 and 2004 were proceeds from
31
(Thousands of dollars, except per share amounts, unless otherwise indicated)
the exercise of common stock and warrants of approximately $37.9 million and
$10.7 million, 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 contractual commitments. The
following table sets forth our contractual obligations as of September 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 3.0 5.3 5.0 4.5 17.8
ALKERAN(R) agreements 15.1 20.0 -- -- 35.1
Employment agreements 1.3 -- -- -- 1.3
Other contract commitments 4.0 8.2 2.5 -- 14.7
-------------------------------------------------
Total $ 23.4 $ 433.5 $ 7.5 $ 4.5 $ 468.9
================================================================================
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.
32
(Thousands of dollars, except per share amounts, unless otherwise indicated)
2005 FINANCIAL OUTLOOK
In our November 3, 2005 earnings release, we updated our financial guidance for
full year 2005. The updated 2005 financial guidance anticipates total revenue in
the $535 million range, research and development expenses in the $200 million
range and selling, general and administrative expenses in the $175 million
range. Although management believes that the November 3, 2005 financial guidance
update continues to reflect the current thinking of management, there can be no
assurance that revenues or expenses will develop in the manner projected or, if
the analysis on which the earnings projection was based were to be redone on the
date hereof, that there would be no change in the guidance.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that 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 Annual Report on Form 10-K
for the year ended December 31, 2004, 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 Annual Report on Form 10-K for
the year ended December 31, 2004, 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 for the nine-month period ended September 30, 2005), 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 $17.5 million at September 30, 2005, which exceeds the estimated
fair value of our common stock investment by approximately $0.7 million based on
the closing share price of EntreMed common stock on September 30, 2005.
The investment is 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 our 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 September 30, 2005, our market risk sensitive instruments consisted
of marketable securities available-for-sale, other equity investments and
unsecured convertible notes issued by us.
34
(Thousands of dollars, except per share amounts, unless otherwise indicated)
MARKETABLE SECURITIES AVAILABLE FOR SALE: At September 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 and other income, net.
As of September 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:
-----------------------------------------------------------------------------------------------
Duration
--------------------------------------------------------
Less
Than 1-3 3-5 5-7 Over
(IN THOUSANDS $) 1 Year Years Years Years 7 Years Total
-----------------------------------------------------------------------------------------------
Principal amount $345,881 $84,214 $172,634 $24,150 $26,513 $653,392
Fair value $346,159 $85,477 $170,731 $20,647 $18,369 $641,383
Average Interest Rate 3.9% 4.4% 4.8% 6.5% 4.0% 4.3%
================================================================================================
PHARMION COMMON STOCK At September 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 September 30, 2005 had an estimated fair value of
approximately $42.3 million, and which exceeded the cost by approximately $22.1
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 September 30, 2005, we held 7,000,000
shares of EntreMed, Inc. common stock to which we are applying the equity method
of accounting. The investment in EntreMed had a carrying value of approximately
$17.5 million at September 30, 2005, which exceeds the estimated fair value of
our common stock investment by approximately $0.7 million based on the closing
share price of EntreMed common stock on September 30, 2005. Under the equity
method, the investment is 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 outstanding
convertible notes can be converted at any time into an aggregate of 16,511,510
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 September 30, 2005, the fair value of our convertible notes exceeded the
carrying value of $400.0 million by approximately $462.0 million, which we
believe reflects the increase in the market price of our common stock to $54.32
per share as of September 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, 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 - None
Item 5. Other Information - None
Item 6. Exhibits
31.1 Certification by the Company's Chief Executive Officer dated
November 9, 2005.
31.2 Certification by the Company's Chief Financial Officer dated
November 9, 2005.
32.1 Certification by the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350 dated November 9, 2005.
32.2 Certification by the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 dated November 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 November 9, 2005 By: /s/Robert J. Hugin
--------------------------- ------------------------------
Robert J. Hugin
Senior Vice President
Chief Financial Officer
DATE November 9, 2005 By: /s/James R. Swenson
--------------------------- ------------------------------
James R. Swenson
Controller
(Chief Accounting Officer)
39